Inclusive Business Models Guide to the Inclusive Business Models in IFC’s Portfolio CLIENT CASE STUDIES ABOUT IFC IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, providing advisory services to businesses and governments, and mobilizing capital in the international financial markets. In fiscal year 2011, amid economic uncertainty across the globe, we helped our clients create jobs, strengthen environmental performance, and contribute to their local communities—all while driving our investments to an all-time high of nearly $19 billion. For more information, visit www.ifc.org. ABOUT IFC’S INCLUSIVE BUSINESS MODELS GROUP Launched in 2010, IFC’s Inclusive Business Models Group mobilizes people, ideas, information, and resources to help companies start and scale inclusive business models more effectively. For more information, visit www.ifc.org/inclusivebusiness. ACKNOWLEDGEMENTS These case studies are based on the pioneering efforts of IFC’s clients, whose inclusive business models they capture. IFC thanks all of you for your leadership. The cases were written by Piya Baptista, Beth Jenkins, Jonathan Dolan, Daniel Coutinho, Alexis Geaneotes, Soren Heitmann, Sabine Durier, Samuel Phillips Lee, and Marcela Sabino. A wide range of IFC investment and advisory services staff shared information and insights with the case writers and served as liaisons with the clients featured—without their help these cases could not have been written. These allies include: María Sheryll Abando Luc Grillet Arata Onoguchi Anup Agarwal María Victoria Guarín roopa raman Samuel Gaddiel Akyianu Edward Hsu Andriantsoa ramanantsialonina Yosita Andari Lamtiurida Hutabarat Chris richards Kareem Aziz Ludwina Joseph Bradford roberts Abishek Bansal Tania Kaddeche Olaf Schmidt Subrata Barman Sylvain Kakou Michele Shuey Adrian Bastien Yosuke Kotsuji Shamsher Singh Svava Bjarnason Nuru Lama Anil Sinha Brian Casabianca Darius Lilaoonwala Satrio Soeharto Omar Chaudry Ishira Mehta Miguel Toledo Alejandra Perez Cohen Gene Moses Ana Margarita Trujillo Andi Dervishi Asheque Moyeed Carolina Valenzuela Inderbir Singh Dhingra Sachiho Nakayama rick van der Kamp Asela Dissanayake Ali Naqvi Colin Warren Samuel Dzotefe Samuel Kamau Nganga Patricia Wycoco Gabriel España Olivier Nour Noel Zaki Uz Zaman Jamie Fergusson Damian Olive Guillermo Foscarini Alexandre Oliveira COVER PHOTOS Jaipur Rugs, India (Eriko Ishikawa) RIGHTS AND PERMISSIONS The material in this publication is copyrighted. Quoting, copying, and/or reproducing portions or all of this work is permitted provided the following citation is used: International Finance Corporation. 2011. “Accelerating Inclusive Business Opportunities: Business Models that Make a Difference.” Washington, DC: IFC. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of IFC. reign Affairs This publication was made possible with financial support from the Netherlands' Ministry of Foreign Inclusive Business Models Guide to the Inclusive Business Models in IFC’s Portfolio CLIENT CASE STUDIES Table of Contents Alquería S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Anhanguera Educacional Participações S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Apollo Hospitals Enterprise Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Bakhresa Grain Milling Malawi & Mozambique . . . . . . . . . . . . . . . . . . . . . . . . 8 Cemar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Coca-Cola SABCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Dialog Telekom PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Duoc UC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ECOM Agroindustrial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Esoko Networks Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Faculdade Mauricio de Nassau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Financial Information Network & Operations Ltd. (FINO) . . . . . . . . . . . . . . . . 24 Husk Power Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Idea Cellular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Ideal Invest S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Jain Irrigation Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 La Hipotecaria Holding Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Manila Water Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Mi Tienda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Moderna Alimentos S.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Nib International Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Promigas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 PT Summit Oto Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Salala Rubber Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Sociedad de Acueducto, Alcantarillado y Aseo de Barranquilla (AAA) . . . . . . 50 Suvidhaa Infoserve Private Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Tribanco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Uniminuto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 VINTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 YellowPepper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Zain Madagascar (now Airtel Madagascar) . . . . . . . . . . . . . . . . . . . . . . . . . . 62 CASE STUDY Alquería S.A COMPANY BACKGROUND Alquería S.A. is Colombia’s third-largest dairy company engaged in the share. Colombians consume around 67 liters of milk per year, making production and marketing of a wide range of Ultra High Temperature Colombia the second largest consumer market in Latin America, after (UHT) dairy products. Founded in 1959 by Dr. Jorge Cavelier, Alquería Costa rica. is still 100% owned by the Cavelier family. Dr. Cavelier saw an op- Alquería owns production plants in three of Colombia’s major cities— portunity for a more modern approach to milk processing and was the Bogotá, Cali, and Medellín—and distribution centers in the cities of first to introduce UHT milk into the Colombian market. Bucaramanga, Villavicencio, Cucuta, Ibague, and Neiva. Each plant With revenues of $280 million in 2010, over 3,500 employees, and serves as headquarters to one of the four business units under which 6,415 farmers and third party suppliers, Alquería is one of the leading Alquería operates. Alquería also has a 7% ownership in DASA, a joint dairy producers in Colombia. On a national level, Alquería controls venture with Danone, which produces and markets yogurt products 13.3% of the milk market, and leads the UHT market with a 25.4% under the Danone brand. ALQUERÍA’S INCLUSIVE BUSINESS MODEL Alquería does business with low-income populations on the supply side Distribution as dairy farmers and on the distribution side as retailers. Alquería has a robust distribution network reaching over 125,000 points of sale. In Colombia, small-scale retail outlets such as corner stores and Supply Chain kiosks continue to be the leading distribution channel and account for Alquería sources 99% of its milk from about 6,500 independent farmers: 75% of Alquería’s sales, while supermarkets comprise only 25%. Because 1,000 of these farmers supply the company directly, for approximately UHT lasts longer than pasteurized milk and does not rely on refrigerated 48% of its total milk supply. Over two-thirds of these direct suppliers systems, storage is easy and affordable for these small-scale outlets. produce less than 200 liters per day—considerably less than the interna- tional average of 400 liters per day for a medium size farm. Most of them Alquería reaches small-scale outlets in a variety of ways. The most im- produce approximately 80 liters per day with an average of 15 cows, on portant is pre-sales, which account for over half of its revenues. Every farms of fewer than 20 acres each. It is important to note that more than morning, company staff visit small-scale outlets nationwide, taking orders 80% of milk producers in Colombia are of this type, and large farms with to be delivered the following day. In Bogotá, 150 pre-sellers visit approxi- production over 10,000 liters per day are very few. mately 80 shops each, taking orders equivalent to 1,500 liters or $2,000 a day. To facilitate this process, the company has developed a mobile Another 5,500 farmers in Alquería’s value chain supply the company indi- application that allows orders to be uploaded and transmitted through rectly, for approximately 42% of its total milk supply. These indirect suppli- cellular phones. Depending on location, deliveries are made anywhere ers tend to be smaller, producing as little as 10 liters per day. The company from three times a week to once a day by third party transporters using reaches them through intermediaries such as cooperatives, independent trucks, carriages pulled by motorcycles, and small trolleys that support tanks, and other intermediaries with their own trucks and refrigerated canteens and very small shops. tanks. These intermediaries facilitate the collection and payment processes with smaller farmers, particularly in remote, rural regions. Payments are made directly to delivery personnel on a purely cash basis. For safety reasons, Alquería has made express service arrangements with local Alquería does not have long-term supply contracts and relies on strong banks. This arrangement allows delivery personnel to make frequent depos- relationships with farmers to maintain supply chain security. The company its, skip the customer line, and promptly continue their delivery activities. leverages its well-established reputation for paying on time and consis- tently off-taking milk, even when the market is flush. It also offers various A new distribution strategy targeting very small towns and remote areas forms of technical assistance. Through a dedicated supply chain manage- is micro-sales. Introduced in 2009, micro-sales now account for ap- ment team, the company provides advice and assistance with: proximately 5% of total revenues and continues to grow. In this model, • Appropriate feed rations Alquería selects one person in a specific locale to serve as an independent • Clean milk collection procedures distributor to small retail outlets in that area. Each person must meet • Bulk procurement of fodder and fertilizer, which helps keep screening criteria such as being married or receiving the recommendation production costs down of a local priest. His or her home serves as a warehouse, and Alquería • Microcredit financing sometimes provides financing for a motorcycle or small truck to use for deliveries. To date, Alquería has provided COP 54 million in financing directly to small farmers who are ineligible for commercial bank loans. This program was implemented recently and will grow in importance. 2 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Alquería S.A DRIVERS FOR ALQUERÍA’S INCLUSIVE BUSINESS MODEL • The majority of milk producers in Colombia are small-scale; supporting them underpins Alquería’s ability to secure raw milk at competitive prices to sustain its growth plans • Demographics and cultural preferences favor small-scale retail On the supply side, Alquería focuses on small- The continued success and growth of the tra- scale dairy farmers because they comprise the ditional channel is reinforced by demographic majority of milk producers in Colombia. The factors. About 70% of the Colombian working company’s success depends on their success: population earns a minimum wage, getting to remain competitive and grow, Alquería paid on a bimonthly or even daily basis, which must work with them to increase volumes and makes small, frequent purchases more conve- enhance production quality. nient. Only 15-18% of the population own a car, making it difficult and expensive to reach On the distribution side, traditional, small-scale supermarkets. Furthermore, small shops provide retail outlets continue to be Colombia’s most credit and retail prices that are on average only important channel. According to AC Nielsen, there are 489,000 such outlets (on average, 3% more than in supermarkets, making them IFC’S ROLE AND VALUE-ADD relatively competitive given their accessibility to one store per block) compared to 5,440 super- IFC has provided Alquería with long-term financing people at the base of the pyramid. markets. In the past two years, traditional stores in the form of $5 million in equity and $15 million were the only channel that experienced growth in debt, with terms that are not available in the at 3.9%, while supermarkets and drugstores local market without real guarantees—yet are nec- declined at -3.9% and -1.8% respectively. essary given the company’s projected cash flows. IFC’s investment is enabling Alquería to increase milk sourcing by increasing volumes from current suppliers, bringing additional dairy farmers into the supply base, and helping new dairy farmers RESULTS OF ALQUERÍA’S INCLUSIVE BUSINESS MODEL to emerge. This financing facilitates expansion to • Distribution linkages with 125,000 small retail outlets that earn on average 5% on sales remote regions outside Bogotá, where farmers are • Distribution linkages with 690 small, independent distributors who earn on average 3.5% on smaller and less sophisticated. In order to achieve sales expansion targets, Alquería must provide farmers • Direct and indirect supply linkages with approximately 6,500 mostly small, independent dairy with technical assistance to improve volumes and farmers worth $120 million in 2010 adhere to quality standards. • $280 million in revenues and $30 million EBITDA in 2010 IFC’s investment is also improving the risk profile of • 25.4% market share in UHT milk a local player in the dairy industry by strengthening Alquería supports micro-enterprise develop- stabilizing and enhancing their incomes and its balance sheet and providing a valuable interna- ment and employment through distribution supporting job creation on their farms. tional “stamp of approval.” Until recently, Alquería linkages with 125,000 small-scale retail outlets focused primarily on the Bogotá region. Without By offering technical assistance, Alquería is ranging from mom-and-pop stores to kiosks to IFC’s participation, Alquería’s strategic plans to also facilitating a change in mindset for these coffee shops. These outlets earn, on average, become a major player at the national level would small producers. rather than viewing their busi- 5% on sales of Alquería products. Some of be delayed, or would have to be financed with nesses purely as means of survival, they now these outlets are, in turn, served by 690 small, shorter-term debt—bringing with it higher risks see growth potential. They are recognizing the independent distributors affiliated with the and higher financing costs. benefits of shifting to more professional ap- company—these distributors earn an average proaches that raise their incomes and improve of 3.5% on sales of its products. quality of life for their families. On the supply side, Alquería sources from ap- Alquería’s efforts have earned it market lead- proximately 6,500 mostly small, independent ership in UHT milk with a 25.4% share, and dairy farmers—providing a stable and reliable second position in the milk market overall with income that compares well with alternative a 13.3% share. In 2010, the company gener- activities such as cattle ranching. Purchasing IFC’s Investment: ated $280 million in revenues, reflecting 152% totaled $120 million in 2010. In addition, $5 million in equity and $15 million in long- growth since 2006. During the same three-year term debt financing through its technical assistance efforts, Alquería period, EBITDA margins increased from $10 is helping small dairy farmers increase and million to $30 million. improve the quality of milk production, thereby Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 3 CASE STUDY Anhanguera Educacional Participações S.A. COMPANY BACKGROUND Anhanguera Educacional Participações S.A. (AESA) is Brazil’s leading The company’s primary shareholder (with an approximate 25% private, for-profit professional education company. Founded in 1994 stake) is the Fundo de Educação para o Brasil, a dedicated invest- as a single college, AESA is currently the largest post-secondary edu- ment vehicle established specifically to invest in AESA. The compa- cation institution in Brazil, with approximately 255,000 students dis- ny’s founders own approximately 2% of its shares with the balance tributed across 54 campuses and 450 distance learning centers, and (73%) held by institutional investors, including leading emerging an additional 500,000 students per year enrolled in its vocational market funds and asset managers who invested in AESA following its and training programs. AESA educated over 755,000 Brazilian adults Initial Public Offering in 2007. AESA is the largest publicly-held edu- in 2009, more than any other educational institution in the western cation company in Brazil in terms of market value, with an estimated hemisphere. Through its network of campuses, distance learning and market capitalization of r$3.05 billion based on official closing price vocational training centers, AESA is present in every Brazilian state. on December 31, 2009. ANHANGUERA’S INCLUSIVE BUSINESS MODEL AESA’s target market consists of lower-income working adults aged company’s business model has proven to be both profitable and scalable 18-30 that generally attend evening classes. The average monthly salary due to four key factors: of an incoming student is r$660 (approximately US$290) per month, • National coverage that offers easy access for working adults with which increases to r$1,000 (approximately US$450) upon graduation. busy schedules, in both urban and rural areas; Average tuition is r$280.3 (US$195) per month, 20% to 40% below • Standardized curricula, which minimize class preparation time for AESA’s main competitors. instructors, and reduce the number of administrative and support staff required by the company; The company’s decision to focus on the lower-income segment has had • High-quality faculty, many of whom are practitioners rather than a profound impact on its business model. recognizing that low-income full-time instructors; and students have different educational needs throughout their lives, AESA • Rigorous monitoring and evaluation to ensure strong has developed a comprehensive portfolio of offerings along three lines educational outcomes across programs and sites, and to identify of business: and eliminate low-demand courses that drain valuable resources. • 54 campuses provide 148,000+ students with access to a wide variety of undergraduate, graduate and continuing education Loans and scholarships have been critical success factors in acquiring and programs. Prices range from r$199 to r$699/month. retaining low-income students. In 2008, the company provided scholar- • 650+ vocational training centers provide 500,000 students per ships to 108,735 students in partnership with federal, state, and local year with industry-relevant technical and vocational education governments. On average, these scholarships covered 23% of student and training (TVET). By emphasizing TVET in its business mix, fees; 27,677 covered upwards of 50% of fees and 8,757 covered 100%. the company has helped to bridge the gap in education services These scholarships are valued at r$134.7 million. AESA students also have between the secondary and college levels for low-income students access to market rate loans offered by a private Brazilian bank. that are unable to attend university. Prices range from r$75 to AESA’s innovative marketing initiatives have also helped the company r$120/month. acquire and retain low-income students. In addition to a variety of • 450+ learning centers and a distance learning platform have low-cost promotions, such as billboards and celebrity appearances, enabled AESA to reach 107,000+ students that are either far away the company has garnered significant brand recognition and goodwill from its campuses or seeking greater flexibility in where and when through its community outreach initiatives. In 2008, these initiatives to study. This platform has also allowed the company to offer short- allowed AESA students from a cross-section of programs to provide pro- term courses to college graduates (e.g. preparatory courses and bono services to more than 800,000 low to middle income people. For placement exams). Prices range from r$159 to r$400/month. these and other programs, Brand Analytics/Millward Brown named the The challenge for AESA has been to balance the provision of affordable, company a Top 100 Brand in Brazil in 2009. high-quality education while achieving a reasonable return on equity. The 4 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Anhanguera Educacional Participações S.A. DRIVERS FOR ANHANGUERA’S INCLUSIVE BUSINESS MODEL • Growing demand for tertiary education • Government policy created a market opportunity for the private sector • research showing that as incomes rise, a disproportionate amount is spent on education Post-secondary education in Brazil has his- for post-secondary education. This created torically been the province of the public sector, a market opportunity for entrepreneurs like with high-quality public universities offering the founders of Anhanguera. As the number highly regarded degrees free of charge. The of private post-secondary schools grew from commitment to free education created capac- several hundred to several thousand, enroll- ity constraints, however, with the result that ment swelled from 2.4 million students in 1999 only the best students — typically those from to an estimated 4.9 million in 2007. wealthy families who attended private high Today approximately 75% of all post-secondary schools — could access the public system. students in Brazil attend private schools. Much Pent-up demand among low and middle of this growth has taken place in the lower income students grew, especially as education IFC’S ROLE AND VALUE-ADD income segments. Until recently, only 5% of policy reforms increased by an order of mag- students from the two lowest economic quin- One of the key pillars of IFC’s global Health and nitude the number of students going through tiles were able to attend post-secondary school. Education Strategy is to invest in education proj- primary and secondary school. Today, this segment represents the fastest ects with strategic clients. These are predominately In the mid-1990s, the Ministry of Education growing demographic entering post-secondary larger, for-profit providers, which have the ability to began accrediting and licensing private schools in Brazil. grow and operate in several markets and to move sector providers to serve pent-up demand down-market to serve lower income households. In recent years, IFC has also strengthened its pipeline of technical and vocational education and training investments, recognizing that this type of post- secondary education is frequently the most afford- RESULTS OF ANHANGUERA’S INCLUSIVE BUSINESS MODEL able and relevant to low-income working adults. • Net revenues of r$904.5 million in 2009 IFC’s Health and Education Department has invest- • EBITDA in excess of 20% ed approximately US$39.5 million in AESA through • Approximately 755,000 students educated in 2009 two consecutive projects. IFC has also helped AESA • Graduates’ earning potential increased more than 50% clearly articulate its business lines and to expand AESA has achieved impressive financial results scholarships and loans in partnership with the its network. through consistent execution. From 2006 to Brazilian government and a private bank. In While AESA has accomplished a great deal in Brazil, 2009, net revenues and EBITDA grew from 2008, AESA provided scholarships to 108,735 one of its greatest contributions has been the dem- r$112.5 million and r$21.6 million to r$904.5 students valued at r$134.7 million. onstration of a profitable and scalable business million and r$188.6 million, respectively. model for serving low-income students. This is a Student surveys suggest that AESA graduates During 2009, AESA preserved EBITDA margins model that IFC will continue to support in Brazil improve their earning potential by more than in excess of 20%, which are likely to improve and that it will seek to replicate through future 50%. Whereas the average monthly wage of as new campuses and acquisitions expand the investment and advisory work in the region and an incoming student is approximately US$290, company’s reach over the next 12 to 24 months. across the globe. he or she will typically earn more than US$450 In 2009, AESA educated over 755,000 Brazilian after graduating. What is more, the wage adults, of which more than 600,000 partici- differential over the working life of an AESA pated in vocational training and distance learn- graduate is likely to be much higher. According ing programs that allow low-income individuals to World Bank studies, the Brazilian economy to improve their skills and earning potential displays a particularly large wage premium while continuing to work during the day. The between university and high school of 339%, company also strives to promote increased as compared to a 74% premium in the United access to its programs by offering students States. IFC’s Investment: $39 million in long-term debt financing Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 5 CASE STUDY Apollo Hospitals Enterprise Limited COMPANY BACKGROUND Apollo Hospitals Enterprise Limited (Apollo) is among the largest Apollo owns 30 hospitals and manages 15 in India and abroad with private integrated healthcare groups in India and recognized as a a total bed strength of 8,000. The company also has a network of leader in the management and delivery of high-quality tertiary care 1,200 retail pharmacies. Apollo’s shares are listed on the Mumbai in Asia. In addition to hospitals, Apollo owns and operates clinics, di- Stock Exchange and the National Stock Exchange. agnostic centers, pharmacies, and provides healthcare management Dr. Prathap C. reddy, a visionary cardiologist, started Apollo Hospitals consulting, education and training, and telemedicine services. The in 1983 despite great obstacles to private sector health delivery. In company is a forerunner in bringing state-of-the art medical technol- keeping with his mission of “providing international quality health- ogies to India for tertiary and quaternary care. Apollo also provides care to all who need it,” Apollo launched Apollo reach Hospitals project consultancy services to hospitals in Africa, East Asia and the for smaller cities and their surrounding rural and semi-urban areas Middle East. in 2008. APOLLO HOSPITALS’ INCLUSIVE BUSINESS MODEL With over 25 years of experience in setting up hospitals across India and These innovations, combined with a steady stream of high-quality phy- the world, Apollo is well placed to identify cities and towns that are in sicians, put Apollo reach hospitals on a strong footing in underserved urgent need of healthcare facilities and the type of hospitals and services communities. Hospitals located in semi-urban and rural areas have more required. Accessibility is thus a key feature of Apollo reach hospitals, difficulty attracting quality physicians. To mitigate recruitment problems, which are located in less-developed population centers known as Tier II Apollo offers a fast-track career which gives doctors more responsibility cities in India. Earlier, patients would have traveled considerable distances and faster promotions if they work for a few years in a reach hospital. to large cities, often at great expense. Apollo’s presence throughout India is an advantage to facilitate this re- cruitment strategy as employees are aware that there are opportunities Low cost is another key feature of Apollo reach hospitals. Treatments in elsewhere once they have completed a rotation in a reach hospital. the Apollo reach model cost 20-30% less than at other hospitals in the Apollo network and other major hospitals. Apollo reach hospitals are To make healthcare affordable to low-income patients, Apollo reach hos- smaller, simpler facilities, offering more limited but robust services than pitals treat both low- and high-income patients. The higher fees paid by other hospitals in Apollo’s networks. Each Apollo reach hospital is being more affluent patients help make the hospitals profitable for the parent built to house 150 beds, 40 intensive care unit beds, and five operation company — illustrating how cross-subsidization between high-income theaters. The range of tertiary care includes cardiac, oncology, radiol- and low-income consumers can bring affordable health services to the ogy, neurosurgery, and other specializations. Other services and facilities poor. include video endoscopy, blood bank, check-up, radiology, complete lab, The rashtriya Swasthya Bima Yojana (rSBY), the Government of India’s dental, ear, nose and throat (ENT), and eye care services. Apart from tra- recently introduced national health insurance scheme for families below ditional ambulance emergency services, Apollo reach hospitals also offer the poverty line, also enables Apollo reach to serve low-income patients. emergency air ambulance services for life-threatening emergencies and rSBY covers hospital expenses up to rs. 30,000 ($659) for a family of remote areas. five. Transport costs are also covered up to a maximum of rs. 1000 ($22) Another measure to increase access to quality healthcare and reduce with rs. 100 ($2.19) per visit. Each beneficiary pays rs. 30 ($0.66) at the costs is telemedicine. With telemedicine available at all Apollo reach hos- time of enrollment, while the central government pays 75% to 90% of pitals, people no longer have to travel long distances for a second opinion the total premium depending on the state with the balance paid by the or wait for weeks before they can meet a specialist doctor. According to state government. Apollo, telemedicine will improve patient care, enhance medical training, standardize clinical practice, and stabilize costs. 6 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Apollo Hospitals Enterprise Limited DRIVERS FOR APOLLO HOSPITALS’ INCLUSIVE BUSINESS MODEL • Demand for low-cost, high-quality healthcare • Changing disease patterns resulting in need for specialized care • Absence of quality hospitals providing specialized care outside of major urban centers Public health insurance creates a market op- over 700 million people in India lack access to portunity to serve low-income patients. quality healthcare as over 80% of hospitals are in urban India. In particular, smaller cities, semi- In countries with underdeveloped healthcare urban areas and rural areas do not have access systems, severe illness or injury can be financially to hospitals for specialized healthcare services. devastating for the poor. For millions of patients Demand for the latter is increasing as chronic in India, a single episode of hospitalization adult diseases such as cardiovascular illnesses, can cost up to 58% of annual expenditures. diabetes and cancer are on the rise in India. research shows that 40% of those hospital- These factors, combined with the government ized must either borrow money or sell personal of India’s health insurance scheme for families belongings to pay medical bills. Advances in below the poverty line, create a significant IFC’S ROLE AND VALUE-ADD medical technology are also increasing the market opportunity for Apollo to provide spe- need for specialists, making healthcare expen- IFC has supported Apollo since 2005 as an equity in- cialized healthcare to underserved low-income sive and inaccessible to the masses. Further, vestor. In 2009, IFC signed a $50 million loan to help families via Apollo reach. finance the rollout of the Apollo reach hospitals. IFC’s value-add to Apollo lies in its ability to provide ongoing strategic advice and guidance based on its broad global and regional experience as well as knowledge of healthcare investments. RESULTS OF APOLLO HOSPITALS’ INCLUSIVE BUSINESS MODEL IFC’s investment in Apollo helps bring much needed • revenue per bed at a reach Hospital is rs. 6,000 ($132) to rs.7,000 ($154) capital and provides a strong signal of support to • Plans to establish 250 Apollo reach hospitals over time the health sector in India. According to the World • Estimated to serve 120,000 patients per year who earn less than $2 per day Health Organization and the Confederation of Indian Prime Minister Dr. Manmohan Singh Apollo expects to set up 15 reach hospitals Indian Industries, the private sector is crucial to the launched the first Apollo reach hospital over the next three years and these hospitals provision of healthcare in India and already accounts in Karimnagar, Andhra Pradesh, in 2008. are expected to serve about 400,000 people for over 75% of total healthcare expenditures. Karimnagar is 162 kilometers from the annually by 2015, of which about 30% or Creating an adequate hospital infrastructure alone major city of Hyderabad. This hospital serves 120,000 people per year would be considered will require $34 billion in private investment by 2012 16,800 outpatients and inpatients annually. very poor, earning less than $2 per day. Over in secondary and tertiary care hospitals, medical col- Approximately 50% are low-income. A second time, Apollo reach plans to establish hospitals leges, nursing, and hospital management schools. Apollo reach hospital has been established in in 250 of the 600-plus districts across India. Karur, Tamil Nadu, and Apollo plans to set up an additional four hospitals in the near future. IFC’s Investment: $50 million in long-term debt and $5 million in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 7 CASE STUDY Bakhresa Grain Milling Malawi COMPANY BACKGROUND Bakhresa Grain Milling (BGM) Malawi is the market leader in flour BGM Malawi was established in December 2003 and currently has milling in Malawi. BGM Malawi is part of the Bakhresa Group of a national market share of 80%. Its flour milling facility is located in companies, a leading industrial house founded by the Bakhresa the south in Blantyre, the country’s industrial and commercial capital. family in Tanzania in the 1970s. The Bakhresa Group currently op- The company also has branches in Mzuzu in the north and Lilongwe erates in Tanzania (including Zanzibar), Malawi, Uganda, Kenya, in central Malawi. BGM Malawi supplies to 90% of commercial bak- Zambia, rwanda, and Mozambique. Its flour milling operations in eries, an estimated 75% of small bakeries, and 60% of small retail East Africa make up more than 89% of total sales. The Bakhresa outlets in the country. In 2010-11, the company’s revenues reached Group also operates food, transportation, and logistics businesses, $82 million. mainly in Tanzania. It has an annual turnover of more than $300 million and employs nearly 2,000 people in the region. BGM MALAWI’S INCLUSIVE BUSINESS MODEL BGM Malawi sells packaged wheat flour to commercial bakeries, small collected, typically twice a month, it deploys vans from the factory or bakeries and small retailers, and supermarkets under a variety of brands branches to drop off supplies directly. This occurs most frequently in the and package sizes ranging from 2-50kgs. Commercial bakeries requir- outskirts of Limbe and Lilongwe. ing larger stocks tend to purchase 25kg and 50kg packages. To target The company plans to open six additional branches in all of Malawi’s smaller bakeries and retail outlets with lower inventory requirements, the major trading centers over the next three to five years. By that time, BGM company recently launched a 10kg package size. Malawi anticipates that 30% of its packaged wheat flour volume will be Distribution distributed through its branches. The company has four primary distribution channels, two of which serve BGM Malawi also directly distributes to large commercial bakeries, each small retail shops and bakeries: of which buys an average of 100-500 bags per week. They account for • Distributors: 60% of BGM Malawi’s volume is channeled through 20-22% of the company’s total volume. While they are not a primary five major distributors that resell to small retail shops (90%), small target for BGM Malawi, approximately1-2% of its packaged wheat flour bakeries (5%), and individuals (2%) is distributed to supermarket chains. • BGM Malawi branches: 10% of volume is sent to company branches that sell to small bakeries and retail shops Technical Assistance BGM Malawi provides training to small bakeries purchasing either directly Distributors collect packaged flour directly from BGM Malawi’s packag- from the company or from distributors. Workshops are conducted in rural ing plant in Limbe and 90% of this volume is then sold to small retail shops areas predominantly in the central region, where most small bakeries are through distribution outlets located throughout rural and urban parts of located. They are scheduled every six months—after the harvest season the country, each servicing an area of 15-20km. retailers, which typically when individuals have time to participate. As many as 100 people par- purchase 14-35 bags on a weekly basis, are family-owned, employ one to ticipate at a time. Elements covered include bakery management, baking two assistants, and range in size from 30-60 square meters. Small baker- processes and machinery, ingredient usage, and basic business skills like ies located in suburban and rural markets throughout the country, but sales and marketing. Training not only enables these bakeries to be more predominantly in the southern region, comprise 5% of the distributors’ successful; it also helps BGM Malawi establish brand loyalty and strong sales. These bakeries, on average, employ three to four employees and customer relationships. Over the past two years, the company has trained purchase one to two bags of flour on a daily basis. 1,000 people from 200-250 small bakeries. BGM Malawi branches, the company’s newest distribution channel, In addition to formal training, company staff visit 250-300 bakeries were initiated as a way for the company to directly reach smaller busi- during routine monthly or bi-monthly market visits to understand market nesses located too far from Limbe to regularly pick up supplies. Around needs, monitor sales throughout the value chain to the end customer, 200-300 small businesses already purchase from BGM Malawi branches, and provide input on technical aspects including machinery and process- including small mom-and-pop retail outlets (70%), small bakeries (20%), es. Distributors also monitor the bakeries they are supplying, though less and small wholesalers (10%). Mom-and-pop outlets tend to be located frequently and specifically for consumption. within a 300km radius of a branch, have four to ten employees and operate in busy trading areas near fuel or bus stations. Finally, BGM Malawi sales and merchandising staff visit small retail outlets once a quarter and provide merchandising support including stocking, In addition, BGM Malawi salespeople call small retail outlets and baker- displays, and point-of-sale advertising. Currently, 200-250 outlets across ies on a regular basis to collect orders. When enough orders have been the country and their 1,800-2,000 staff receive such support. 8 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Bakhresa Grain Milling Malawi DRIVERS FOR BGM MALAWI’S INCLUSIVE BUSINESS MODEL • rising consumption of wheat, at 6% growth annually • Products and distribution channels are tailored to large commercial bakeries, making it harder for small bakeries and retail outlets to purchase The primary driver for BGM Malawi’s inclu- distributors, distributors of competing brands, sive business model is local market demand and unorganized sources such as informal for wheat. Wheat consumption has experi- traders selling by the scoop. Interruption in the enced 6% annual growth since 2008 due to supply of BGM Malawi products was a common improving economic conditions and increased problem since these retailers were not a prior- urbanization. ity for large distributors. Now, BGM Malawi branches ensure that small retailers have a con- Small bakeries and retail outlets constitute sistent and uninterrupted supply of products at a significant portion of the wheat market in competitive prices. The business opportunity in Malawi, yet they are inadequately serviced by branch-based sales to small bakeries and retail- large wheat distributors. BGM Malawi opened ers has been validated by the huge growth in IFC’S ROLE AND VALUE-ADD local branches in the central and northern parts sales that company branches established in of the country to directly service these custom- In 2008, IFC provided a $5 million loan to help BGM 2010 have already experienced. The branch ers. Before, mom-and-pop retail outlets were Malawi to finance short-term supplier credit, allow- distribution channel already comprises 10% of required to travel long distances or purchase ing it to strengthen its balance sheet and reduce the sales. packaged wheat flour from large, third-party refinancing risk. This loan was provided as part of a $20 million loan to the Bakhresa Group, of which an additional $7 million went to BGM Mozambique to establish a grain handling and storage facility in Nacala. This storage facility has enabled the Bakhresa RESULTS OF BGM MALAWI’S INCLUSIVE BUSINESS MODEL Group to increase food security and efficiency of • Small retail outlets receive an average margin of 10-15% on sales of BGM products and distribution in northern Mozambique, Malawi, and bakeries an average of 20-25% Tanzania. With this port, BGM can transport wheat • Over 1,000 small bakery staff have received business and technical training to date from Nacala to Malawi via rail in a more direct and • Over 1,800-2,000 staff from more than 1,000 small retail outlets have received reliable way. The wheat terminal in Nacala reduced merchandising support costs by allowing larger quantities of wheat to be • 33.6% annual revenue growth in calendar year 2010 transported, quick unload times, and lower inland • $12.5 million in EBITDA in calendar year 2010 transportation costs due to the rail link between Nacala and Blantyre. This directly enabled BGM To date, BGM Malawi has provided over 1,000 made with BGM products receive an average Malawi to ensure a stable supply, thus making the small bakery staff with business and technical profit margin of 20-25%, and small retail product consistently available to small bakeries and training. As a result of this training, bakeries outlets selling packaged flour typically achieve retail outlets at competitive prices. are better equipped to produce high-quality a margin of 10-15%. baked goods and resell to customers. At the IFC’s investment has enabled the Bakhresa Group to As a result of BGM Malawi’s inclusive business same time, BGM Malawi builds brand loyalty access longer-term loans than those available locally model, the company has positioned itself as within its customer base. Additionally, BGM and to pursue regional expansion. Additionally, with the market leader in wheat milling in Malawi, Malawi has provided merchandising support concurrent support in corporate governance and en- achieving 33.6% revenue growth and $12.5 to more than 1,800-2,000 staff at more than vironment and social standards, it has been able to million in EBITDA in calendar year 2010. 1,000 small retail outlets. Bakeries selling goods improve its risk profile. IFC’s Investment: $5 million in long-term debt financing Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 9 CASE STUDY CEMAr COMPANY BACKGROUND Companhia Energética do Maranhão, or CEMAr, is the power dis- 2009, CEMAr’s geographic coverage spanned 97% of the state, tribution company servicing Brazil’s northeastern state of Maranhão. with approximately one million of its residential subscribers classified Maranhão is one of the poorest states in Brazil, whose 6.2 million in- as low-income. habitants earn a per capita income 29% below the national average. The company’s primary shareholder is Equatorial Energia, a publicly With increasing demand for power, and electrification a key element listed holding company with 65.1% ownership, whose investments to both improving the quality of people’s lives and fueling economic target power generation, distribution and transmission primarily in growth, CEMAr is working to bring power to the entire state, with a Brazil. The public power utility, ELETrOBrAS, holds a 33.6% stake particular emphasis on rural and low-income segments. Since 2004, and minority shareholders, which include CEMAr’s management, the company has participated in a Brazilian government program hold the remaining 1.3% of the company. CEMAr is a regulated called Light for All (Programa Luz Para Todos) aiming to bring about utility company, with tariffs and contracting obligations set by Brazil’s universal access to electricity throughout the country. At the end of National Agency for Electrical Energy (ANEEL). CEMAR’S INCLUSIVE BUSINESS MODEL CEMAr’s concession mandates it to continuously invest in its distribu- reducing commercial losses was another key component, addressed tion network, but reaching Maranhão’s rural and low-income popula- by many operational improvements to the network, such as upgrading tions presented the company with a number of challenges. Expanding information systems, enabling precise GPS-based location for distribu- infrastructure into rural and sparsely populated areas represented sig- tion poles and automating network operations. This enabled CEMAr to nifi cant capital expenditures. Moreover, the potential customer base improve collection rates and combat electricity theft. The modernization was approximately 88% residential — of whom about 70% were low- also led to significant reductions in the frequency and duration of service income — meaning their power needs and tariff categories would be disruptions and boosted service quality and customer satisfaction. relatively low. Yet the needs for power were clear, and for CEMAr this Finally, the management structure was dramatically overhauled, focus- represented a hugely untapped customer base. The challenge was there- ing on reducing costs and increasing productivity. regional departments fore to develop the rural power market both profitably and inclusively. were eliminated, and the management structure was reduced from seven In 2004, GP Investimentos, a private equity firm and the former parent layers to three. Many operational aspects were outsourced, such as company of Equatorial, took control of CEMAr, which was left financially billing, customer service, and network maintenance. CEMAr focused on adrift in the wake of Brazil’s 2001 energy crisis. Under the direction of GP providing stronger incentives, including performance-based bonuses for Investimentos, CEMAr adopted a new strategy, focusing on building a all its employees and stock options for management. strong, stable platform for future growth and rural electrification. At the CEMAr’s enrollment as an implementing agency in the government’s same time, the government of Brazil launched the Light for All program Light for All program obliged the company to electrify the entire state of providing the needed incentives to stimulate demand and develop these Maranhão and to contribute 15% of the costs while government grants rural markets. and subsidized loans comprised the rest. This was designed to reduce The company underwent major organizational and operational restruc- capital costs, as low-income and rural customers would have been unable turing, which focused on efficiency improvements in three main areas. to bear the initial connection costs. The government also provided incen- First, CEMAr invested heavily in modernizing and expanding its distri- tives to promote demand in rural markets through a low-income consum- bution network, including replacing obsolete equipment, installing new er subsidy. This program allowed residential customers classified as low- distribution lines and sub-stations and voltage regulating equipment. The income to receive a reduction of up to 65% off their energy bills, with modernization mitigated technical power losses, a particular concern the reduction depending on the amount of power consumed, such that given that Maranhão lacks any generation capacity and reaching rural the lowest users paid the lowest rates. In 2007, nearly 65% of CEMAr’s areas requires transmission lines to traverse greater distances. customers were eligible for the low-income rebate. 10 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY CEMAr DRIVERS FOR CEMAR’S INCLUSIVE BUSINESS MODEL • reaching a new customer base • Better service is more efficient and less costly • The Brazilian government’s Light for All program • ANEEL’s low-income tariff structure The primary driver for CEMAr’s inclusive busi- Bringing power to over one million individu- ness model was a federal government program, als under the Light for All Program fueled the Light for All, that created new market segments state’s demand for more power. Brazil’s for the company to reach. The objective of the Institute of Geography and Statistics reports program, launched in 2003, was to connect 1.7 GDP growth rates for Maranhão averaging million households and 12 million individuals by 10% per year between 2004 and 2007. Strong the end of 2010. economic growth, supported by increased electricity access and coupled with low starting The northeast region of Brazil saw the highest levels of consumption, has pushed electricity need for rural electrification, nearly half of the demand across all customer segments, increas- IFC’S ROLE AND VALUE-ADD total, and consequently received nearly 44% of ing CEMAr’s electricity load by 4.2% between overall federal funding, according to a report Brazil’s power sector reform lead to the privati- 2007 and 2008, outpacing the national in- from the US Commercial Service. Total project zation and purchase of CEMAr by Pennsylvania crease of 2.9%. In 2009, the company reached cost was estimated at r$9.5 billion ($4.3 Power and Light (PPL) in August 2000. However, an increase of 1.4% in electricity load, outpac- billion), with 71% to be funded by the federal in 2001 low rainfalls caused the country’s signifi- ing the northeast region’s increase of 0.2% and government and the rest split among state gov- cant hydroelectric generation to plummet, creat- the national decrease of 1.0%. ernments and distribution companies. ing an energy crisis that put distribution compa- nies under severe financial pressure. As demand fell and customer delinquency increased, CEMAr faced mounting losses. PPL wrote off its entire in- RESULTS OF CEMAR’S INCLUSIVE BUSINESS MODEL vestment and exited the Brazilian power sector in • 1.69 million customers reached by the fourth quarter of 2009 2002. Although the energy crisis abated, investor • 230,000 new power connections under the Light for All program confidence did not return quickly and local compa- • Costs fell as efficiency improved nies who previously had relied on foreign currency • Large service quality and reliability gains financing were left nervous about facing foreign • Power demand grew as the market developed and stimulated the state’s economic growth exchange risks. IFC provided CEMAr an $80 million reais-linked CEMAr’s emphasis on efficiency gains proved a significant gains in the quality and reliability loan that helped address market failures stem- winning strategy: since 2004, the company has of service, with measures of the length and ming from the energy crisis by offering local cur- seen consistent growth that’s climbed into the frequency of interruptions dropping by 44.6% rency financing at a longer maturity compared to double-digit levels. Net operating revenues and and 38.2% between 2006 and 2009. the market. The transaction also assured the ap- EBITDA have respectively climbed from r$526.1 Expanding distribution through the Light for plication of IFC’s environmental and social perfor- million and r$85.24 million in 2004 to r$1,148 All program has had the greatest development mance standards as CEMAr expands its distribu- million and r$470.3 million in 2009, an average impacts: CEMAr has reached over 230,000 tion network. revenue growth rate close to 12% per year. new customers to date in rural Maranhão, Moreover, the reorganization quickly led to a directly reaching over one million inhabitants drop in costs relative to revenues, stimulating a under this program. And through expansions sharp improvement in EBITDA margins, which outside the program, CEMAr has increased its climbed from 16.2% in 2004 to 40.2% in 2006, reach to over 300,000 additional customers, remaining around 41.0% through 2009. growing from a total of 1.161 million in 2004 Strong increases in demand fueled this growth, to 1.688 in 2009. Over this time, nearly 50% with CEMAr seeing an average annual in- of this increase targeted un-electrified rural and crease in total residential power consumption low-income segments. In 2010, CEMAr expects between 2007 and 2009 of 8.5%. Moreover, to reach a total 1.777 million customers. Access IFC’s Investment: as demand rose, customers posted high repay- to electricity is a fundamental element to im- ment rates of 93.4%, suggesting that policies proving the quality of people’s lives and driving $80 million in long-term debt financing to stimulate both economic growth and power economic growth, enabling both domestic and demand among low-income consumers were commercial refrigeration, use of appliances, sustainable. At the same time, CEMAr achieved machinery and artificial lighting. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 11 CASE STUDY Coca-Cola SABCO COMPANY BACKGROUND The Coca-Cola Company (TCCC) is the largest non-alcoholic bever- Coca-Cola SABCO (CCS) is one of TCCC’s largest bottlers in Africa, age company in the world, manufacturing nearly 500 brands and operating 18 bottling plants and employing more than 7,900 people serving 1.6 billion consumers a day. In the 200 countries in which it in Eastern and Southern Africa. Headquartered in South Africa, it operates, TCCC provides beverage syrup to more than 300 bottling is 80% owned by a private investment group, Gutsche Family partners, who then manufacture, distribute, and sell products for Investments, and 20% by TCCC. local consumption. Its bottling partners are local companies owned independently, or either partially or fully by TCCC. COCA-COLA SABCO’S INCLUSIVE BUSINESS MODEL The Coca-Cola Company utilizes a wide range of distribution methods and anticipated volume of the retail outlets it will service. Ideally, to ensure that consumers around the world have access to its products. each MDC services an area 1 kilometer in circumference, reaching a In East Africa, CCS has adopted a manual delivery approach working maximum of 150 retail outlets. with small-scale distributors to deliver products to small-scale retailers in • Provide limited start-up guidance and support: MDC owners densely populated urban areas. These distributors previously had limited are responsible for financing the start-up costs of their MDC economic opportunities and were unemployed or underemployed, including business licenses, pushcarts, rent, initial stock of empty working part-time or in the informal economy. As many as 75% of the crates and bottles, and beverage supply. Occasionally, CCS offers distributors in Ethiopia and 30% in Tanzania never owned a business credit for crates and empty bottles, which represent some of the before. Most of the retailers they serve are kiosks or small stores serving biggest start-up costs, though this is less frequent today than when neighborhood customers, and have enough funds and space to manage the model first started. Owners hire their own staff, though CCS a few days’ supply at most. guides them on staffing numbers and salaries. The Manual Distribution Center (MDC) approach was first developed Once new MDCs have been established, the most critical success factor in as a pilot with 10 MDCs in Addis Ababa, Ethiopia, in 1999. By 2002, the model is regular training, monitoring, and communication. The level the company had implemented the successful model on a broad scale of interaction with CCS staff largely determines how well MDCs perform. throughout its markets in East Africa. SABCO utilizes the following ap- There are two regular points of contact for each MDC, which are the Area proach when establishing new MDCs: Sales Manager (ASM) and the resident Account Developer (rAD). ASMs • Assess the need for MDCs: First, CCS collects detailed data on are full-time Coca-Cola SABCO employees who manage 10-20 MDCs every retail outlet in the target area. This information is used to each, which they visit daily or every other day to monitor supply and in- develop a beverage demand forecast and determine whether a new ventory, adherence to CCS standards, and overall business performance. MDC is needed, ensuring that MDCs are introduced in areas where The rAD, typically a part-time CCS staff member based in the same they are likely to thrive. neighborhood, develops retail accounts, regularly monitors and manages • Recruit MDC owners : Next, SABCO sales managers identify in-store beverage placement and productivity, and generates orders as and recruit candidates they believe would be good MDC owners. needed. They also visit their local MDCs daily to check stock and ensure Successful candidates must plan to be directly involved in the routes are followed. business on a full-time basis and have a strong work ethic, access to a suitable site, sufficient funds to support start-up costs, and good Through this interaction, MDCs are regularly coached and supervised on relationships with the surrounding community. warehouse and distribution management, account development, mer- • Define MDC territory and customer base : Once a new MDC chandising and customer service, which is helpful since more formal has been identified, CCS gives that MDC exclusive access to the training occurs less frequently. They and CCS staff have access to a set retail outlets in a defined geography based on a map that CCS of management tools SABCO has developed to track inventory, sales, provides. The exact size of the territory is based upon the terrain market competitiveness, and overall business performance. 12 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Coca-Cola SABCO DRIVERS FOR COCA-COLA SABCO’S INCLUSIVE BUSINESS MODEL • Increase sales and facilitate delivery in areas hard to serve with conventional trucks • Enable small but frequent deliveries to retail outlets In many countries, Coca-Cola primarily uses Thus, Coca-Cola SABCO’s MDC model was traditional distribution models in which large born out of this business need to adopt its quantities of product are delivered via trucks or delivery model to local infrastructure, customer other motorized vehicles to large retail outlets. needs and market conditions. Through the Yet in much of the developing world, such as MDC model, SABCO has been able to more ef- East Africa, where road infrastructure, retail fectively and efficiently reach small-scale retail markets, cost implications, and customer needs outlets located in densely populated urban differ, other distribution methods have been areas where truck delivery is challenging. It developed — ranging from bicycles to boats. has been able to improve sales and customer service by providing outlets with access to smaller, more frequent deliveries of product. IFC’S ROLE AND VALUE-ADD IFC investment has played an important role in en- abling Coca-Cola SABCO to expand and modern- ize its operations in Ethiopia, Kenya, Mozambique, RESULTS OF COCA-COLA SABCO’S INCLUSIVE BUSINESS MODEL Tanzania, and Uganda — particularly in Ethiopia, • Generated company revenues of US$420 million and improved customer service where it was considered a pioneering investment • Created entrepreneurship opportunities for 2,200 new MDC owners and over 12,000 jobs in a country perceived to be highly risky. In 2002, • Enabled MDC owners and staff to support over 41,000 dependents and invest in health, IFC provided a $15 million loan, equity of up to education, and housing $10 million, and $12 million in bank guarantees • Built human capital through business and customer service training in Ethiopia and Tanzania. IFC also helped address challenges associated with banking requirements The MDC model has helped CCS increase sales informal sector. MDC owners and employees in Ethiopia by facilitating dialogue with govern- by improving customer service to small retailers support an estimated 41,000 dependents. With ment officials. compared to the traditional model of distribu- the income they receive from their MDCs, they tion. Providing retailers with regular interaction are now able to invest in housing, health, and With this initial investment, the IFC played an im- and constant access to products, the MDC education for their families, as well as create job portant role in discussions to scale up the MDC model enables them to carry less inventory and opportunities for relatives from the countryside. model at that time and helped to create an inclu- purchase more on a demand-driven basis, ad- sive business model that would later become the Second, the MDC model has created new eco- dressing some of the financial and space limita- core business model in East Africa. In 2007, on nomic opportunities for women, both as MDC tions they face. In Ethiopia and Tanzania, more behalf of the Coca-Cola Company, IFC conducted owners and employees and as SABCO manag- than 80% of the company’s volume is now research to assess the MDC model in Tanzania ers and sales staff. Across East Africa, the MDCs distributed through MDCs. MDCs are CCS’ core and Ethiopia and generate recommendations for have created entrepreneurship opportunities distribution model in Kenya and Uganda, where improving the model’s business and development for close to 300 women. In Ethiopia and they are responsible for 90% and 99% of total impact moving forward. This research alerted Tanzania, samples showed that 19% and 32% volume respectively. They account for 50% of SABCO to the ongoing opportunity and impact of of MDCs, respectively, were owned by women. volume in Mozambique and have been used to training, financing and women’s empowerment in In addition, couples own a high proportion of a lesser extent in Namibia and elsewhere. inclusive business models such as the MDCs. MDCs jointly, many of which are managed by The MDC model has had development impact the women. in three broad areas. First, the MDC model Finally, the MDC model has helped develop creates new opportunities for entrepreneurship human capital. The training SABCO provides and employment in the formal sector. As of the to ensure that the business is successful ben- end of 2008, Coca-Cola SABCO had created efits the MDC owners and staff members who 2,200 MDCs in Africa, generating over 12,000 receive it even after they leave the Coca-Cola jobs. Three-quarters of MDC owners in Ethiopia IFC’s Investment: system, helping them qualify for higher-skilled and one-third in Tanzania reported that they $80 million in long-term debt financing jobs and more lucrative business opportunities. were fi rs t-time business owners who previ- across multiple projects ously held only part-time jobs, or worked in the Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 13 CASE STUDY Dialog Telekom PLC COMPANY BACKGROUND Dialog Telekom PLC is Sri Lanka’s leading mobile telecommunications company is 83% owned by Axiata Group Berhad, the leading tele- service provider with approximately 6.3 million subscribers and a communications company in Malaysia, and 17% owned by indepen- market share of around 49% in 2009. dent shareholders. It is listed on the Colombo Stock Exchange. In 1993, Dialog was awarded a 20-year license to provide cellular telecommunications services by the government of Sri Lanka. The DIALOG’S INCLUSIVE BUSINESS MODEL In its expansion plans, Dialog has undertaken South Asia’s first “qua- To facilitate business training and access to financing for the retailers in its druple play” strategy, offering mobile telephony, fixed wireless tele- network, Dialog has worked with IFC on a capacity-building project called phony, broadband internet, and satellite-based pay television services. Dialog Viyapara Diriya (DVD) that leverages a local language version of Quadruple play is an important element in reaching underserved remote IFC’s SME Toolkit. So far 1,835 retailers have participated in the program. populations with wireless services, as it helps lower costs by leveraging Through this project, Dialog and IFC provide these retailers with training synergies across all four product offerings. on business skills such as business planning and tax compliance. These Another important element in reaching underserved populations is sessions improve retailers’ ability not only to manage and sell Dialog Dialog’s distribution network. Dialog has 32 primary distributors that products but also to operate their primary businesses — grocery stores, work exclusively for the company servicing and supervising indepen- communications kiosks, and other enterprises — a facility that has helped dent retailers. Close to 40,000 retailers spread throughout all provinces Dialog draw and maintain loyal retailers even while the Sri Lankan mobile of Sri Lanka currently stock Dialog products. These include phone cards sector has become increasingly competitive. This strong distribution and SMS-based reloads in which a user purchases airtime electronically network has provided a backbone for the company’s efforts to expand through a retailer. These retailers keep margins of 5-7% on the Dialog further into rural markets and connect lower-income consumers. products they sell. In addition to business skills training, the DVD project aims to build loyalty The typical Dialog retailer owns or operates a primary business and sells and grow retailers’ business by facilitating access to financing. For internal Dialog airtime as an additional source of income. Approximately 60% purposes, Dialog categorizes its retailers into three categories: Category of these retailers run small grocery stores and 40% run shops that sell a A are super-grade dealers with monthly sales of Dialog products greater range of communications products and services such as telephones and than $500; Category B are average-size groceries that sell between $250 Internet access. On average, these shops are open 13 hours per day and and $500 each month; and Category C are microenterprises that sell less have 1.8 employees: 95% are sole proprietorships, 50% have been oper- than $250 each month. The DVD training helps retailers graduate into ating for fewer than five years, and 15% are not formally registered, and higher categories.While the company does not provide or facilitate credit 81% of them have not had any formal business training. for retailers, this system is laying the foundation by tracking and grading retailer performance over time, showing the company — and prospec- Because these are independent retailers without exclusive arrangements tively banks — which ones are likely to be good credit risks. with Dialog, the company must compete with other mobile network operators for shelf space for its products. In part this is done by offer- Dialog is now coordinating with IFC to train a total of 5,000 retailers ing competitive margins on the Dialog products they sell. However, the by the end of 2010, including retailers in the post-conflict northern and company has also found that helping to facilitate business training and eastern regions of the country. access to financing helps to build a loyal retail network — the key to pro- moting its brand and expanding its business. 14 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Dialog Telekom PLC DRIVERS FOR DIALOG’S INCLUSIVE BUSINESS MODEL • Growth and brand awareness, including in lower-income, more remote regions • To maintain market share and competitiveness as the Sri Lankan mobile market expands • As part of achieving these objectives, to build a loyal, high-quality retail network In 2007, Dialog’s primary business area of program of expansion with the provision of mobile telephony was growing at 27%, a rela- coverage and affordable service options as key tively low level when compared to the rest of drivers. By 2009, penetration reached 66% and Asia. In addition, growth was concentrated in the market was growing at an annual rate of wealthier urban regions of the country. Dialog 40%. With the corresponding entry of new identifi ed the need to connect the uncon- players into the market, Dialog identified the nected — to extend the benefits of connectivity need for a strong and loyal distribution and and communication to underserved rural seg- retail network offering economies of scale. ments — and thus embarked on an aggressive IFC’S ROLE AND VALUE-ADD As the Sri Lankan mobile market grew, Dialog needed large-scale, long-term financing to expand RESULTS OF DIALOG’S INCLUSIVE BUSINESS MODEL and remain competitive as well as technical assis- • 6.3 million subscribers, an increase of 3 million since 2007 tance to strengthen its retail network. • 32% compound annual growth rate In this context, IFC provided $50 million in long- • 49% market share term debt financing (which the company prepaid in • $16.3 million in sales income for retailers selling airtime in 2009, approximately $408 per early 2009) and $15 million in equity to finance the retailer company’s overall expansion and quadruple play • 1,835 retailers trained strategy. IFC’s involvement also reassured other Since its expansion in 2007, Dialog has ac- Dialog’s inclusive business model is not only lenders and helped Dialog mobilize additional fi- quired more than 3 million new subscribers expanding access to telecommunications but nancing. This was important given that Dialog’s at a compound annual growth rate of 32%, also expanding economic opportunity for the expansion efforts are amongst the largest-ever in reaching a 50% market share. Leveraging its micro- and small-scale retailers that sell its Sri Lanka and involve communication and media quadruple play strategy to reduce prices, Dialog products. During 2006, Dialog’s retailers earned business models that are new to local lenders. has remained the leader in the competitive Sri $16.3 million selling airtime. This translates IFC has also been involved in providing technical Lankan telecommunications market and has to an average income of $408 per retailer. assistance to strengthen Dialog’s retail network been able to expand its reach into previously Capacity-building efforts, which have reached through the DVD project, delivering SME Toolkit- underserved groups, tapping into significant 1,835 retailers so far, are expected to help them based training to improve their skills and business unmet demand. Increased telecommunications increase their incomes even further. performance. A project of IFC, the SME Toolkit penetration is typically associated with GDP offers free business management information and growth and poverty reduction. It is estimated, training for SMEs on accounting and finance, busi- for instance, that a 10% increase in mobile ness planning, human resources, marketing and phone density leads to a 0.6% increase in per sales, operations, and information technology. capita GDP.1 In collaboration with Dialog, IFC has been able to tailor SME Toolkit materials to the Sri Lankan context. IFC’s Investment: $50 million in long-term debt financing and $15 million in equity 1 Waverman, Leonard, Meloria Meschi, and Melvyn Fuss. 2005. “The Impact of Telecoms on Economic Growth in Developing Countries.” Vodafone Policy Services. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 15 CASE STUDY Duoc UC COMPANY BACKGROUND Duoc UC is a non-profit, private institution of higher education. Duoc financial independence from the University. In 1990, two additional UC has been established as a professional institute in accordance Duoc foundations were created following regulatory changes in the with Chilean education regulations, providing official recognition to Chilean education system, which distinguished among three types of its courses and diplomas. It has 13 campuses in three economically institutions: universities, professional institutes, and technical train- important regions of Chile (Santiago, Valparaíso Viña del Mar, and ing centers. As a result, three foundations comprise “Duoc UC.” Concepción) and is planning to build five additional campuses. Fundación Duoc, the original Duoc foundation, includes a polytech- nic high school and an adult education program; Fundación Instituto Duoc UC was founded in 1968 by a group of students at the pres- Profesional Duoc is a professional education institute; and Fundación tigious Universidad Pontificia Católica de Chile (the University), with Centro de Formación Técnica Duoc is a technical training center. the help of professors and labor unions, to offer training courses Duoc UC remains a part of the University’s network. for blue-collar workers that lacked access to university education. In 1973, Fundación Duoc was created to achieve managerial and DUOC UC’S INCLUSIVE BUSINESS MODEL In contrast to five- or six-year university programs, Duoc UC offers two- Duoc UC also focuses on employability after graduation. Students receive year technical degrees and four-year professional degrees. Students are career services support through three avenues. First, Duoc UC maintains admitted on a “first come, first served” basis. Approximately 64% of an online jobs portal that is exclusively available to its students and gradu- Duoc UC students are from the lowest three income quintiles compared ates. Second, professors play a key role in job linkages as 65% are also to 39% for the Chilean tertiary education sector as a whole. A quarter of employed outside the institution. Third, Duoc UC facilitates connections its day students work while in school and 15% pay for their own studies; with potential employers through internships, contests, conferences, and for evening students, the percentages are 75% and 70%, respectively. collaborative projects that give students opportunities to create prototype Day students tend to be younger, at an average of 21 years, than evening products or services for companies. students, at an average of 25 years. Around 70% of students are the first Another key characteristic of Duoc UC’s business model is affordability. in their families to receive higher education, representing a significant Duoc UC programs cost $2,500 to $3,600 per year as compared to uni- opportunity for a new generation of Chileans whose families historically versity programs that cost $5,400 to $9,600 per year. Students at Duoc have lacked access to higher education. regionally, 70% of Duoc UC UC pay a fixed semi-annual tuition fee regardless of the number of students are based in Santiago, 22% in Viña del Mar/Valparaíso, and the courses they take, and therefore have an incentive to complete their edu- remaining 8% in Concepción. cation in the shortest possible timeframe. Other features that make Duoc Duoc UC focuses on employability with 72 courses relevant to the labor UC programs affordable include evening classes that enable students to market, offered through nine schools: engineering, informatics and tele- work while in school and a modular course structure that enables them communications (ICT), communication, design, health, business adminis- to receive intermediate certifications even if they must leave before com- tration, natural resources, construction, and tourism. The most popular pleting the program. courses by number of students are business administration (11,876), con- Duoc UC also offers student loan financing through private banks and struction (8,544), ICT (7,679), and engineering (6,511). Duoc UC also the government Credit Guaranteed by the State (CAE) program. In 2007, offers cross-cutting subjects like English and ethics, as well as entrepre- Duoc UC, IFC and the Banco de Crédito e Inversiones (BCI) created a neurship programs that are unique in the region. Duoc UC focuses on student loan risk-sharing program of up to $51 million to offer student “learning by doing,” using state-of-the-art infrastructure and equipment loans. Interest rates are competitive at 6%. In 2010, 60% of Duoc UC to simulate conditions students will find on the job. Professors also have students accessed financing. In that year, CAE provided 81% of loans work experience in their fields of specialization. To ensure that its cur- and private banks provided 19%, and 21% of students also received riculum stays up-to-date with labor market needs, Duoc UC schools have scholarships. business councils comprised of industry representatives. 16 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Duoc UC DRIVERS FOR DUOC UC’S INCLUSIVE BUSINESS MODEL • Duoc UC’s mission is to provide equal opportunity access to tertiary education • Demand for affordable, quality tertiary education which leads to higher income • Demand for practical programs oriented to the labor market The fundamental driver of Duoc UC’s inclusive training centers earn on average 2.8 times and business model is its mission to create equal 1.6 times the income of those with secondary opportunity access to high-quality tertiary edu- education alone. However, the high cost of cation for all Chileans. Access to tertiary educa- tertiary education in Chile—which is among tion remains uneven among different income the highest in the world when adjusted for groups in Chile largely due to the high cost of per capita income—has limited enrollment university programs. In 2003, while 74% of the especially among low-income segments of the population between the ages of 18 and 25 in population. Meeting the needs of this popula- the highest income quintile was enrolled in ter- tion in Chile is a significant market opportunity tiary education, only 15% of the population in for Duoc UC. the lowest income quintile was enrolled. Duoc IFC’S ROLE AND VALUE-ADD A third driver is that tertiary education pro- UC’s non-university tertiary education programs grams in Chile have generally been character- IFC’s investments have enabled Duoc UC to support seek to reduce this disparity. ized by highly theoretical curricula and technical rapid growth in student enrollment on two fronts. A second driver of Duoc UC’s model is the offerings not in sync with the needs of the labor First, an IFC guarantee of $19 million in 2007 strong and growing demand for affordable, market. Students also have limited opportuni- enabled the creation of a $51 million student loan quality tertiary education based on the income ties to personalize their learning paths. Thus, risk-sharing program by Duoc UC, IFC, and local differential between graduates of secondary programs that equip students with competen- bank BCI. In designing this program, IFC drew upon and tertiary education. Graduates of non- cies to enter and compete in the labor market its global experience in structuring risk-sharing fa- university professional institutes and technical are in great demand. cilities for student lending—in particular drawing on lessons learned in other programs to reduce the overall risk profile. As a result, low-income students can secure loans without which they may have either not enrolled in tertiary education or dropped RESULTS OF DUOC UC’S INCLUSIVE BUSINESS MODEL out. Approximately 40% of the loans are targeted • Over 63,000 students enrolled in Duoc UC programs in 2011 at students from the poorest two quintiles. • 70% of students are the first in their families to receive higher education Second, an IFC investment of $30 million in 2009 • 81% of surveyed graduates are employed in the fields they studied at Duoc UC is now enabling Duoc UC to meet long-term fi- nancing needs for campus expansion. The project Duoc UC is the largest provider of technical time for finding a job after graduating from involves the construction of five new campuses and professional tertiary education in Chile. As Duoc UC was estimated to be five months. and the expansion of nine existing campuses. This an indication of its quality, in 2010, Duoc UC Graduates earn competitive wages after at- will increase capacity by approximately 32,000 stu- became the only professional institute granted tending for a relatively short period of time and dents, or more than 60%. The expansion will also the maximum seven-year accreditation by the paying relatively little compared with universi- allow for penetration into new geographic areas of National Accreditation Commission (CNAP). ties. As an indication of the economic mobility Santiago, with new campuses that offer programs that education at Duoc UC provides, a student Duoc UC’s student body has tripled in size over tailored to local labor market needs. whose father earns $500 a month, upon gradu- the past ten years, and has been growing at ation from Duoc UC, earns on average $900— 13% annually since 2006. As of 2011, more almost double his father’s salary. than 63,000 students were enrolled at Duoc UC including foreign students from 25 countries. Duoc UC has shown strong financial results Approximately 70% of current students are the over the past years. Its annual revenue is ap- first in their families to receive higher education. proximately $200 million. Given its non-profit More than 60% received loans and scholarships status, Duoc UC allocates all of its retained in 2011 compared with 0.5% in 2002. earnings to the expansion of existing campuses and the construction of new ones. Duoc UC is IFC’s Investment: Duoc UC has more than 63,700 alumni and also establishing a strong reputation in Peru, $30 million in long-term debt financing and a 81% of surveyed alumni are employed, most in $19 million guarantee Ecuador, Bolivia, Argentina and Colombia. the fields they studied at Duoc UC. The average Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 17 CASE STUDY ECOM Agroindustrial Corporation COMPANY BACKGROUND ECOM is a soft commodity trading company founded in Barcelona in and has average annual sales of $2.7 billion, positioning it as one of 1849. Originally a cotton trader, ECOM has expanded primarily into the world’s leading traders of coffee, cocoa, and cotton. coffee and cocoa. The company is an integrated commodity origina- ECOM’s coffee business is global, with more than 20 offices on five tor, processor, and merchandiser, and it sells its products to branded continents. In recent years, 20% of ECOM’s total coffee trade was in product manufacturers, including Nestlé Group, Starbucks, Hershey, certified varieties and the company’s long-term vision is to increase Mars, Sara Lee, Kraft, and Folgers. Now incorporated and headquar- this percentage significantly. tered in Switzerland, ECOM and its subsidiaries operate in 30 coun- tries. The company employs approximately 6,000 people worldwide ECOM’S INCLUSIVE BUSINESS MODEL In Central America, where coffee is predominantly grown by smallhold- topics like soil conservation and biodiversity protection typically taking er farmers at the base of the economic pyramid, ECOM engages with longer to address. coffee growers to support farm productivity and promote certification. rainforest Alliance and CIrAD contribute their expertise through train- The model includes seasonal and very selective medium term financing ing of trainers and farmer workshops. ECOM staff participate in both, to farmers for inputs and capital improvements, as well as technical as- and then follow up with further knowledge-sharing for farmers. They sistance to increase yields, improve quality, and become certified under conduct follow-up visits to monitor progress and resolve the implementa- one of the labels ECOM markets (rainforest Alliance, Starbucks 4C, or tion issues that arise as farmers work toward their production and certi- Nespresso AAA). fication goals. On the financing side, ECOM is providing seasonal credits to its coffee Successfully implemented, these improvement programs can enable suppliers in Mexico, Guatemala, Nicaragua, Honduras, and Costa rica. farms to increase productivity or meet the eligibility requirements of cer- These pre-payments finance the farmer throughout the production cycle, tification programs. supporting the purchase of inputs like fertilizer, the maintenance of the coffee plants, and harvesting. Before extending credit, ECOM visits In addition to the financing-technical assistance combination described farms to determine their production capacity for the coming year. Based above, the participation of a high-value coffee buyer like Nestlé Group’s upon this assessment, ECOM and its operating subsidiaries determine Nespresso is critical to ECOM’s inclusive business model in Central the size of the loan, typically under $1,000, and manage the financing America. Nespresso’s participation includes money to co-finance, with process — from credit approval to monitoring to servicing the loans. IFC, the roles of rainforest Alliance and CIrAD. This sends a strong signal to farmers about the company’s intention to purchase high-quality, sus- On the technical assistance side, ECOM works with rainforest Alliance, tainable coffee at premium prices and allows ECOM to work with its a US-based NGO that promotes sustainable livelihoods, and CIrAD, a farmers to plan in advance the quantities that are required. This signaling French agricultural research center, in a partnership facilitated by IFC to is important as farmers decide whether or not to invest in the improve- improve farmer productivity, sustainability, and eligibility for certification. ment programs they need to meet Nespresso’s strict quality and sustain- Farmers are encouraged to improve their operations through better docu- ability criteria. mentation of production processes, management of fertilizer, improved labor conditions, and other measures. Improvement programs vary in duration depending on the nature of the problems encountered, with 18 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY ECOM Agroindustrial Corporation DRIVERS FOR ECOM’S INCLUSIVE BUSINESS MODEL • Need to ensure stability and security of coffee supplies • Market demand for high-quality, certified coffees and related sales premiums • Company vision to scale up its certified coffee trade Given the characteristics of coffee farming in Depending on market conditions, premiums Central America, ECOM must do business with paid for certified coffee can be significant to the smallholder farmers. The company must also growers. As of 2008, 20% of ECOM’s coffee invest proactively in their development: any was sold as certified. The company aims to loss of competitiveness would threaten the increase this figure to 50-80% over time. This company’s supply chain. will be possible only if the smallholder farmers in its supply chain can consistently produce Farmer competitiveness is also critical to ECOM’s certified varieties in the necessary quantities, access to premium coffee markets. Demand for making the availability of smallholder financing high-quality, certified coffee is increasing, with and technical assistance key to the company’s roasters, retailers, and consumers looking for long-term vision. IFC’S ROLE AND VALUE-ADD various combinations of high quality, environ- mental sustainability, traceability, and social IFC’s value proposition to ECOM lies in its ability standards. to provide both investment and advisory services, including $25 million in debt financing and $1.5 million in technical assistance, of which IFC is funding 50%. While investment and advisory ser- vices are each available separately from other part- RESULTS OF ECOM’S INCLUSIVE BUSINESS MODEL ners, IFC’s integrated offering has enabled ECOM • Increased productivity for farmers reached, in some programs by more than 40% to provide a package of financing and technical as- • 481,606 bags of certified coffee purchased, representing $3.7 million in additional income sistance helping farmers improve their productivity, for coffee farmers sustainability, and livelihoods. • Increased farmer loyalty to ECOM and more stable supply chain IFC’s relationship with ECOM in Central America • Increased trade volumes of certified coffee has led to an additional $55 million in debt financ- The business and development results of made possible through $17.4 million in sea- ing and $8 million in advisory services to support ECOM’s inclusive business model are intimately sonal financing to 14,149 smallholder farmers the company across Africa (Kenya, Tanzania, and linked. As smallholder farmers are reached and technical assistance that has enabled Uganda) and Asia (Indonesia, Papua New Guinea, with fi nanc ing and technical assistance, they 10,145 farmers to work toward the certifica- and Vietnam). Together, these new programs are enjoy greater productivity, security, and earning tion and quality standards of Nespresso AAA, expected to reach 80,000 coffee farmers, of which potential. Meanwhile, ECOM strengthens and FLO-Fairtrade, and Nestec 4C. An additional 43,000 are expected to be certified. secures its supply chain, expands its access to 3,282 farmers have improved their productiv- high-quality, certified coffees, and captures the ity through training in management, pruning premiums they bring. techniques, and the benefits of hybrid plants. By June 2009, ECOM had purchased 481,606 These results are encouraging and point to a bags of certified coffee in the three years since greater impact potential as ECOM estimates it the model was established, representing a works with about 125,000 growers in Central premium of $3,692,000 paid to smallholder America. farmers in Central America. This has been IFC’s Investment: $80 million in long-term debt financing across various projects Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 19 CASE STUDY Esoko Networks Ltd. COMPANY BACKGROUND Esoko Networks Ltd. (Esoko) began providing market information for owns its Ghanaian franchise, Esoko Ghana, and BusyLab, a subsidiary the agricultural sector in Ghana in 2004 under the name TradeNet, that provides system development, maintenance, and tech support getting its start within the Ghanaian ICT incubator BusyInternet. to the company and its franchisees. TradeNet was rebranded Esoko (after the Swahili word soko, Esoko was founded by Mark Davies, a British entrepreneur with a meaning “market”) in 2009. Esoko is now a holding company that track record of successful technology ventures in the United States, owns, maintains, and licenses the use of a web and mobile platform United Kingdom, and Ghana. Esoko now employs 60 staff in Accra offering market information and communications services for the ag- and 30 contractors across Ghana. ricultural sector in Ghana and 14 other countries in Africa. Esoko also ESOKO’S INCLUSIVE BUSINESS MODEL The Esoko platform is a web-managed system that enables real-time data $250 to $8,000 a year, depending on the scope of the project, number gathering and dissemination via the Internet and mobile phones. Though of members, and tools used; prices are similar in other franchises, but it is industry-agnostic, the first and most highly developed application on tailored to the local market. the platform targets the agribusiness sector. The application allows users Organizations like producers’ associations, non-governmental organi- to contribute and receive various types of market information through zations (NGOs), and agribusinesses use Esoko to communicate with text messaging, and is designed to work on any phone on any network. smallholder farmers, traders, dealers, and other actors in the value chain Primary users include individual farmers and traders, farmers’ associa- more frequently and at much lower cost than would be possible through tions, agribusinesses, and public sector organizations such as national field visits. Producers associations and government agencies can share agricultural ministries. The platform handles buy and sell offers, agricul- weather information, notify farmers of disease and pest outbreaks, and tural input and crop prices, extension messages, locations where seeds send reminders for trainings. Agribusinesses can track how products are and fertilizers are available, stock counts, and SMS polling. used, market to new customers, conduct polls to estimate crop yields Esoko users access content on the Internet and on their mobile phones, among farmers, and track inventories among distributors. choosing from a range of applications to create a personalized interface. Esoko’s growth strategy is two-pronged: to license country franchises For example, farmers can sign up to receive alerts on their mobile phones and to facilitate multi-country projects in collaboration with large non- when new market prices are posted or send one-time price requests for governmental organizations (NGOs) and corporations. the most recent prices. The ability to tailor the interface allows Esoko to target a diverse range of customers and maintain user-specificity and The franchise strategy has grown out of the company’s experience with its navigability. Ghanaian franchise, where Esoko is learning that deploying management information systems works best when promoted by a local champion. Esoko generates content in two ways: its own collection efforts and users’ submissions. Market price information is collected by the company, Multi-country projects establish regional management information and goes through an online approval process before it becomes avail- systems in collaboration with large NGOs and, in the future, corpora- able. Beyond market price information, Esoko allows users to upload and tions—which interact with producers’ associations, agriculture ministries, share information, without screening by the company. For example, any and others in multiple countries. For example, the International Fertilizer user can upload an offer to buy or sell their goods via SMS or the web, Development Center (IFDC) is using the Esoko platform to collect and dis- and that message will be redistributed to others who have signed up to seminate price data on fertilizers, pesticides, seeds, and other agricultural receive news on that specific commodity. Another example is bulk SMS, inputs in eight Eastern and Southern African countries. where governments, associations, businesses, and other groups can send Esoko has made two additional strategic decisions to position itself for extension messages to members or suppliers. growth. First, from a technology standpoint, it has adopted an open API While individual subscriptions are available, it is difficult to reach indi- architecture, which allows any third party to build or customize applica- viduals to sign them up, there is no training involved, and it can be chal- tions for the Esoko platform. Second, through its support services subsid- lenging for them to pay or make changes on their own. Organizational iary, BusyLab, Esoko will invest in developing local technical knowledge sales and marketing has, therefore, been an important strategy for Esoko, and skills rather than outsource to an international firm, creating stronger enabling the company to get a critical mass of users on the system. In links between software developers and the markets they serve. Ghana, organizational subscription and SMS fees range from around 20 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Esoko Networks Ltd. DRIVERS FOR ESOKO’S INCLUSIVE BUSINESS MODEL • Market inefficiencies in the African agriculture sector • rapidly increasing mobile phone penetration • A ready organizational market of development agencies, NGOs, and agribusinesses that had struggled to develop and maintain their own mobile-enabled solutions Esoko was created with the goal of addressing mobile penetration rate at 60% and Africa’s at market information asymmetries in the African 41%, and increasing rapidly, that opportunity agriculture sector. In Ghana, for instance, will only grow. agribusiness is a sizeable part of the economy, Finally, other early efforts to provide agricul- accounting for 65% of land use and 59% of tural market information via mobile phone have labor. However, the sector is also characterized struggled to achieve financial viability, due to by huge inefficiencies that cost both buyers the time and costs required to build the tech- and sellers money. Four million people work as nology and the inability to scale. The inability farmers, and 70% of their farms are small—less to scale was rooted in several factors, the most than three hectares apiece—making it nearly IFC’S ROLE AND VALUE-ADD important being flexibility and a valid business impossible for buyers to estimate which crops model. Earlier systems were project-based and Esoko began operations in 2004 within the are being grown in what quantities, or where. limited to specific countries or value chains, Ghanaian information and communications tech- As a result, many buyers resort to importing while Esoko has developed a product that can nology incubator BusyInternet, a client of the World what they need. At the same time, smallholder be used regionally, in many different languages, Bank’s infoDev program. As a client, BusyInternet farmers are limited in their ability to sell their and by many clients at the same time. That flex- received funding for specific incubation projects in products at market value because they are ibility allowed the company to envision a solid Ghana, access to a worldwide community of prac- unaware which markets need what products; revenue stream that provided a basis for large tice on incubation, and exposure for its technology because they are unable to physically get their investments. Esoko believed that by establishing center model. After an incubation period funded product there; or because they lack pricing a platform that could be used across countries by the founder, the company raised its first outside information, reducing their ability to negotiate. and sectors—achieving economies of scale—it investment in early 2009. Advances in information technology and rapidly could tap into a ready market of development In 2010, IFC made a joint investment with the increasing mobile phone penetration through- agencies, NGOs, and agribusinesses that would Soros Economic Development Fund (SEDF) of out Africa have turned these inefficiencies into find licensing its platform a more affordable $1.25 million in equity each. For IFC, Esoko is a a market opportunity for Esoko. With Ghana’s option than trying to develop their own. high risk, high development impact investment in an early-stage business. As such, IFC is helping with a number of issues early-stage businesses face, such as building robust financial controls, accounting and reporting systems; ensuring good RESULTS OF ESOKO’S INCLUSIVE BUSINESS MODEL governance and transparency; and meeting envi- • 4 franchises in Ghana, Nigeria, Mozambique, and Malawi ronmental and social standards. IFC’s involvement • 7 international partnership projects spanning 15 countries is also expected to help Esoko attract high-quality • Early evaluations showing 30-40% income increases for farmers using the system franchise partners. Since Esoko’s time in the market is still relatively In 2009, Esoko won the United Nations’ World short, the full impact of its model is yet to be Summit on the Information Society award for realized. However, early customer feedback e-inclusion and participation, highlighting indicates increased market efficiencies through the importance of locally acquired, relevant more equitable pricing, and better access to content. Esoko was also the runner up for markets for farmers and buyers. Early evalua- 2009’s One Africa Award. The company has tions of Esoko’s impact on farmers specifically been featured on CNN, Voice Of America, and found that those using Esoko in Ghana have in The Economist. increased their revenues by an average of 30% to 40%. IFC’s Investment: $1.25 million in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 21 CASE STUDY Faculdade Mauricio de Nassau COMPANY BACKGROUND Faculdade Mauricio de Nassau (FMN) is a leading for-profit provider of The primary shareholder is founder and CEO Janguiê Diniz, a Brazilian undergraduate, graduate, and technical education programs in north- lawyer and professor, who holds 88% of the company. The balance is ern and northeastern Brazil. Founded in 2003 with one campus in held by Cartesian Capital Group, a private equity group based in New the city of recife in Pernambuco state, FMN now operates nine cam- York (11%), and Jânyo Diniz, brother of the founder and CEO (1%). puses across five states. As of May 2011, approximately 27,000 under- FMN was one of the top 15 post-secondary education providers in graduate and 5,000 graduate students were enrolled, with more than Brazil in terms of sales in 2010. 50% of these students studying at its original campus in recife. To date, 8,000 undergraduate students have graduated from FMN. The company employs 3,000 employees of whom 1,400 are teaching staff. MAURICIO DE NASSAU’S INCLUSIVE BUSINESS MODEL Faculdade Mauricio de Nassau’s mission is to offer flexible, relevant, work schedules. With tuition approximately 30% lower than at FMN- quality education at affordable prices. It targets low- and middle-income branded campuses, FJN-branded campuses can target even lower so- students in north and northeastern Brazil, a region where private sector cioeconomic classes than its sister brand. 100% of FJN students come options for education are minimal despite relatively rapid economic from the C and D classes, with household incomes between $459 and growth. $2,874 per month. FJN educates approximately a quarter of the com- pany’s students and is reaching one of the fastest-growing markets for FMN offers three main educational products: post-secondary education in Brazil. • Undergraduate degree programs: Four-year undergraduate degree programs comprise the majority of FMN’s offerings and Accessibility is a critical success factor for FMN across both brands. The include fields such as accounting, health services, law, and business company operates a decentralized model in which campuses are located administration. There are 27,000 students currently enrolled and in areas with a high concentration of the target student population and they attend classes in the morning or evening. close to public transportation. This is important as studies have shown • Vocational and technical programs: These are, on average, that the farther students have to commute to school, the more likely they two-year courses emphasizing practical training in areas such as are to drop out. Additionally, FMN offers night and weekend classes so radiology, computer networks, fashion design, and gastronomy. working students can still pursue a degree. There are 5,000 students currently enrolled. Affordability is another key success factor. First, the company main- • Non-degree graduate courses: These courses tend to be shorter tains tight control on overhead costs, for example by maintaining well- professional development courses or specializations within a field equipped but “no-frills” campuses. Second, it has developed standard- such as health, law, or finance. FMN also offers several business ized curricula to significantly reduce teacher preparation, thus reducing courses including marketing, logistics, banking, and auditing. costs. As a result, an FMN education tends to be 5-45% cheaper than Unlike its undergraduate programs, some courses are taught by that of its competitors. FMN has also established agreements with the partner institutions, though FMN provides assistance and certifies government that enable students to access government scholarships. graduates. There are currently 3,000 students enrolled. One such scholarship, PrOUNI, provides universities with tax breaks in FMN has developed a branding approach in which it operates schools return for granting full tuition scholarships to 10% of their students. under two different name brands—FMN and Faculdade Joaquim Nabuco Another program, FIES, offers highly subsidized long-term loans for (FJN). The FMN brand targets “students who work.” These students lower-income students. Approximately 20% of FMN students currently are an average of 21 years old and more likely to study full-time while receive partial to full tuition scholarships. working part-time: 60% are enrolled in night classes. With tuition being Quality and job relevance are also critical for FMN. The company focuses 5-10% lower than their competitors, FMN-branded campuses primarily on hiring highly trained teaching staff, with more than 50% of its 1,400 serve students from Brazil’s B and C income classes with monthly house- professors holding Master’s or more advanced degrees. Wherever possi- hold incomes of $667 and up. These campuses currently educate ap- ble, FMN hires working professionals as professors; this provides students proximately 75% of the company’s students. with current, “real world” perspectives. The company maintains modern In contrast, the FJN brand targets “workers who study.” Its students gen- classrooms with multimedia equipment, and adjusts course offerings to erally work full-time and study part-time to improve their employment reflect changing market conditions based on insights from internal re- prospects. At FJN-branded campuses the average age is older, at 26, and search. Finally, FMN has a placement office and is increasing efforts to a higher concentration (65%) is enrolled in night classes to accommodate ensure students can move directly into the job market upon graduation. 22 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Faculdade Mauricio de Nassau DRIVERS FOR MAURICIO DE NASSAU’S INCLUSIVE BUSINESS MODEL • Market demand, as economic growth increases the need for qualified human resources and graduates’ incomes rise relative to those of non-graduates • relatively little competition in the post-secondary education sector in northern and northeastern Brazil • Targeted government policies incentivizing the private sector to deliver market-based solutions to post-secondary education As Brazil’s economy has grown, demand for Targeted government policies incentivizing qualifi ed labor has outstripped supply, and private sector participation in post-secondary raised the incomes of those with college degrees education have enabled and enhanced this op- up to three times higher than those without. portunity. For instance, the 1996 Education Law This premium has increased market demand simultaneously reduced regulation and focused for post-secondary education—but there are on the quality and accessibility of education few options in northern or northeastern Brazil. offered. In 1999, the government passed leg- Places in the prestigious public university system islation enabling full participation of for-profit IFC’S ROLE AND VALUE-ADD are limited, and tend to go to higher-income private institutions in post-secondary educa- In 2010, IFC extended a $35 million loan to FMN students who are better prepared academically. tion. It created a more amenable regulatory en- with the goal of helping expand access to post- The region’s 500 private sector post-secondary vironment including tax breaks for schools that secondary education among low- and middle- providers tend to be small and of mixed quality. accept a percentage of low-income students. income students, raising the quality of education More than 60% have fewer than 1,000 stu- It also created full and partial scholarships available in northeast Brazil, and stimulating job dents each. Combined with growing demand, and a government-sponsored student lending creation. This loan will help finance the completion this fragmentation in the market for post-sec- program. As a result, whereas only about 5% of FMN’s 2008-2011 expansion program which in- ondary education in northern and northeastern of students from the lowest-income households cludes the inauguration of six new campuses and a Brazil created a business opportunity for FMN. were able to attend university in the late 1990s, library as well as the remodeling and refurbishment today this is the fastest growing demographic of existing buildings. in the country. Through this investment, IFC has provided FMN with longer-term financing unavailable in the local market, and leveraged its credibility to send a signal to other investors about the attractiveness of the RESULTS OF MAURICIO DE NASSAU’S INCLUSIVE BUSINESS MODEL education sector in Brazil. IFC has also shared best practices and industry contacts among private • Total undergraduate enrollment of almost 27,000 across nine campuses as of May 2011 sector providers in Brazil, and guided FMN on im- • Net revenues of $89 million and EBITDA margin of 36% in 2010 provements to its environmental and social man- • One of the top 15 private post-secondary education providers in Brazil in terms of sales in agement systems. 2010 Today, total undergraduate enrollment is 27,000 Through its emphasis on accessibility, afford- across the company’s nine campuses. More ability, quality, and job relevance, FMN was able than 55% of students are female and nearly to grow its sales to $89 million and reach an half are from the lowest three income classes, EBITDA margin of 36% in 2010. The company’s with less than $2,874 in household income per original campus in recife is its largest and most month. FMN has facilitated access to financing important, accounting for more than 75% of for 5,000 students or 20% of its student body, its revenues. FMN is considered the second for a total of $6 million in financial aid. most popular post-secondary education brand in recife. IFC’s Investment: $35 million in long-term debt financing Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 23 CASE STUDY Financial Information Network & Operations Ltd. (FINO) COMPANY BACKGROUND Mumbai-based Financial Information Network & Operations Ltd. (FINO) FINO was incubated by ICICI Bank, India’s largest private sector builds and implements technologies that enable financial institutions bank and second largest bank overall, before spinning off as a sepa- to serve under-banked populations. FINO offers a suite of products rate entity in April 2006. Currently public sector banks, including to banking, microfinance, insurance and government clients serving Corporation Bank, Indian Bank, Life Insurance Company of India, and primarily rural and semi-urban regions of India. As of November 30, Union Bank of India, account for 16% of investment financing. Private 2009, the company’s client base included 20 microfinance institutions sector investors include HSBC (25%), ICICI Group (25%), and IFMr (MFIs), 14 banks, seven government entities, and four insurance agen- Trust (1%). International investors are IFC and Intel which own 17% cies with over 12 million individual customers combined. FINO reaches and 16% respectively. clients in 208 districts across 21 states in India. FINO’S INCLUSIVE BUSINESS MODEL FINO offers a banking and payments system that uses smart cards and can also be used to access services such as subsidies, payments, or credit agent-operated mobile point-of-transaction terminals to facilitate reli- as well as health, life, and weather insurance. Today, they are used by the able, low-cost financial transactions between institutions and customers. government to transfer payments under the National rural Employment With this system, FINO addresses a number of challenges that financial Guarantee Act and to administer health insurance under the govern- institutions face when serving low-income customers in particular, includ- ment’s health insurance program for people below the poverty line. Other ing illiteracy, information asymmetry, inadequate infrastructure, security, services include a remittance solution which enables individuals to send and — highly important — high cost relative to transaction size. The remittances from cash-to-smart card, card-to-bank, or card-to-card; a de- system enables users to overcome these barriers to achieve financial sus- posits management product that enables institutions to process recurring tainability and scale in serving under-banked populations. deposits or mutual funds; and a credit scoring solution for banks and MFIs with plans to extend to credit bureaus and financial risk manage- FINO’s core product offerings consists of several components, including: ment services. Finally, one of FINO’s newest offerings, FINO MITrA, utiliz- • Accounting and MIS systems: back-end processing systems that es a mobile platform to enable agents to enroll and conduct transactions FINO builds and may maintain to facilitate and track transactions at and end users to conduct mobile banking and commerce. the financial institution • Point-of-transaction terminals: hand-held mobile devices Although the revenue model varies by product and by client, FINO gener- that 6,000+ FINO agents and their customers use to conduct ally charges the financial institution ongoing rental fees for space on their transactions, such as deposits, loans, and payments back-end system and for point-of-transaction terminals, annual mainte- • Biometric smart cards: authentication devices carried by nance fees for the terminals, and new card issuance fees. Some institu- customers and agents alike to ensure transactions are secure tions may opt to buy point-of-transaction terminals as well. Customers do on both ends; each card carries fingerprints, demographic and not have to pay for any services except for the remittance product — for financial relationship information on a chip and a photograph with which they pay 20 rupees, less than $.50, directly to FINO in exchange for cardholder details on the face of the card remitting up to 10,000 rupees in a single transaction.2 FINO’s core system can be used for a variety of financial transaction types Currently, FINO’s revenues are driven by one-time fees, such as enrollment for which specific products have been developed. For example, in the charges and sales of point-of-transaction terminals. It anticipates that savings account product, the smart card enables people to check balanc- by 2011, about 57% of its revenues will come from recurring revenue es, transfer funds, make deposits, and withdraw cash. The smart cards streams, such as transaction fees and card and POT maintenance. 2 Mahalingam, T.V. 2009. “Bank at the Doorstep.” Outlook Business India. 24 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Financial Information Network & Operations Ltd. (FINO) DRIVERS FOR FINO’S INCLUSIVE BUSINESS MODEL • Market opportunity for technology that enables financial institutions to serve more than 600 million under-banked Indians cost-effectively • Mission to enable greater financial inclusion among under-banked populations The primary driver for FINO’s business model is a According to the reserve Bank of India, 41% of market opportunity for technology and services the adult population in India today is unbanked that enables financial institutions to realize the and only 27% of farmers have access to formal untapped potential to serve profitably the more credit sources. Informal money lenders control than 600 million rural Indians who are currently up to 75% of the market and charge interest under-served by or excluded from the formal rates as high as 90%. Non-credit related ser- financial system. vices are virtually non-existent in remote areas. IFC’S ROLE AND VALUE-ADD RESULTS OF FINO’S INCLUSIVE BUSINESS MODEL IFC’s role has been a combination of early-stage fi- nancing and technical assistance. IFC’s investment • Operating revenue growth of 140% since 2006 (34% CAGr from 2006-2009) included $4 million in equity in the first round and • Client base of 20 MFIs, 14 banks, seven government entities, and four insurance agencies another $2.8 million in the second round. This filled • Financial institutions can reduce costs, increase efficiency and productivity, improve an immediate financing gap that early-stage com- transparency, and reach a larger population, including those in more remote settings panies like FINO face, and enabled the company to • As of early 2010, over 12 million individuals in 21 states across India had access to credit and reach a stage where funding options were more non-credit related services, including loans, payments, remittances, savings, insurance and widely available. government subsidies Through its role as a trusted intermediary, IFC Operating revenues grew by 140% between more capital and, in turn, offer credit to more helped FINO to spin off successfully and to encour- 2006 and 2009, for a compound annual individuals. age banks and MFIs to adopt its technology. growth rate of 34%. Further, in just a few This model serves to promote financial inclu- years, FINO has grown its customer base to 20 IFC also agreed in December 2007 to provide a sion among people who currently lack access MFIs, 14 banks, seven government entities and technical assistance grant of up to $1 million to to financial services, particularly in rural regions four insurance agencies serving over 12 million support pilot projects and training programs. With where 90% of FINO’s customers live. Financial individual customers who were previously un- these funds, FINO worked with MFIs such as SEWA inclusion is critical to enabling individuals to banked. FINO has deployed over 7,000 point- to develop and test its technologies, as well as con- increase incomes, build savings, and manage of-transaction terminals to date, and currently ducted 872 training workshops for 8,002 partici- uncertainties such as sickness or financial reaches 26,000 different locations which are pants across the country. FINO conducted several shortfalls. Without financial inclusion, indi- predominantly small villages or towns. pilots including one for a mobile application in viduals have to rely on themselves to invest in Andhra Pradesh, during which FINO enrolled 1.7 FINO’s automated payments systems enable education or economic growth, greatly limiting million families below the poverty line in a cashless fi nanc ial institutions to lower transaction their opportunities and perpetuating economic health insurance coverage program. costs, increase efficiency and productivity, and inequality and poverty.3 Through FINO, even improve transparency. Institutions can allocate individuals in more remote regions of India greater staff time to account acquisition and can access formal loans as well as insurance, scale up operations. FINO’s clients can offer savings, remittances and government pay- customized products to their clients, provide ments. FINO has also substantially contributed cashless and paperless insurance, and ensure to employment generation, with more than timely and full payment. Finally, with simple 800 direct employees and 6,000 field agents, and reliable data systems, smaller institutions, of which nearly 70% are women. such as microfinance institutions can attract IFC’s Investment: 3 Demirgüç-Kunt, Asli, Thorsten Beck, and Patrick $6.8 million in equity Honohan. 2008. “Finance for All: Policies and Pitfalls in Expanding Access.” World Bank Policy research report. Washington, DC: The World Bank. Page 21. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 25 CASE STUDY Husk Power Systems COMPANY BACKGROUND Founded in 2007, Husk Power Systems (HPS) is a decentralized power HPS is promoted by first-generation entrepreneurs Gyanesh Pandey, generation and distribution company serving rural India. It has devel- ratnesh Yadav, Manoj Sinha, and Charles ransler, who won several oped an innovative biomass gasification technology capable of gen- business plan competitions in the United States and decided to im- erating power as efficiently as conventional biomass gasifiers, but on plement their idea in the state of Bihar. Besides IFC, Draper Fisher a micro scale—enabling the company to serve rural villages at prices Jurvetson, Cisco, Oasis Fund, Acumen Fund, and LGT Philanthropy they can afford. HPS covers 250 villages and employs 350 people. Foundation also have equity stakes in the company. HUSK POWER’S INCLUSIVE BUSINESS MODEL HPS provides electricity in remote, rural villages in India through small- built, and will be added gradually to those already in operation. In ad- scale systems that generate and distribute power cheaply enough for dition, circuit breakers are designed to cut off the flow of electricity if base of the pyramid consumers to afford. Its target markets are previ- it exceeds the designated level, and resume when it returns to normal. ously unelectrified villages in India’s low-income states, including Bihar, HPS uses two primary revenue models. Uttar Pradesh, Orissa, and Jharkhand. Most of HPS’ target customers • Build, own, operate, maintain: In the first model, HPS builds, earn around $2 a day. owns, operates, and maintains the power generation and Each HPS system consists of a 30-50 kilowatt (kW) power plant that runs distribution system, with revenues coming from subscriber fees. entirely on rice husks, generating electricity through biomass gasification, Each plant requires four staff—an operator, husk loader, collector, and a simple distribution micro-grid connecting subscribers directly to the and electrician—though the company plans to reduce this to two plant using insulated wires strung from bamboo poles. Systems are sited or three staff via process and technology improvements that would only in locations where rice husks are plentiful. HPS plants offer competi- enable HPS to increase salaries and save on costs. It typically takes tive prices for husks year-round, approximately $0.02-0.03 per kilogram, two to three months for a plant to reach operational profitability, and farmers have an incentive to supply them in order to ensure that and three to four years to recoup capital expenditures, depending electricity remains available in their villages. The typical plant can serve on whether (and how much) subsidy is received. Additional revenue two to four villages—approximately 500 households—within a radius of streams come from the sales of rice husk ash (to be mixed in 1.5 kilometers, depending on size and population. cement or used to produce incense sticks) and, starting in 2012, carbon offsets. Each of these revenue streams could add up to 50- Including both generation and distribution, HPS systems can provide elec- 60% to the total margins of each plant. tricity at a levelized cost of approximately $0.20 per kilowatt hour at • Build and maintain: In the second model, HPS builds and sells the current system utilization levels (likely to drop to $0.15-0.16 as utilization system to an independent owner-operator. The owner-operator is increases). Household subscribers pay a base rate of $2.20 per month, responsible for all costs and entitled to all revenues. Staff training which includes 40W of electricity for 6-8 hours every evening, enough is included in the purchase price, and maintenance and repair are to power two 15W compact fluorescent lamp (CFL) bulbs and recharge provided on a fee-for-service basis. For a share of the revenues, HPS a cell phone. Business subscribers tend to use more electricity, between will also facilitate marketing of rice husk ash and obtaining carbon 60-75W, paying an average of $4-4.50 per month. Subscribers can pay credits. HPS also facilitates access to Indian government subsidies more, at $1.10 for each additional 15W connection, if they have appli- available for rural electrification, which can cover up to 50% of the ances requiring greater wattage. HPS’ service compares favorably to the total project cost. cost of alternatives such as candles, kerosene lamps, and LED lanterns, which serve only lighting needs. The build and maintain model will be HPS’ primary focus scaling up. The company is establishing processes, technologies, and training infra- Local employees collect payments once a month, in advance. In two vil- structure to facilitate its growth as a solutions provider. For instance, HPS lages, smart meters installed on subscribers’ premises help the company has set up a training institute called Husk Power University to help fulfill make sure that subscribers are using only the wattage that they have, human resource needs. HPU uses both classroom-based and experiential keeping non-payment under 5%—compared to a national average of learning to train power plant entrepreneurs and technicians. approximately 30%. Smart meters will be part of each new HPS system 26 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Husk Power Systems DRIVERS FOR HUSK POWER’S INCLUSIVE BUSINESS MODEL • Demand for affordable, reliable electricity in rural India • ready supply of husks left over from rice processing, as well as other biomass, with few competing uses • Government support for off-grid energy solutions More than 400 million Indians lack access to lighting, and energy needs for non-lighting electricity. Approximately 125,000 rural villages purposes—like mobile phone recharging— are “off the grid,” with 25,000 of these con- were going unmet. While Bihar is a low-income sidered unviable to connect via conventional state, it also has a young population and a pro- means. The problem is particularly acute in the reform government, and has experienced rapid state of Bihar, India’s third largest state (with economic growth in the last half decade—at an 83 million residents) and also its poorest (with average of 11.5% a year between 2005 and average per capita income of $260 per year, 2010. It is also an important rice-producing less than a dollar a day). Bihar is very rural, with state, generating approximately four billion 85% of its citizens living in villages. Only 28% pounds of husks a year that—with few compet- IFC’S ROLE AND VALUE-ADD have access to electricity. Those without are ing uses—can be used to generate electricity In 2010, IFC invested $350,000 in convertible forced to rely on kerosene, wood, and dung through biomass gasification. quasi-equity in HPS. At the time, HPS had just com- for their household energy needs and diesel for Indian government policy has provided an pleted a $1.75 million round of equity financing, their agricultural and commercial energy needs. additional driver for HPS. recognizing that attracting mostly “impact investors” interested These alternatives are costly and cause health electricity is fundamental for economic growth in social as well as financial returns, like Acumen hazards like indoor air pollution. They are also and poverty alleviation, the government is en- Fund and the Oasis Fund. HPS had initially received damaging to the environment. couraging the development of off-grid power grant funding and technical assistance from the HPS’ founders saw a market opportunity in the solutions through subsidies and other forms of Shell Foundation, which continues to be a strategic swelling demand for more reliable, affordable support available through the Ministry of New partner assisting the company with research and sources of energy. People were already paying and renewable Energy. development, management information systems, high prices for kerosene and battery-powered and training infrastructure. The off-grid power sector is still evolving and is considered too risky for commercial financing. IFC’s investment in HPS is intended to help bridge this RESULTS OF HUSK POWER’S INCLUSIVE BUSINESS MODEL gap. IFC is helping HPS, an early-stage venture, to firmly establish its business model; develop a • 72 power plants installed, serving more than 30,000 households in 250 villages in Bihar financial structure conducive to scale; and comply • Total customer savings of $1.25 million thus far, compared to available alternatives ($17 per with social and environmental standards. Together household per year) with the Shell Foundation, IFC Advisory Services is • 358 jobs created helping the company to build up the Husk Power To date, HPS has installed 72 power plants staff, including operators, husk loaders, collec- University—for example, by developing a soft skills serving more than 30,000 households—150,000 tors, electricians, and mechanics. HPS employs training module. In addition to building the compa- people—in 250 villages in the state of Bihar. 350 people directly, and two independent plant ny’s capacity, IFC’s participation is also expected to HPS’ services enable parents to work and chil- owner-operators have created eight additional have an important signaling effect to larger, more dren to study beyond daylight hours; reduce the jobs between them. Close to 300 of these em- commercial investors. amount of time women must spend collecting ployees are from the villages HPS serves. firewood; and cut down on indoor air pollu- While the company is still young, it has expe- tion from burning fuel. HPS’ services also save rienced fast growth, from three to 72 plants customers money. Estimating average annual in three years. HPS expects to have built more energy expenditure per household at $38 for than 100 plants by the end of 2011. Plant level villagers using kerosene lanterns, HPS customers margins are between 20 and 30%, and the paying approximately $21 save $17 per year. In company is on track to break even within six total, since its inception, HPS has saved custom- IFC’s Investment: to nine months of reaching the 100-110 plant ers $1.25 million. $350,000 in convertible quasi-equity mark. HPS won an Ashden Award for Sustainable HPS has also created economic opportunities for Energy in 2011 and a BD Biosciences Economic power plant owners, operating partners, and Development Award in 2010, among others. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 27 CASE STUDY Idea Cellular COMPANY BACKGROUND Idea Cellular Limited (Idea) is the fastest growing telecom service engaged in an initial public offering to raise the capital necessary to provider in India. The company’s origins extend back to 1995, and it support a network expansion. The Aditya Birla Group (Birla) now owns started its commercial operations in 1997 in Maharashtra and Gujarat 57% of Idea. Private equity investors Providence Equity Partners, Inc. states. Idea expanded into other service areas through a combination and Citigroup Global Markets (Mauritius) hold a combined 17.7%. of organic growth and acquisitions. The remaining 24.6% is held by approximately 350,000 individual shareholders. In late 2006, the Aditya Birla Group consolidated majority ownership over Idea and assumed management control. In February 2007, Idea IDEA CELLULAR’S INCLUSIVE BUSINESS MODEL When Aditya Birla Group took over, Idea’s new management reoriented projects around the world. Central to the model is a grassroots-level part- the company’s strategy to focus network expansion mostly in India’s nership, originally brokered by IFC, with India’s Self-Employed Women’s remote areas where demand is both high and underserved. The company Association (SEWA). With limited financial support from IFC, SEWA fulfills also built a distribution network of 1,520 branded service centers and critical project functions, namely: more than 700,000 multi-brand retail outlets around the country as of • Providing access to the information and relationships required to March, 2009. These investments have enabled Idea to serve customers at partner with rural micro-entrepreneurs the base of the economic pyramid by bringing coverage to rural areas and • Financing micro-entrepreneurs to purchase and operate PPCO achieving economies of scale that help keep prices low. equipment • Training and building the capacity of PPCO operators Idea’s approach has also included a suite of products and services custom- ized to meet the needs of rural and low-income consumers. For example, While Idea provides overall management for the project and ensures Idea has launched small recharge sachets in denominations as low as regulatory compliance, SEWA is responsible for identifying and screen- $0.20. The company provides value-added services such as “music on ing PPCO operators and providing them with training in their local lan- demand,” which has been particularly successful in rural areas where FM guages. SEWA gives PPCO operators the financing to purchase PPCO radio does not reach. Idea’s media and advertisement campaigns are also equipment — including a handset, shared phone software, SIM card, and conducted primarily in local languages to reach out to rural users. airtime for about $35, or just a SIM card for about $11 for operators who already own their own phones. This financing, in turn, provides the Most recently, Idea has been working to extend its reach specifically to organization with interest income. SEWA also provides PPCO operators consumers who cannot afford their own phones through a Pocket Public with technical support and collects data for monitoring and evaluation Calling Offices (PPCO) project. PPCO is at once a product of Idea’s expan- purposes. sion efforts and a part of its strategy for further growth. The company considers PPCO a commercial project, and as such it was developed via PPCO operators are responsible for maintaining PPCO equipment, pro- Idea’s standard business development process: concept documentation, moting their businesses, and maintaining accurate call records. PPCO management approval, product configuration, testing, and full commer- operators generate income by selling airtime to their communities, for cial launch. which Idea pays a 20-47% commission depending on the volume of airtime an operator sells each month. Operators may also have additional PPCO is a shared access model in which a mobile phone is used as a revenue streams such as phone recharging and sales of prepaid cards to public phone operated by a micro-entrepreneur. To develop the model, customers who own their own phones. Idea partnered with IFC to leverage its experience with shared phone 28 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Idea Cellular DRIVERS FOR IDEA CELLULAR’S INCLUSIVE BUSINESS MODEL • To increase the number of Idea customers • To increase the number of transactions per consumer • To increase brand awareness, remain competitive, and increase market share • To maintain Aditya Birla Group’s reputation as a socially responsible company by expanding access to telecommunications services and economic opportunities The primary driver for Idea’s inclusive busi- to 50 million new rural customers via 300,000 ness model was significant pent-up demand operators within three years. throughout India, especially in semi-urban and An additional driver was the Aditya Birla Group’s rural areas where 2008 telephone penetration commitment to commercially sustainable, pro- or “teledensity” averaged approximately 6%. poor approaches. The company’s efforts have This compares with 40% teledensity for India been enabled by measures by the Government as a whole, still less than half the average for of India to liberalize the telecommunications Asia. The specific objectives of Idea’s PPCO sector and introduce pro-competitive policies. project were to extend the company’s services IFC’S ROLE AND VALUE-ADD For Idea, IFC’s value-add has been the combination of large-scale debt financing for network expan- sion and advisory services to help bring the benefits of network expansion even closer to the base of RESULTS OF IDEA CELLULAR’S INCLUSIVE BUSINESS MODEL the pyramid through the PPCO project. • 185% increase in subscribers to 60 million since 2007, approximately 40% of these in rural With respect to the PPCO project, IFC brought areas two distinct benefits. First, IFC offered exper- • 2% increase in market share since 2007, from 9 to 11% tise in the planning and management of shared • 31% increase in revenues and 8% increase in EBITDA phone models. Drawing on its experience with • Increased access to telephony among rural and other previously underserved populations such models in multiple African countries, IFC was • 1,228 PPCO operators in business in the pilot phase, earning 20-47% commissions well-positioned to advise Idea and its implement- • Income and employment generation in the retail sector ing partner, SEWA, on appropriate business and Idea’s overall inclusive business model, in which telecommunications. PPCO has also created operating models. Second, IFC’s long-standing network expansion brings coverage to rural business opportunities for 1,228 PPCO op- relationship with SEWA and its experience linking areas and economies of scale help keep prices erators in the pilot phase alone, each of whom large corporations with micro, small, and medium low, has enabled the company to increase earns between 20-47% on sales. enterprises allowed IFC to play a critical role broker- subscribers by 185% to 60 million since the ing and facilitating the partnerships involved. Idea’s growth has also contributed to overall network expansion began. Approximately 40% growth in the telecommunications sector, of these are in rural areas. During the same where increasing penetration has fueled period, the company gained two percentage competition and helped maintain affordability. points of market share, reaching 11% percent. Studies have shown that increasing penetration Idea’s revenues increased by 31% from 2008 to is also associated with GDP growth and poverty 2009 to $2.15 billion. reduction. It is estimated, for instance, that a The PPCO project has helped facilitate customer 10% increase in mobile phone density leads to acquisition in more rural, lower-income seg- a 0.6% increase in per capita GDP.4 ments that previously had little access to mobile IFC’s Investment: $100 million in long-term debt financing 4 Waverman et al. 2005. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 29 CASE STUDY Ideal Invest S.A. COMPANY BACKGROUND Ideal Invest S.A. (Ideal) is the leading private provider of student loans Ideal was founded by Oliver Mizne, a young entrepreneur with a in Brazil, with a current portfolio of over $65 million. Founded in 2001, vision to leverage the use of finance to increase access and choice for Ideal originally offered working capital financing to private universi- lower-income students seeking tertiary education in Brazil. Following ties, backed by student tuition receivables. The company moved into several rounds of equity financing, the company attracted an experi- student lending in 2006 with the development of its signature lending enced group of investors, including prominent individuals with ample product, Pravaler. Since then, Pravaler has reached over 17,000 stu- experience in the Brazilian financial sector, as well as leading local and dents enrolled in 175 private partner universities in 14 Brazilian states, international private equity firms such as Gavea Private Equity. IFC has making it the largest such program in the country. also invested BrL 12 million (approximately $7.5 million) in equity in the company. IDEAL INVEST’S INCLUSIVE BUSINESS MODEL Pravaler loans are available to students enrolled in one of more than 8,000 An incremental approach to lending has also been critical, further mini- approved courses offered by 175 partner universities with which Ideal mizing Ideal’s risk and accommodating the needs of lower-income stu- works. Students interested in applying for Pravaler loans must first fill out dents. Ideal finances students’ educations through successive small loans. an online form. The online process limits Ideal’s staffing needs and helps Once a student is approved to borrow, Ideal issues an initial loan covering keep costs down. Applicants are not required to have bank accounts, but part of the first semester. Each subsequent loan covers another semester’s must demonstrate, among other conditions, that their monthly family tuition and is repayable in a period of 12 months. While each of these income is sufficient to meet loan payments. Interest rates vary according semester loans are independent from each other, repayment is coordi- to programs and courses, and participating universities share some of the nated and staggered, such that only one installment is due each month. costs in order to make the loans more affordable to students. In 2011, Students begin repaying the first loan right away, the second loan after over half of new Pravaler clients have joined Ideal’s Zero Interest Program, the first is paid off (effectively receiving a grace period of six months where students pay only the principal amount and participating universi- where no interest accrues), the third loan after two years (a grace period ties pay 100% of the students’ interest. Delinquency rates are currently of one year), and so on as needed until they complete their studies. New well below those of traditional consumer lending loans in Brazil. loans are only issued to students who are up-to-date on their payments. This incremental approach limits Ideal’s exposure to any given student. Ideal’s in-depth knowledge of student repayment behavior has been criti- It also appeals to lower-income students and families whose cash flows cal to the success of the Pravaler product. Over the years, Ideal learned may be too uncertain to commit up front to larger, longer-term loans. important lessons about when students repay and when they do not. For example, issues like the distance a student travels to and from school, Ideal has two main revenue streams. The first is a commission fee charged the specifi c courses he or she takes, and the quality of the educational to partner institutions, equivalent to a percentage of the principal amount institution all factor into the likelihood he or she will repay on time. This on loans issued to their students. This fee reflects the important role Ideal information now influences Ideal’s lending decisions. financing plays in expanding access to its partners’ programs among students who might not have been able to afford it otherwise. Ideal’s Another aspect of Ideal’s model is that it partners with educational insti- second revenue stream comes from a special purpose vehicle (SPV) that tutions; Ideal currently has 175 university partners and will only lend to the company has structured to carry the loans to maturity. Ideal receives students attending these universities. This partnership is mutually benefi- management and performance fees from the SPV, as well as capital gains cial because the universities gain students who would otherwise not have from the percentage of junior notes that it holds in the vehicle. The SPV the means to attend, and Ideal gains allies that will market its services collects interest from both students and universities. It funds itself in the and help reduce the cost of the loans to students. Ideal has also signed Brazilian capital markets by issuing senior notes, which are currently rated an agreement with Itaú Unibanco, a large Brazilian commercial bank, to AA by Standard & Poor’s. gain access to its network of university partners. Students at those uni- versities will now be referred to Pravaler, expanding the market for Ideal and allowing Itaú to observe how the student lending market develops. 30 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Ideal Invest S.A. DRIVERS FOR IDEAL INVEST’S INCLUSIVE BUSINESS MODEL • Market demand for university education, due to economic growth increasing the need for qualified human resources and graduates’ incomes rising relative to those of non-graduates • Insufficient supply of free public university education relative to demand • Limited financing options for students attending private universities As Brazil’s economy has grown, demand for operate fully in the post-secondary education qualifi ed labor has outstripped supply and market. It created a more amenable regulatory raised the incomes of those with college environment for these institutions, including tax degrees up to three times higher than those breaks for schools that accept a percentage of without a degree. This premium has increased low-income students. market demand for post-secondary education Private institutions have played a critical role in —but spots in the free public university system expanding access to post-secondary education are limited, and tend to go to higher-income among lower-income students in particular. In students who are better prepared academically. the late 1990s, only about 5% of students from IFC’S ROLE AND VALUE-ADD Because the government will not increase the the lowest-income households were able to number of publicly funded universities in the attend university, whereas today this is the fast- In 2009, IFC committed BrL 12 million (approxi- country anywhere near the levels needed to est-growing demographic in the country. The mately $7.5 million) in equity to enable Ideal Invest address pent-up demand, it has encouraged government has offered full and partial schol- to expand its student loan program. Ideal’s innova- private operators to come into this space. In arships and created a government-sponsored tive way of leveraging the capital markets to mobi- 1996, the government created the Education student lending program, helping to fuel this lize funds for student loans was a unique approach Law to incentivize private operators. The Law trend. However, these programs are expensive in Brazil. IFC’s investment was and continues to be simultaneously reduced regulation and focused to maintain and do not address the needs of all important because it adds to the credibility of the on the quality and accessibility of the education students who see education as a stepping stone organization, thereby making it more attractive for offered. In 1999, the government passed legis- to a better life. Ideal was founded to address other investors to participate. IFC’s knowledge of lation enabling for-profit private institutions to this gap. the education sector in Latin America and Brazil, as well as its expertise in structured finance, helped Ideal mobilize capital from investors. In addition, access to best practices within IFC’s network is en- abling the company to serve its student customers RESULTS OF IDEAL INVEST’S INCLUSIVE BUSINESS MODEL better and more sustainably. • Over 17,000 student borrowers have attended 175 partner universities in 14 Brazilian states as of April 2011 • Over 10,000 female students • Portfolio of approximately $65 million Ideal has become the largest private student from families with less than $1,500 (r$3,000) a loan provider in Brazil with a portfolio of $65 month in household income, and 66% are the million, having served over 17,000 students at first in their families to go to college. 175 partner institutions in 14 states. An addi- Further growth will not be without its chal- tional 38,000 students have been approved but lenges. Market-based financing for education have not yet chosen to borrow; they feel safer in Brazil is still in its nascent stages, and Ideal enrolling in post-secondary education programs must compete with other forms of credit—like knowing they have been pre-approved for ubiquitous consumer credit—and with govern- financing in case they need it. ment scholarships and loans that offer subsi- Approximately 88% of Ideal’s borrowers are dized interest rates. However, as more and more located outside the major Brazilian cities of Brazilians aspire to go to university, the demand rio de Janeiro and São Paulo. Nearly 61% are for additional financing options will only con- women and 64% work while in school, at an tinue to grow. IFC’s Investment: average age of 25. Approximately 62% come BRL 12 million (approximately $7.5 million) in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 31 CASE STUDY Jain Irrigation Systems COMPANY BACKGROUND Jain Irrigation Systems Ltd. (JISL), based in India, is the largest manu- United States. Within India, JISL is the largest provider of micro-irriga- facturer of efficient irrigation systems worldwide and a leading pro- tion systems — with a 55% share of the drip irrigation market and a cessor of fruits and vegetables — JISL is the world’s largest processor 35% share of the sprinkler market. of pureed mangos and third-largest in dehydrated onions, and over JISL is listed on the Bombay Stock Exchange, but the Jain family has the years, has expanded into bananas, guava, pomegranates, aonla, controlling ownership of the company. JISL currently employs 6,000 papaya, and tomatoes. The company has establishments in India, the people in India and this number is expected to reach 8,000 by 2012. Middle East, Europe, Australia, Central and South America, and the JAIN IRRIGATION SYSTEMS’ INCLUSIVE BUSINESS MODEL Centered around agriculture, JISL’s business model makes almost a full Launched in 2002, JISL’s contract farming model is built on selecting pro- circle through the value chain. The company provides farmers with micro- gressive, receptive farmers and providing them with high-quality seeds; irrigation systems (MIS), seeds, and other inputs to produce more and access to MIS, fertilizers, and other inputs; agronomical training and better crops and then purchases fruits and vegetables through its food guidance on all aspects of planting, input application, and other farm processing division. In this way, Jain’s inclusive business reaches farmers functions via JISL’s 60 extension associates. Additionally, farmers’ rela- as both consumers and producers. tionships with JISL often allow them to obtain credit from commercial banks to fund MIS and other purchases, such as seeds, planting material, Serving farmers as consumers and packaging for certain crops. The company then buys the produce JISL’s MIS are enabling farmers to switch from flood irrigation to more back — at a minimum price established at the beginning of the growing water- and energy-efficient systems, such as drip and sprinkler. These season or at approximate market price at harvest time, whichever is products are supplied via a network of 1,750 distributors throughout greater. Successful contract farms are used for demonstration to encour- India. JISL has also set up an institute to train distributors, government of- age others to adopt good agricultural practices. ficials, and others on the skills to lay out and use MIS. All of JISL’s dealers and distributors are trained by the company, including specialized training In response to its major buyers’ concerns about food safety and increased for engineers and fitters. interest in farm-level practices and traceability, JISL is also helping farmers to meet international standards. JISL’s own farms are GLOBALGAP- A key factor in the success of JISL’s MIS business is a subsidy provided by certified and the company is now working with IFC to develop and apply the central and state governments in India. Farmers working less than five the Jain GAP standard to farmers in its supply chain. The Jain GAP stan- hectares of land receive a 50% subsidy on MIS equipment. The subsidy dard will help the company meet its buyers’ concerns without significant- is routed through banks in some states and administered through special ly increasing cost to low-income farmers. By 2011, around 1,000 farmer purpose vehicles set up by the government in other states. Farmers raise suppliers of onions and mangoes will be certified on Jain GAP, bringing the balance of the funding from their own sources or from the banks 2,500 acres of farm land under sustainable management. In the long responsible for routing the subsidy. JISL works with several banks to fa- term, JISL hopes to expand Jain GAP to the larger number of farmers cilitate access to financing for MIS, including Yes Bank, Central Bank of from whom it sources via traders. India, IDBI Bank, and others. These banks have developed the necessary procedures as well as systems for monitoring and reporting. An average For JISL, the advantages of contract farming include greater control loan for purchasing a drip irrigation system is about $817 per farming over the quality and quantity of supply compared to traditional procure- household. ment channels. JISL has thus far applied the contract farming model to onion procurement, and is expanding the model to mango and tomato. Reaching farmers as producers Approximately 90% of JISL’s onion contract farmers are small, with an JISL procures fruits and vegetables directly from 4,150 contract farmer average farm size of less than 2 hectares. suppliers and indirectly through traders who source from over 25,000 farmer suppliers. 32 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Jain Irrigation Systems DRIVERS FOR JAIN IRRIGATION SYSTEMS’ INCLUSIVE BUSINESS MODEL • Market opportunity for MIS which increases productivity and income for farmers, enabled by government subsidy • Need to ensure consistent quality and quantity of produce for processed foods for export • Buyer and consumer concerns regarding food safety and farm-level practices • Water scarcity and low productivity of farmers in JISL’s supply chain Driver for serving farmers as consumers quantities, and the use of MIS is a key element JISL founder Mr. B.H. Jain’s underlying vision in ensuring farm productivity especially in to promote sustainable water management water-stressed regions. in agriculture, based on his own experiences Driver for reaching farmers as producers with the challenges facing farmers in India, is a Securing regular supplies of consistent quality strong driver for the company’s entry into and and quantity for its food processing business commitment to promoting MIS in India. is a strong driver for JISL’s entry into contract Another driver is the large and growing market farming. Contract farming is enabling the IFC’S ROLE AND VALUE-ADD for MIS, enabled by the government of India’s company to develop a cost-effective supply subsidy and by the increased production and chain in a market characterized by fragmented Since 2007, IFC has invested $60 million in debt income that MIS make possible for the pur- supply chains with many intermediaries. and $14.47 million in equity in JISL to promote wa- chaser. The government’s Task Force on Micro ter-use efficiency in agriculture via MIS. In addition Further, compliance with food safety standards Irrigation recommended that 17 million hect- to financing, IFC advisory services are helping JISL for export markets and growing interest from ares of cultivated land be brought under MIS to develop and roll out the Jain GAP standard with buyers regarding traceability and farm-level between 2004 and 2012. This will eventually specific support for project design and implementa- practices are leading JISL to introduce systems save the government money as it reduces the tion, monitoring and evaluation, and knowledge- such as Jain GAP into its supply chain. Such need for other subsidized farm inputs such as sharing of international good practices. IFC is also measures are necessary to maintain and grow fertilizer and water. working with JISL on a water footprint assessment the company’s customer base over time, and Finally, as JISL’s food processing business pro- they are easier to introduce in a contract to document and disseminate the benefits of MIS. cures fruits and vegetables from farmers, it is farming model given the level of monitoring in JISL’s interest to ensure consistent supply required. RESULTS OF JAIN IRRIGATION SYSTEMS’ INCLUSIVE BUSINESS MODEL • 35,000 tons of onions procured from 1,800 contract farmers in 2008, of which 90% are small farmers • Ensured market and increased income by $300-400 per acre for onion farmers • Farmers using MIS are increasing net incomes by $100 to $1,000 per acre due to efficiency gains • Estimated reduction of 500 million cubic meters of water per year through JISL drip and sprinkler irrigation, compared to flood irrigation By working with JISL, onion contract farmers forward, farmers who eventually comply with benefit from the availability of high-quality GLOBALGAP will be able to sell their higher- seeds, input finance, agronomic support, MIS grade fresh mangos to markets outside India and an assured market for a crop that yields an at substantial premiums. Compliance with Jain additional $300-400 per acre compared with GAP is a stepping stone to this end. previous growing practices. For its part, JISL benefits from its work with Farmers in general using JISL’s MIS products farmers both as a built-in market for its agricul- alone have also increased their efficiency and tural inputs and as a way to manage quality and reduced their dependence on rain for their security of supply. In 2008, JISL procured 35,000 IFC’s Investment: livelihoods. As a result of these efficiency im- tons of onions from 1,800 contract farmers cul- $60 million in long-term debt financing and provements, farmers are increasing their net tivating 3,700 acres of land, of which 90% were $14.47 million in equity incomes by $100 to $1,000 per acre depending small farmers. JISL expects to increase the area upon the crop, meaning the investment pays for under contract farming to 6,000 acres by 2012. itself typically in less than one year. Finally, going Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 33 CASE STUDY La Hipotecaria Holding Inc. COMPANY BACKGROUND Headquartered in Panama, La Hipotecaria Holding Inc. (LH Holding) 2003 in El Salvador; and most recently La Hipotecaria de Colombia, is a full-service housing finance company specializing in originating, S.A. which will become operational in mid-2011. The latter two cur- servicing and securitizing residential mortgages for low- and lower rently operate as non-deposit-taking specialized commercial institu- middle-income borrowers. LH Holding was established in 2000 to tions. Today, LH Holding employs 161 people in its eight offices in manage the operations of three subsidiaries: Banco La Hipotecaria Panama, El Salvador, and Colombia. In 2010, LH Holding’s total assets S.A., a regulated banking institution established in Panama in 2010 were $253 million and its total mortgage portfolio under administra- (originally a non deposit-taking financial institution established in tion was $375 million. 1997 as La Hipotecaria, S.A.); La Hipotecaria S.A. de C.V. formed in LA HIPOTECARIA’S INCLUSIVE BUSINESS MODEL LH Holding’s inclusive business model is built on a niche product: mort- Prudent, consistent underwriting criteria and a standard approval process gages for owner-occupied homes targeting formally employed borrowers for all types of mortgages are essential to LH Holding’s success in serving whose average family incomes range from $400 to $800 per month. its target borrowers. Its underwriting criteria include, but are not limited The majority are first-time homebuyers seeking homes generally priced to, a good credit history, a minimum of two years of formal employment, between $15,000 and $50,000. Loans range from $5,000 to $80,000 a mortgage payment of 35% or less of gross family income at the time with an average of $24,700. of loan approval, and a total debt payment (including consumer loans) of 55% of gross income. LH Holding also uses a four-stage loan approval LH Holding offers mortgages at variable interest rates with maturities of a process. First, sales representatives or applicants submit loan applications maximum of 30 years. In Panama, a preferential interest rate law enables to branch offices. Second, staff at branch offices screen loan applications the company to offer interest rate subsidies in which the government before sending them to the credit department in the country where the compensates mortgage lenders through a tax credit equal to the differ- loan is originated. Third, the credit department conducts further credit ence between the Panamanian reference rate5 and the subsidized rates. analysis. And fourth, the credit department presents loan applications to As of June 2011, the Panamanian reference rate was 6.5%. Borrowers the loan committee based at LH Holding’s headquarters for final credit pay zero interest for homes up to $30,000, 2.5% for homes between analysis and approval. $30,001 and $65,000, and 4.5% for homes between $65,001 and $80,000. Correspondingly, mortgage lenders receive tax credits of 6.5%, Monthly payments are collected in three ways: payroll deduction, bank 4%, and 2%, respectively, for mortgages in these three home price cat- account deduction, and voluntary payment. Legal frameworks enabling egories. Loans issued prior to July 2001 are eligible for subsidized interest payroll deduction in Panama, utilized by 85% of clients, have mini- rates for 10 years and subsequent loans for 15 years. Mortgages for used mized late payments and delinquencies. In El Salvador, payroll deduc- homes and refinancings, however, are not eligible. In El Salvador, where tion is negotiated with individual employers, and used by 75% of clients. no such law exists, LH Holding offers loans at market rates. It will do the Borrowers making voluntary payments in Panama have three options in- same when it launches in Colombia. tended to maximize customer convenience, and therefore likelihood of on-time payment: first, to deposit payments into La Hipotecaria bank ac- rather than a bricks-and-mortar model of extensive branch offices, LH counts at two banks with over 100 branches; second, to pay authorized Holding reaches new home buyers through an on-the-ground sales collectors located in a major supermarket chain offering extended hours force—assigned to between eight and ten housing developers in target seven days a week; and third, through an authorized money transfer regions and educating them about loan products and the application company that also operates seven days a week nationwide. LH Holding’s process. Housing developers, in turn, promote LH Holding´s products and servicing systems automatically signal a missed payment, regardless of refer clients to the company. Housing developers also allow sales repre- the payment method. sentatives to be based at their construction sites to meet potential clients. There, they can expedite a sale by initiating the loan application process The key to LH Holding’s success serving lower-income borrowers is to on the spot. LH Holding employs this marketing method to originate new minimize the transaction costs involved in servicing a large number of home mortgages and uses its branch offices to serve clients seeking used smaller-sized mortgages. LH Holding places strong emphasis on efficient home loans or refinancing. loan origination and servicing procedures—income verification, appropri- ate documentation, and timely loan collection. The company’s proprietary 5 The rate represents the weighted average of the interest rates charged on Spanish-interface Management Information System (MIS) is critical in this mortgage loans not subject to any subsidy by the five private banks and respect, managing each mortgage from the point of origination to the one state-owned bank with the largest residential mortgage portfolio at the point of securitization. beginning of each calendar year. 34 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY La Hipotecaria Holding Inc. DRIVERS FOR LA HIPOTECARIA’S INCLUSIVE BUSINESS MODEL • Increased demand for mortgages among low- and lower middle-income borrowers as affordable housing development takes off • Market opportunity for a specialized, private sector mortgage finance institution • Government policies that enhance affordability for borrowers and reduce risk for the company The affordable housing construction sector has leaving a large underserved swath in between. become more competitive in all three countries There is ample opportunity to target this in- in which LH operates—generating increased between segment in Colombia, too, as the five demand for home mortgages. Today, there is largest private banks—controlling 85% of the a diversifi ed, experienced and reputable group mortgage market—are also focused on middle- of affordable housing homebuilders offering and high-income borrowers. a variety of homes in different price ranges. LH Holding believes the market opportu- These homebuilders are seeking to reduce the nity is particularly strong for a specialized housing deficit across the three countries. mortgage finance institution, as opposed to IFC’S ROLE AND VALUE-ADD Yet the supply of mortgages has not kept up one that offers a range of financial products. with demand, particularly among low- and Specialization enables the company to operate In 2004, IFC provided a three-year credit line of up to lower middle-income segments. In Panama, more efficiently, resulting in lower cost and $15 million to support La Hipotecaria S.A. (now known LH Holding’s main competitors are the govern- better customer service. as Banco La Hipotecaria S.A.) in its mortgage origina- ment-owned banks, Banco Nacional de Panama tion business in Panama. In the same year, IFC provided Finally, government policy has played a role and Caja de Ahorros, and private banks such as a seven-year revolving warehouse credit line of up to in enabling LH Holding’s successful model. In $20 million to finance the expansion of La Hipotecaria Banco General. All banks mainly target upper Panama, the government compensates mort- S.A. de C.V.’s nascent mortgage origination business middle- and high-income borrowers. Similarly, gage lenders that offer subsidized interest rates. in El Salvador. IFC funding aimed to increase access to in El Salvador, government programs such as In both Panama and El Salvador, legal frame- long-term finance for low- and middle-income bor- Fondo Social para la Vivienda target very low- works facilitate loan collection via payroll deduc- rowers in both countries. To that end, it assisted LH income borrowers, while private banks mainly Holding in developing the sale of mortgage-backed tion, thus reducing lenders’ repayment risk. focus on upper middle-income borrowers, securities for the Salvadorian capital markets, and pro- vided a true revolving feature for the El Salvador loan that enabled the company to issue a volume of mort- gages many times larger than the size of the facility. More recently, in 2009, IFC provided a revolving ware- RESULTS OF LA HIPOTECARIA’S INCLUSIVE BUSINESS MODEL house credit line of up to $25 million to LH Holding’s • Efficient mortgage origination, with approximately 42% of all applications approved in three operating subsidiaries in Panama, El Salvador, and Colombia, co-borrowed by the parent company. Panama and 50% in El Salvador IFC also made an equity investment of $3.5 million in • 18,612 total mortgages issued, approximately 65% of these to first-time homebuyers LH Holding (for a 15% participation) to strengthen • Net income of $3.7 million in 2010, up 21.2% from the previous year the company’s capital base and support expansion. • Multiple successful mortgage-backed securities issuances in Central America and This recent round of financing aimed to further the United States strengthen LH Holding’s existing mortgage lending LH Holding prides itself on being an efficient loan ratio for loans on its books and securitized operations in Panama and El Salvador, and to fa- originator of mortgages in both Panama and stood at 0.91%, well below the averages for cilitate ramp-up of the company’s new operations in Colombia. Although funding from local investors was El Salvador, and expects to reach and maintain the banking sector in Panama and El Salvador. sufficient to enable LH Holding to get through the this efficiency in Colombia. It approves approxi- Its net income reached $3.7 million, up 21.2% 2008 financial crisis, IFC funding has been critical to mately 300 loans per month in Panama and 60 from the previous year. pursuing growth opportunities. loans per month in El Salvador—approximately In 1999, La Hipotecaria S.A. in Panama became 42% and 50% respectively of all applications re- the first company in Central America to suc- ceived in those countries. To date, 18,612 loans cessfully issue a $15 million mortgage-backed have been issued in total: 13,900 in Panama securities (MBS) transaction. In 2007, it was the and 4,712 in El Salvador. Approximately 65% of IFC’s Investment: first non-bank company to issue a $90 million these were to first-time homebuyers. $60 million in long-term debt financing and cross-border securitization in the United States, At the end of 2010, LH Holding’s residential and in 2008 the first to securitize mortgages $3.5 million in equity mortgage portfolio consisted of 15,300 loans originated and serviced in El Salvador through a for a total of $375 million. Its non-performing $12.5 million issuance in Panama. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 35 CASE STUDY Manila Water Company COMPANY BACKGROUND Manila Water Company (MWCI) operates a 25-year concession for the In 1997, the Ayala Group, one of the largest holding companies in water and wastewater system in Metro Manila’s east service zone, a the Philippines, took a controlling 52.7% interest in the newly-formed 1,400-square kilometer area encompassing the Philippine province of Manila Water Company, which immediately sought to address the sys- rizal, with 23 municipalities and home to 6.1 million people. Following tem’s chronic problems. Becoming profitable in 1999, the company the 1995 Water Crisis Act, the floundering state-owned and operated continued to expand, and in 2005 was listed on the Philippine stock Metropolitan Waterworks and Sewerage System (MWSS) was priva- exchange. Today, Ayala retains a 43.3% stake, followed by Mitsubishi tized in 1997 by partitioning its operations into two east-west conces- Corporation and IFC with 7% and 6.7% respectively, and the public sions and offering them in an internationally competitive tender. The and MWCI employees with the remaining 43%. Manila Water Company was established by the consortium winning the tender with the lowest tariff bid of PHP2.32 per cubic-liter, 73.6% below the prevailing rate. MANILA WATER’S INCLUSIVE BUSINESS MODEL Manila Water’s inclusive business model, Tubig Para Sa Barangay (TPSB), post-completion, leaving MWCI to bear the bulk of initial capital expen- or Water for Poor Communities, is designed to reach low-income com- ditures. For the 2004-2009 period, the company allocated P19 billion munities based on a clear business case: underserved, low-income house- ($351.85 million) for TPSB capital expenditures, funded directly from op- holds demonstrate a willingness to pay for safe, reliable water and con- erations and borrowing. The precise cost-sharing breakdown is decided necting them means reaching new markets while reducing costs from per MoA, but the P1.3 million Quezon City project serves as an illustrative ineffi ciencies and illegal connections.6 The TPSB model creates partner- example: MWCI bore 46.2% of the cost, while the municipal government ships with local government units (LGUs) and community-based organi- and community shared 38.4% and 15.4%, respectively.8 The community zations (CBOs) to actively include communities themselves in the design component typically represents the cost of bringing water from central and implementation of water supply systems. This establishes positive metering points to individual households, although both MWCI and LGUs incentives for all stakeholders and helps ensure the success and sustain- offer financing mechanisms to reach as many homes as possible. ability of the program. Communities themselves are central to the efficiency and cost-savings Manila Water’s partnerships with LGUs and CBOs are formalized in components of Manila Water’s inclusive business model. By visibly placing Memoranda of Agreement (MoA) that legally define each party’s fi- water meters in side-by-side arrangements in public areas, meter moni- nancial and operational roles. Broadly, Manila Water takes responsibil- toring becomes easier and the community can regulate itself as water ity for installing infrastructure, including pipes and meters, while local use and fees become more transparent. In informal settlements or very and municipal governments help reduce the cost, for example by waiving low-income areas where land ownership is a problem, bulk metering and permit fees, providing small subsidies, or offering construction labor.7 cost-sharing programs enforce self-monitoring through collective respon- Communities may determine their own level of participation; this is typi- sibility. The community also assigns or elects individuals to administer cally high, especially in low-income neighborhoods, where CBOs or LGUs collections, monitoring and maintenance, which directly supports local are responsible for collecting and remitting fees to Manila Water, moni- employment. These methods help build a sense of local ownership and toring and maintaining systems, and preventing pilfering. Exact obliga- responsibility that enhances the system’s good repair, promotes on-time tions are negotiated for each community or municipality. payment, and discourages water pilfering. This results in superior service and water quality for the community and lower costs for Manila Water. Program costs are typically shared between Manila Water, municipalities and communities, although the communities typically remit payments 6 Baclagon, Maria Lourdes et al. 2004. “Water for the Poor Communities (TPSB), Philippines.” Pro-poor Water and Wastewater Management in Small Towns, United Nations Economic and Social Commission for Asia and the Pacific. Page 12. 7 Ibid., page 40. 8 Ibid., page 43. 36 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Manila Water Company DRIVERS FOR MANILA WATER’S INCLUSIVE BUSINESS MODEL • MWCI’s concession agreement and associated operational targets • reducing system inefficiency costs and increasing metering and payment • reducing water contamination from aging or illegal water lines When Manila Water Company began operat- of a nearly non-existent sewerage system that ing the concession in 1997, only 58% of the reached just 3% of the population.9 population had water service and only 26% of To remedy this situation, the service zone con- the service area offered 24-hour access. With a cession agreement set 23 operational targets, mere 1,500 connections, Manila’s low-income which formed the primary driver for Manila households were especially underserved, Water’s inclusive business model. These targets forcing people to meet their needs for drinking included increasing water and sewer cover- and cooking water by fetching it from public age, achieving 24-hour supply, meeting water faucets, buying it at inflated prices from street quality and environmental standards, and de- vendors, or tapping illegally into nearby pipes. creasing non-revenue water. To enforce them, Combined with physical losses from leaky pipe- IFC’S ROLE AND VALUE-ADD Manila Water was obliged to post a $70 million lines, non-revenue water levels were as high as performance bond that permitted the govern- IFC acted as lead advisor for MWSS’s privatization, 63%. Meanwhile individuals buying from street ment to withdraw up to $50 million from the designing the operating agreement and oversee- vendors faced prices up to 16 times above bond for non-compliance. ing the bid. This marked the first large-scale water MWCI tariffs, not to mention the health risks privatization initiative in Asia. However, to meet the concession targets, Manila Water required an esti- mated $2.72 billion over the concession period. The privatization also coincided with the Asian financial RESULTS OF MANILA WATER’S INCLUSIVE BUSINESS MODEL crisis, leading to a near doubling of Manila Water’s existing foreign-denominated debt burden, which • EBITDA increased from P277 million to P6,803 million between 1999 and 2008 included a concession obligation to take on 10% • The TPSB program has reached 1.6 million people of MWSS’s outstanding loans. MWCI thus required • 99% of customers have 24-hour water availability significant long-term financing during a time that • Customers now pay 20 times below per cubic meter rates previously charged by water vendors markets were constrained and shaken. Manila Water turned a loss-making operation MWCI’s efforts have achieved 100% compli- IFC provided Manila Water a $30 million loan in into a financial, social, and environmental ance with national drinking water standards, 2003, a $15 million equity investment in 2004, and success story. EBITDA grew from a P37 million with a direct, positive impact on people’s an additional $30 million loan in 2005. Advisory ser- loss in 1997 to P277 million in 1999 and health: the Department of Health reported a vices supported these, helping the company rewrite reached P6,803 million in 2008, an average 300% reduction in diarrhea cases from 1997 to its corporate governance manual and develop a increase of 42% per year.10 Manila Water has 2007.12 Finally, by providing local communities sustainability strategy, marking the first time a also successfully met its concession targets. By the opportunity to collect fees, monitor meters, Philippine company publicly disclosed its environ- 2009, a total 3,155.86 kilometers of pipeline and service pipelines, Manila Water’s inclusive mental and social performance on an annual basis. had been laid and MWCI served over one business model has generated over P25 million IFC’s involvement also served as a stamp of approval million households, reaching over six million in new jobs, benefiting 850 families over the supporting the company’s 2005 IPO, which raised people, with 1.6 million individuals benefiting last several years.13 an additional $97.8 million. under the TPSB program. These customers have 24-hour access in 99% of the distribution area, 9 McIntosh, Arthur C. and Cesar E. Yñiguez. 1997. at water pressures high enough to conveniently Second Water Utilities Data Book: Asia and use faucets and enable indoor plumbing. Pacific region. Manila: Asian Development Bank. Cited in Comeault, Jane. 2007. “Manila Water System losses and non-revenue water have Company: Improving Water and Wastewater fallen dramatically, coming down from 63% in Services for the Urban Poor.” Growing Inclusive Markets Case Study. New York: United Nations 1997 to 15.8% as of year end 2009, surpassing Development Programme (UNDP). Page 8. the concession obligation.11 This has reduced 10 Manila Water. 2008. “Manila Water Company IFC’s Investment: costs for the company and customers alike, Inc. 2008 Annual report.” Online at http://www. manilawater.com/downloads/M WC-Ar-2008. $60 million in long-term debt financing and and connected households now pay 20 times $15 million in equity pdf (accessed March 23, 2009). below per cubic meter rates previously charged 11 Ibid. by water vendors. 12 Baclagon et al. 2004, page 43. 13 Manila Water. 2008. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 37 CASE STUDY Mi Tienda COMPANY BACKGROUND Mexico’s Sistema Integral de Abasto rural S.A.P.I. de C.V., or Mi offering non-perishable food and personal care products to stores Tienda, is a privately held rural distribution company founded in 1999 in surrounding villages, typically with populations of less than 5,000 by José Ignacio Avalos, one of the founders of Banco Compartamos, each. Mi Tienda focuses on the country’s more than 600,000 small- the country’s leading microfinance bank. Mi Tienda began opera- scale retailers in rural markets — where large retailers do not reach. tions in Atlacomulco in central Mexico as a single distribution center MI TIENDA’S INCLUSIVE BUSINESS MODEL Mi Tienda’s customers are small-scale retailers in small, rural villages. visit each retail outlet at least once a week, are well-positioned to gather These retailers face a number of challenges, including small markets and information about what is selling and what is not. In addition, outlets that traditional over-the-counter sales formats which further limit sales. With participate in the company’s capacity-building program undergo more low weekly store purchases, they are unable to take advantage of econo- systematic demand assessments. As a general rule Mi Tienda has found mies of scale. They tend to have low levels of business knowledge and that rural Mexican consumers are highly brand conscious, and would very limited access to finance. Most of their shops are below 10 square rather buy a smaller package of brand name detergent than a larger meters in size, often integrated into the owners’ homes, where they are package of generic detergent. As a result, the company carries very few tended overwhelmingly — approximately 80% — by women. They serve generic items. customers with incomes averaging an estimated $4 a day. Mi Tienda’s single unit delivery helps retail outlets use their working Mi Tienda offers these retailers a distinctive value proposition: afford- capital more efficiently. The company helps further in this regard by of- able door-to-door delivery of individual items within 48 hours, extended fering extended payment terms of typically seven days to stores with payment terms, and business training and advice to improve sales. This proven track records. Approximately 60% of stores avail themselves of is because its growth strategy includes increasing the volume of sales per this option. Creditworthiness is assessed by sales agents based on per- customer, in addition to the numbers of distribution centers and of retail sonal knowledge and relationships developed during their weekly or customers per center. twice-weekly visits. If stores are late in their payments, they cannot get more products — such a strong incentive to repay that the default rate Mi Tienda’s distribution centers are simple, approximately 1,000 square has been less than 0.1%. The single unit delivery and extended payment meter warehouses where products are stored. Once or twice a week, options are both key differentiators for Mi Tienda in the rural distribution sales agents travel six or seven different routes, which typically cover market, where store owners would otherwise have to travel long dis- between 620-740 rural stores, taking orders on laptops and synchroniz- tances and pay in cash up front for large quantities of product. ing them at the warehouse at the end of the day. There orders are pre- assembled in boxes, by hand, for delivery drivers to take out the following Finally, Mi Tienda offers retail outlets free training and capacity-building day. There are approximately six trucks and six cars for every warehouse. intended to help increase their sales — and by extension their purchases from the company. The company has its own training unit staffed with From a cost perspective, it is also important to note that villages in central trainers who typically visit and stay with each participating outlet for a Mexico are located fairly close together, which enables Mi Tienda to week, helping with accounting, working capital management, inven- achieve operating efficiencies and economies of scale. tory management, and product assortment. Trainers often help modern- Mi Tienda also keeps costs down by stocking primarily non-perishable ize store design as well, moving from traditional, over-the-counter sales food and personal care products in a limited number of stock-keeping set-ups to shelf displays that increase product visibility. Modernized stores units (SKUs): roughly 1,000 compared with as many as 80,000 for a large have experienced, on average, 35% increases in sales. retailer like Wal-Mart. Selection is highly customized to local demand and can vary from warehouse to warehouse. Mi Tienda sales agents, who 38 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Mi Tienda DRIVERS FOR MI TIENDA’S INCLUSIVE BUSINESS MODEL • Market opportunity for efficient commercial distribution in rural Mexico • Desire to improve the lives of rural families by improving rural supply chain efficiency Mi Tienda aims to build a business and improve Many small, rural retailers are not yet served the lives of rural families by improving rural by wholesalers. If they are served, it is with supply chain efficiency. Four factors create a minimum quantities of products and no market opportunity for more efficient com- working capital access. In Atlacomulco, for mercial distribution in rural Mexico: layers example, where Mi Tienda’s original distribution of intermediaries, limited access to working center is located, 30% of stores are unserved. capital fi nancing for micro, small, and medium Mi Tienda’s main competitors are Diconsa, a retailers, high transaction and transportation government entity with approximately 22,000 costs, and poor feedback on the needs of rural distribution centers across the country, and populations to food and consumer products local wholesalers. However, these wholesalers companies. do not deliver single units of product and their prices are higher — both of which increase re- IFC’S ROLE AND VALUE-ADD tailers’ working capital requirements. With overall profitability predicted only in the medium term due to the cost of ramping up, IFC’s $2.5 million equity investment has helped Mi Tienda go ahead with its plans to expand. IFC’s in- vestment has also played an anchor role, enabling RESULTS OF MI TIENDA’S INCLUSIVE BUSINESS MODEL the company to attract additional investors. • 2 distribution centers serving 1,300 stores In addition to investment capital, IFC has contrib- • Operational break-even achieved uted global retail sector knowledge and helped • 200 stores trained, with an average 35% increase in sales for those undergoing Mi Tienda implement international environmental, modernization social, and corporate governance standards. • Improved product accessibility and affordability Mi Tienda has two distribution centers in At the consumer level, Mi Tienda’s inclusive operation, reaching about 1,300 stores and business model has improved product acces- generating enough revenue to cover operating sibility and affordability, and offers the possibil- costs. With $2.5 million in equity from IFC, a ity to pass on a portion of the efficiency gains $2 million loan and $1 million capacity-building to customers. Possible savings have not been grant from the Inter-American Development measured but are estimated at 2-3%, which is Bank, and additional equity from other inves- not negligible for customers earning $4 a day. tors, Mi Tienda is now rolling out an additional Finally, the company has begun to create a 34 distribution centers over the next six years. platform through which other services — such Together, these 36 centers are expected to reach as micro-credit, insurance, and utility bill 25,000 stores serving 4.7 million households. payment — can eventually be offered. As it For the small-scale retailers in its network, Mi develops, this platform is expected to become Tienda’s inclusive business model has reduced a major source of both revenue growth and working capital requirements and, where mod- development impact. ernization has taken place, increased sales by an average of 35%. Cumulatively, additional revenues from modernization are expected to reach $200 million by 2016. IFC’s Investment: $2.5 million in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 39 CASE STUDY Moderna Alimentos S.A. COMPANY BACKGROUND Moderna Alimentos S.A. (Moderna) is Ecuador’s leading miller and has resulted in lower costs and greater affordability for customers at marketer of wheat flour. The company has been in operation since the base of the pyramid. June 2009, when it was formed by the merger of Molino Electro- Headquartered in Quito, Moderna operates three wheat flour mills Moderna S.A., Molinos del Ecuador S.A., and Grupo Moderna. located in Manta, riobamba, and Cajambe. Its trademark brand, Each of these companies had more than 12 years of experience in Ya, is Ecuador’s leading wheat flour brand. Additionally, Moderna Ecuador’s wheat and flour market. The merger gave Moderna imme- produces and markets bakery products, and manages a chain of 13 diate control of 39% of the market; combined the companies’ reach bakeries under franchise in Quito. Today, Moderna is owned by the to different regions and customer groups nationwide; and generated Correa family with 36.6%, Seaboard Corporation and Continental competitive advantages like the ability to negotiate full cargo vessel Grain Company with 25% each, the Lopez family with 10.6%, and shipments and consolidate port handlings and internal freight. This investment fund Fondo País Ecuador with 2.8%. MODERNA’S INCLUSIVE BUSINESS MODEL Moderna reaches approximately 75% of Ecuador’s nearly 6,000 small expensive brand in the Ecuadorian market, but small bakeries choose it bakeries with its flour products. These bakeries come in two forms and over other brands for consistent quality, convenience, and opportunities sell their products in two different ways: for technical assistance. • Individual bakers bake bread in their own homes to be sold at Moderna’s preferred method of distribution is direct sales and delivery. open air markets. Because their volumes tend to be smaller, they Moderna serves more than 2,700 bakeries this way in the country’s sell directly from baskets as they walk through the markets. two largest cities—Quito and Guayaquil—and most of the country’s • Small bakery stores are typically operated by two or three people, Andean region. In other markets, wholesalers comprise a large portion usually family members, who bake and handle sales. They are of Moderna’s sales, and serve more than 1,500 additional bakeries. slightly more formal than the individual bakers because they have Wholesalers are serviced by rey Ventas, a Moderna subsidiary. their own stores; however, these stores tend to be very small, approximately 40 square meters, with baking activities taking place Through the direct sales and delivery method, salespeople from Moderna in the rear and sales taking place in the front. or one of its exclusive, independent distributors visit bakeries weekly to review inventory and outstanding payments and place orders for delivery Moderna’s approach is to supply bakeries with flour together with yeast, the following day. Deliveries are typically made weekly or bi-weekly, de- sugar, flavorings, and other essential ingredients as part of a “one-stop” pending on the bakeries’ storage capacity, and “emergency” deliveries package. In addition, Moderna provides extensive training sessions on can also be made if additional needs arise. The flour is delivered by truck, effi cient usage of flour, including the correct proportions and tempera- with the majority of customers receiving five to ten 50kg bags per deliv- tures to use for baking bread. The company has deployed four training ery. Sales are made on credit for seven days, with payment expected on sites and offers training on the bakeries’ own premises. It conducts pe- the salesperson’s next visit. Credit is not used as a sales tool. riodic workshops on a variety of topics, such as bakery, pastry, business management, taxes, and even self-esteem. The company has 10 techni- Whether a given bakery is served by Moderna staff or those of its exclu- cal assistants who make an average of 400 client visits per month, and sive, independent distributors depends on geography and security factors remain on call to support clients with production concerns and product in the market. For example, in sparsely populated rural areas, highly dis- development. persed and hard-to-reach bakeries are better served by independent dis- tributors with the appropriate distribution models, and who can deliver The one-stop package and technical assistance create business value for other products at the same time. In cities like Guayaquil, informal settle- the bakeries in its client base. They also provide Moderna with a direct ments pose security challenges, and bakeries there are better served by marketing channel that allows the company to establish and main- local distributors. tain direct relationships with its clients. Moderna flour is not the least 40 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Moderna Alimentos S.A. DRIVERS FOR MODERNA’S INCLUSIVE BUSINESS MODEL • Consumer preference for the cachito bread rolls sold by small bakeries • Small bakeries consume over 90% of flour used for baking (baking, in turn, accounts for approximately 70% of the total flour market) • Stability, loyalty, and profitability of the small bakery segment • rising demand for flour, at 3-4% annually The overarching driver for Moderna’s inclusive The country’s best-selling baked product is the business model is market opportunity: Ecuador’s cachito—a bread roll similar to a croissant sold approximately 6,000 small bakeries account for primarily by smaller bakeries. Industrial baker- more than 90% of flour sales in the country. ies do not produce cachitos, reinforcing small The company has found these small bakeries to bakeries’ competitive advantage. At $0.30 for be stable, loyal, and profitable customers. They three, cachitos are well within reach of the tend to switch products infrequently because average Ecuadorian consumer and small baker- of the cost involved in adapting their baking ies can sell large volumes, fueling demand for methods. Furthermore, their demand for flour Moderna flour. While most bakeries sell on IFC’S ROLE AND VALUE-ADD is rising, at a rate of 3-4% annually. One in a cash basis, some have expanded into small Given the challenging economic environment in 20 small bakeries, on average, grows into a convenience stores offering credit—further Ecuador, private sector companies are finding it in- medium-sized business. heightening the appeal for consumers at the creasingly difficult to raise financing. This includes base of the pyramid. Demand for flour at the small bakery level is strong and viable companies like Moderna. In 2010, further driven, in part, by consumer preferences. IFC invested $8 million in debt to help improve Moderna’s competitiveness in the production and commercialization of wheat flour, and to extend its product mix to other staple food products such as pasta and bread. RESULTS OF MODERNA’S INCLUSIVE BUSINESS MODEL IFC’s investment is also acting as a catalyst, attract- • Over 10,000 individuals at more than 5,000 small bakeries have received business and bakery ing other international financial institutions that can training co-finance the investment program. For instance, • 20% compound annual growth in revenues since 2009 IFC’s participation has helped mobilize additional • $17.4 million in EBITDA in 2010 long-term debt from the Inter-American Investment Moderna currently supports more than 4,200 As a result, Moderna has become the largest Corporation. small bakeries with critical ingredients, conve- player in the flour market in the country, well- Finally, through a partnership with the Global nient ordering and delivery methods, technical known to all experienced bakers. revenues Alliance for Improved Nutrition (GAIN), IFC is sup- assistance, and credit—contributing to their have grown at a compound annual rate of 20% porting Moderna to develop a new commercial business stability and success, and helping to since the merger in 2009. In 2010, EBITDA business model capitalizing on the company’s ex- fuel a significant leap forward in the bakery reached $17.4 million. perience in nutrition to benefit infants from under- business in Ecuador over the years. In total, over served, low-income families. Through the IFC-GAIN 10,000 individuals at more than 5,000 small Challenge Fund, IFC is contributing project man- bakeries have been trained. agement, project monitoring and evaluation, and knowledge of low-income market dynamics and incentives. IFC’s Investment: $8 million in long-term debt financing Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 41 CASE STUDY Nib International Bank COMPANY BACKGROUND Founded in 1999, Nib International Bank S.C. (NIB) is one of Ethiopia’s banks. Also, with 6% of its lending allocated to agriculture, NIB had fastest-growing private banks, with total assets having grown 64% the highest share of total loan portfolio dedicated to the sector. between 2008 and 2010 to reach $400 million. It is headquartered NIB is owned by 3,316 shareholders, of which Nib Insurance Company in Addis Ababa and operates a network of 48 branches, providing S.C. (6%), Moplaco Trading Co. Ltd. (4.6%), and Mr. Seid Hussein Ali extensive coverage throughout the country. NIB employs a workforce (2.1%) are the three largest. The Bank’s Board of Directors is com- of about 1,700 people and serves more than 181,000 customers. prised of 12 Ethiopian nationals who are responsible for formulating In 2010, NIB had the largest market share of loans to the Ethiopian strategy and approving major policies and risk limits. agriculture sector, providing nearly 29% of all lending by private NIB’S INCLUSIVE BUSINESS MODEL The Ethiopian economy is based on agriculture. In 2010, the sector ac- working capital from NIB to purchase farmers’ fresh coffee cherries and counted for 43% of GDP and employed 85% of the population. Coffee process them through the wet mills. Farmers benefit by receiving a com- is a particularly important crop—it represents 35% of all export revenues petitive price from the cooperative at the time of sale and then a second and employs more than a million smallholder farmers. Ethiopia is currently payment, or dividend, out of the cooperative’s net profit (calculated after the largest producer of coffee in Africa and the fifth largest in the world. all exports and debt payments are complete). Combining the first and In 2010, the country’s coffee exports were valued at over $500 million. second payments, farmers typically receive a share of two-thirds of their cooperative’s gross revenues. Gross revenues for the 2010 harvest aver- NIB is the market leader of the private banking sector in lending to agri- aged $100,000 but in some cases exceeded $300,000 per cooperative. culture. To maintain and grow this position, the Bank aims to expand its reach into rural areas and to continue to strengthen its risk management TechnoServe’s role is to help the cooperatives make effective use of the practices. In support of these goals, NIB is providing access to finance for wet milling process to produce higher value-added coffee. TechnoServe cooperatives of smallholder coffee farmers as part of the Coffee Initiative provides technical assistance in operating and managing the wet mills, as in East Africa. The Coffee Initiative is a $47 million program funded by well as close collaboration in the business development and governance the Bill and Melinda Gates Foundation and managed by the US-based of the cooperatives. For instance, it helps them organize and register non-governmental organization TechnoServe. Its goal is to increase the formally, provides their leaders and farmers with training and technical incomes of coffee farmers in Ethiopia, Kenya, rwanda, and Tanzania by support, and creates linkages with other players along the coffee value increasing the quality and quantity of coffee they produce. chain. One TechnoServe business advisor works closely with two to three cooperatives at a time, and coordinates local specialists that can provide In Ethiopia, participating cooperatives range from 300 to 500 smallholder additional training and agronomy services. In addition, TechnoServe helps farmers who average approximately three-quarters of a hectare of land the cooperatives negotiate and export their coffee directly to buyers each. Nearly 40% of NIB’s bank branches are outside of Addis Ababa, instead of working through intermediaries. providing a foundation on which to reach these farmers. Beyond physical access, the Bank’s inclusive business model hinges upon partnerships for TechnoServe’s support for the cooperatives not only helps build their ca- financial risk-sharing and farmer capacity-building. pacity, but in doing so, helps mitigate NIB’s risk in lending to the coffee sector. TechnoServe also helps mitigate NIB’s risk by getting involved at For financial risk-sharing, NIB entered into an agreement with IFC estab- the due diligence stage, using its on-the-ground knowledge and experi- lishing a three-year, up to $10 million facility to provide working capital ence to help the bank identify the best cooperatives to invest in. The due loans to cooperatives working with TechnoServe. The facility offers up diligence process first considers technical aspects, such as the amount of to $250,000 per cooperative, disbursed against cash flow requirements coffee available, levels of competition around the cooperative, suitability and collateralized by coffee stocks. The program is designed such that of the wet mill site, and availability of labor. TechnoServe then helps the cooperatives should be able to repay their working capital loans within cooperative to develop a leadership team and assesses the leaders’ skills one year entirely through the sales of their coffee. However, IFC will cover and commitment to ensure strong governance. The final stage of due up to 75% of any credit losses NIB incurs. diligence involves supporting the cooperative to prepare a business plan In order to qualify for the working capital loans, cooperatives must and have it approved by member farmers. At any stage, a cooperative have the capacity to produce high-quality washed coffee that earns a can be ruled out of consideration for NIB’s working capital loans, which premium in the market—the product of using the wet milling process to gives them strong motivation to fulfill its due diligence requirements. remove the skin and pulp from coffee cherries, and then wash and dry TechnoServe also plays an important role in ensuring that the coopera- the coffee beans. During the coffee harvest, the cooperatives use the tives comply with environmental and social best practices. 42 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Nib International Bank DRIVERS FOR NIB’S INCLUSIVE BUSINESS MODEL • Underserved but significant business opportunity in lending to the Ethiopian coffee sector • NIB’s commitment to support small farmers and promote sustainable growth in the coffee sector • Need to mitigate risk in lending to the agriculture sector in Ethiopia Despite the size and importance of the ag- to low-quality, unwashed coffee in export riculture sector, and of coffee in particular, markets. Furthermore, global demand for high Ethiopian banks are often reluctant to lend quality or specialty coffee is increasing, making due to the inherent risks of weather-dependent it the fastest-growing segment of the coffee agriculture and the challenges of lending to export market. This represents an untapped op- smallholder farmers with no formal collateral or portunity in Ethiopia, where only 20% of coffee credit history. In fact, the general trend over the today is produced and sold as high-quality in last year has been for private banks in Ethiopia export markets. to allocate smaller portions of their total loan Over the life of the risk-sharing facility, the portfolios to agriculture. IFC’S ROLE AND VALUE-ADD volume of coffee processed by borrowing Nevertheless, agriculture remains one of cooperatives is projected to increase to 4,000 IFC’s risk-sharing agreement of up to $10 million Ethiopia’s most promising sectors, and NIB’s metric tons with an increasing share sold as with NIB facilitates access to finance for coop- inclusive business model is designed to capture high-quality—a strong indication that they eratives of smallholder coffee farmers in Ethiopia. the business opportunity associated with its will be able to repay the loans they take out. Given the risks associated with lending to the growth potential while at the same time miti- Furthermore, TechnoServe’s capacity-building weather-dependent agriculture sector and a dif- gating the attendant risks. is designed to help build cooperatives that are ficult regulatory environment, access to finance is sustainable after the organization phases out its one of the key challenges to scaling up and improv- TechnoServe’s analysis suggests that in assistance, representing potential repeat busi- ing the quality of coffee production in the country. recent years, high-quality washed coffee ness for NIB. IFC’s agreement with NIB not only reduces NIB’s fi- has received, on average, a 50% premium nancial risk but also demonstrates confidence in the producer side of the country’s coffee sector. IFC’s value-add also lies in its experience working on environmental and social best practices in sectors RESULTS OF NIB’S INCLUSIVE BUSINESS MODEL characterized by large numbers of smallholder • Working capital loans to 62 cooperatives made up of 45,000 farmers farmers. In particular, IFC has been able to contrib- • Cooperatives have exported two million pounds of green coffee, receiving an average ute its experience with sustainability standards and, premium of 40% ($0.75 per pound) above the price of low-quality, unwashed coffee in collaboration with TechnoServe, help improve • Increase in cooperative revenues of approximately $1.5 million wastewater and coffee pulp disposal practices. • 8% growth in NIB’s agriculture lending portfolio in 2010 In 2010, NIB made working capital loans to 62 stewardship, transparent economic practices, cooperatives made up of 45,000 smallholder social responsibility, and operational health and coffee farmers. With TechnoServe’s support for safety. The recommended practices and associ- the wet mill model, the cooperatives produced ated training content were developed through and sold high-quality, washed coffee directly close collaboration between TechnoServe and to 12 international buyers in Europe and the IFC. Each cooperative received 12 unique train- United States. They received on average 40% ings before the start of the coffee harvest, for ($0.75 per pound) more than they previously a total of 744 trainings delivered to cooperative received for low-quality, unwashed coffee, leaders, employees, and farmers in 2010. translating into a total of $1.5 million in added For NIB, the working capital loans have allowed revenues. Over 1,500 full- and part-time wet it to remain a leading lender to the agriculture mill jobs were created. sector and to expand its portfolio even further, TechnoServe also supported the cooperatives to increasing its lending by 8% in 2010 over the IFC’s Investment: implement a broad set of sustainable business previous year. $10 million risk-sharing facility practices by providing trainings in environmental Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 43 CASE STUDY Promigas COMPANY BACKGROUND Founded in 1974, Promigas is an energy holding company headquar- its five distribution companies serves close to 2.2 million households tered in Barranquilla, Colombia. In addition to its own operations, it or 12 million people—approximately 25% of the total population. has investments in 18 other companies in the natural gas transmis- Promigas is mainly owned by private investors such as sion and distribution, power distribution, and telecommunications Corficolombiana, Corredores Capital Private Equity, EEB, Amalfi, and sectors in Colombia, Perú, and Panamá. Its customers include power Consultoría de Inversiones. Around 8.5% is owned by Colombian plants, cement, petrochemical, and mining companies as well as pension funds and the remainder is owned by more than 800 mi- residential users. In its home country, Colombia, Promigas through nority shareholders. The company has been listed on the Colombian stock exchange since 1989. PROMIGAS’ INCLUSIVE BUSINESS MODEL Approximately 87% of Promigas’ residential customers in Colombia belong the Brilla name. The single brand name enabled Promigas and its local to the country’s lowest-income strata. The company has connected more distribution companies (LDCs) to launch a unified marketing campaign than 90% of these customers to the natural gas network for the first time. and maximize brand recognition for the new program. Endorsing it using Because the cost of a new home connection can be as much as three times their individual brand names enabled the companies to take advantage monthly income for these families, at approximately US$500 per home, of the consumer trust they already had. Promigas and its five distributors offer financing in order to get over this Brilla offers loans of the same amounts clients had borrowed for their gas main barrier to service penetration. New customers pay $25 up front, and connections, at market interest rates and with repayment periods of up then spread the remaining amount over up to 72 months, paying an addi- to 60 months. No down payment, co-signer, or collateral is required. The tional $10-15 a month on their regular gas bills. Because natural gas costs average amount borrowed is $400, with monthly payments of $15-30 less than other available energy sources, customers generally recoup their incorporated into the borrower’s gas bill. To be eligible, a borrower must investments in four to six years through energy cost savings. have four years without missing a gas payment, be the gas account At various points, donors have provided funds partially subsidizing new holder, and be finished repaying the gas hookup. He or she must present home connections for certain low-income groups, but even the subsidized an identification card, two gas receipts, a signed contract, promissory cost has typically exceeded recipients’ capacity to pay up front. Nearly note, and a repayment instruction letter. The monthly repayment includes 98% of users belonging to the country’s lowest-income strata have uti- credit life insurance (typically up to $0.50 per person/month premium) lized the financing option, with an overall repayment rate of 98%. to cover the outstanding amount in the event of the borrower’s death. As market penetration increased and more new customers paid off their Promigas and its five LDCs approach Brilla sales in different ways. They connections, Promigas’ revenues from that part of the business began to all rely heavily on two sales channels: door-to-door (either through con- decline, leading the company to undertake a strategic planning process. tractors or through agents belonging to retailers) and direct point-of-sale Promigas realized that with more than 30 years of financing new home transactions. Other channels include fairs, agencies, and call centers. For connections, it had developed a “hidden asset”: knowledge of the Brilla as a whole, points of sale account for 50% of transactions, door-to- payment habits of two million clients, 70% of whom had no other access door for more than 45%, and other channels for a minor share. to the financial system, and did not have credit histories available to other Once a borrower is pre-approved, he or she can purchase on credit from companies. The company also had a certain “share of wallet” from these any one of the 271 retailers registered with Promigas. These retailers clients already—the $10-15 set aside in their monthly budgets to pay off include hardware stores, department stores, and appliance vendors eager their gas connections. to expand their sales into segments that would not have been able to Promigas decided to leverage this asset and retain its “share of wallet” afford their products without credit—without those retailers having to by offering its clients credit for other uses once they had paid off their provide credit themselves. gas connections. The company conducted a large-scale survey and found Promigas obtains capital to lend from its own retained earnings and local that people needed credit for home improvements, starting their own commercial bank lending. To manage risk, it relies on accurate assess- businesses, school fees, household appliances, and emergencies. Home ment up-front, rigorous document control, and a convenient repayment improvements, especially floors, were clients’ top priority since 50% of re- channel—the borrower’s existing monthly gas bill. As a safety measure, spondents either had plain cement floors in their homes or no floors at all. the company also sets aside 3% of loans outstanding as a provision for After a year-long pilot phase, Promigas launched a new financing product delinquency levels in receivables; so far this provision has not been used. focused on home improvements and appliances in December 2007 under 44 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Promigas DRIVERS FOR PROMIGAS’ INCLUSIVE BUSINESS MODEL • Company desire to sustain revenue stream from financing, once new gas connections had been paid off • Demand for home improvement materials and appliances to improve low-income households’ quality of life • Limited access to financing for such purchases Approximately 98% of Promigas customers Through the survey conducted, the company took advantage of the company’s financing found considerable demand for financing to option to connect their homes to the natural purchase home improvement materials, such gas network for the first time since they could as flooring and appliances. Approximately not afford to pay cash. While it required a lot 93% of the Colombian population and 70% of of working capital, at market interest rates, Promigas customers lacked access to financing this fi nancing activity generated a reasonable from the formal financial system, leaving them revenue stream for the company, complement- dependent on informal lenders that charged ing its regulated revenues from distributing gas. up to 240% interest per year. This created a IFC’S ROLE AND VALUE-ADD As more and more customers paid off their gas market opportunity for Promigas—given its in- IFC has been involved with Promigas since its incep- connections, Promigas’ revenues from financ- timate knowledge of its customers’ repayment tion as a shareholder, lender, and advisor on project ing began to fall, and the company began to habits—to offer credit at more affordable rates, formulation, structuring, and strategic planning. look for ways to preserve its EBITDA and value as allowed by financial authorities. Though Promigas is a successful company, it has at by financing other items. various times faced the barrier of country risk in fi- nancing its operations. IFC has helped in a number of ways, including providing early stage equity, lending, and mobilizing additional debt financ- ing from other international financial institutions. RESULTS OF PROMIGAS’ INCLUSIVE BUSINESS MODEL IFC was critical in enabling the company to access • More than 499,567 borrowers have benefited from Brilla credit, 93% of them in low-income donor funding for new customers’ natural gas con- segments; 31% of loan proceeds used to make home improvements nections. Finally, IFC has provided technical support • $140.4 million in loans outstanding, with only 1.31% more than 60 days past due on the environmental aspects of several projects, • Net revenues of $30 million in 2010, up from $1.5 million in Brilla’s first year, and EBITDA of in some cases raising standards above Colombian $14 million government requirements. To date, Brilla has provided more than 499,567 but also because—being profitable—it is some- With IFC’s assistance, Promigas has transformed borrowers with access to home improvement thing the company can sustain over time. Brilla itself from a local company in the gas transmission materials, appliances, computers, and capital has created a wider economic ripple effect as business to an important player in the Colombian to start micro-enterprises and pay school well, creating 1,000 jobs within the Promigas energy sector, with a diverse portfolio of transmis- fees, thus helping to improve their standards system and among the suppliers and retailers sion and distribution companies. Promigas has of living. 93% of these borrowers come from that are part of the program. also become a multinational entity able to promote low-income segments of the population. The expanded natural gas use—with its significant Promigas’ natural gas business has generated company currently has $140.4 million in loans economic and environmental benefits—to other impressive results as well, serving close to 2.2 outstanding, with only 1.31% more than 60 countries in the region, such as Perú. The company million households—12 million people, or days past due. This compares favorably to has also successfully entered the telecom services approximately 25% of the Colombian popula- almost 4% for the Colombian microfinance market in Panamá. tion—with a cheaper and more environmental- sector overall. Brilla generated net revenues ly-friendly cooking fuel. 87% of the company’s of $30 million in 2010, up from $1.5 million natural gas customers come from low-income in the program’s first year, and an EBITDA of segments. Promigas’ natural gas business regis- $14 million. Promigas now considers Brilla one tered consolidated net revenues of $780 million of its best businesses, mainly because of its in 2010, and a consolidated EBITDA of $210 impact on low-income families’ living standards million. IFC’s Investment: $36.3 million in long-term debt financing and $2 million in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 45 CASE STUDY PT Summit Oto Finance COMPANY BACKGROUND Based in Jakarta, PT Summit Oto Finance (OTO) is one of the largest In 2003, OTO shifted its focus from corporate leasing to motorcy- motorcycle financing companies in Indonesia. OTO was initially es- cle financing exclusively, and changed its name to PT Summit Oto tablished in 1990 as PT Summit Sinar Mas Finance, a joint venture Finance. OTO provides financing to low- and middle-income consum- between PT Sinar Mas Multiartha and Sumitomo Corporation. ers primarily in Java and Sumatra, and is currently expanding to rural Sumitomo Corporation, an integrated trading company based in regions. With over 13,000 employees and 12.4% market share, OTO Japan, owns 99.6% of OTO directly and indirectly through Summit has capitalized on the strong growth of the Indonesian domestic Auto Group and PT Sumitomo Indonesia. As the majority share- motorcycle market, and maintains its position as one of the leading holder, Sumitomo Corporation provides support to and controls all players in the motorcycle financing business. aspects of the business, from management and treasury to financial and operational needs. OTO’S INCLUSIVE BUSINESS MODEL With good fuel efficiency and low acquisition and maintenance costs, a credible and stable revenue source and a permanent residence. The form motorcycles are widely used by low-income groups in Indonesia for both also tracks the size of the down payment made to the dealer (preferably personal and business transportation. OTO focuses exclusively on new more than 10% of the total motorcycle price) and the size of the monthly motorcycle financing through small loans to low- and middle-income bor- loan repayment relative to the applicant’s income (preferably less than rowers. Nearly 99% of its more than 1.6 million active borrowers are indi- 30%). In an effort to reduce the risk of fraud prior to final loan approval, viduals. The vast majority earn $150 to $300 per month and do not have OTO has established a separate, internal team to provide oversight and bank accounts. Approximately 99% of them have only primary education order verification. This team’s task is to ensure that the information col- and typically run micro-enterprises, or work as low-level employees. The lected by the CMO is correct. average initial loan amount per customer is $1,460. Upon approval, loan proceeds are disbursed directly to the dealer follow- OTO has successfully engaged a large pool of unbanked borrowers in a ing delivery of the motorcycle to the customer. The loan repayment period viable way by basing its business strategy on the microfinance model. Its is typically 36 months, during which time OTO retains the title as collateral. approach relies on an effective understanding of its borrowers and close, OTO has a national market penetration strategy built on a robust distribu- continuous customer contact, rather than formal underwriting processes. tion network and strong partnerships. The company has 137 branches Because its borrowers are typically the owners or employees of micro- spread across the country, and cooperates with more than 4,000 au- enterprises, they often do not have good records and are unable to thorized dealers of leading motorcycle brands—it is not captive to any produce salary slips or other documentation to validate their incomes. particular manufacturer. OTO has entered into additional partnerships As a result, client due diligence includes a mandatory visit before each to support its collection efforts. For example, it has established payment credit decision is made—usually within 24 hours of receiving an applica- and collection arrangements with the country’s largest microfinance in- tion. OTO Credit Marketing Officers (CMOs) also talk to people in the stitution, Bank rakyat Indonesia; the commercial banking system’s ATM applicant’s neighborhood. network; and the Indonesian Post Office network. To maintain a structured appraisal process, CMOs are required to com- plete a standardized form for each applicant, verifying that he or she has 46 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY PT Summit Oto Finance DRIVERS FOR OTO’S INCLUSIVE BUSINESS MODEL • Strong demand for motorcycles • Gap in access to motorcycle finance, especially among low-income groups • Opportunity to capture first-mover advantage in rural areas In many emerging markets such as Indonesia, access to financing in the country, as the main motorcycles are the primary family and work customer groups generally have insufficient vehicles and a principal means of transport for savings to purchase motorcycles in cash. low-income groups. The Indonesian motorcycle Demand for motorcycles and a lack of access to market is the world’s third largest after China financing to buy them have created a market and India, accounting for about 10% of global opportunity for OTO, particularly in Java and demand. Since 2004, national motorcycle sales Sumatra. Now, the company is seeking first- have increased at an 11.5% compounded mover advantage by expanding into rural areas annual growth rate. Upgrades (e.g. from two- in Kalimantan, Sulawesi, and Aceh, which are stroke to four-stroke engines) and business ap- not yet served by many financial institutions. plications (like two-wheeler taxis) are expected IFC’S ROLE AND VALUE-ADD In these areas, roads tend to be less developed to fuel even greater demand. than in cities like Jakarta, making motorcycles Sumitomo Corporation, OTO’s majority sharehold- Nevertheless, market penetration in Indonesia an even more effective means of transportation er, supports the company primarily through equity remains low compared to neighboring coun- than other vehicles. In 2010, over half of OTO’s injections and requires it to raise its own debt fi- tries. One reason for the difference is a lack of new branches were opened in rural markets. nancing. Sumitomo Corporation provides OTO with only emergency credit support in situations of market disruption, and guarantees none of its mid- term borrowings. Unlike many other financial insti- tutions, which are majority-owned by banks, OTO RESULTS OF OTO’S INCLUSIVE BUSINESS MODEL has no easy access to cheap financing or to fixed long-term rupiah loans. • Increased mobility of people and goods, enabling greater access to markets and services • Significant job creation along the motorcycle value chain, from manufacturing to sales to IFC’s funding is designed to match the repayment service and interest rate profile of OTO’s loan portfolio, • Sustained improvement in OTO’s business performance helping improve its asset-liability structure and reduce its market risks. IFC provides up to five-year, In Indonesia, motorcycle finance has done more limited incomes. Motorcycles can also be used fixed-rate rupiah loans which are in short supply than enable consumption. First, it has helped to generate income, by working or trading. from other lenders. IFC is also building OTO’s ca- develop a credit culture among large numbers Motorcycle financing has also played a critical pacity to tap the securitization market when secu- of low-income customers with little to no previ- role in enabling the motorcycle industry to ritization becomes a viable source of financing in ous exposure to the formal financial system. In grow and create jobs along the value chain, Indonesia. the process of repaying motorcycle loans, these from manufacturing to distribution to sales and customers have built credit histories that will With IFC’s investment, OTO is expanding its mo- finally to after-sales service. enable them to access other formal financial torcycle lending especially in underserved loca- services in the future, moving closer to full As a reflection of the value it has created for tions. More broadly, IFC’s investment is strength- financial inclusion. Indonesian society, OTO has maintained healthy ening Indonesia’s limited Non-Banking Financial growth coupled with good profitability. From Institution (NBFI) sector. With lower operational Second, motorcycle finance has increased 2004 to 2010, OTO’s consumer financing re- costs than most banks, NBFIs can more efficiently mobility among low-income groups. Mobility is ceivables grew at a compound annual rate of finance low-income individuals and SMEs, making an essential component of economic opportu- 47%, and its net income rose at a compound them critical to financial inclusion. nity, as it increases productivity and may enable annual rate of 55%. As a result of improving people to take higher paying jobs located overall performance, the local rating agency farther from where they live. It also expands Pefindo raised OTO’s rating to AA-, indicating a access to goods and services that may be avail- stable outlook. In terms of asset quality, OTO’s able more cheaply, or at a higher level of quality, accounts more than 30 days past due stood farther away. Compared with other mobility at 3.9% at the end of 2010. Actual portfolio IFC’s Investment: solutions, motorcycles are relatively inexpensive losses were slightly higher at 5.5%. $45 million in long-term debt financing to purchase, operate, and maintain, making them especially well-suited for individuals with Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 47 CASE STUDY Salala rubber Corporation COMPANY BACKGROUND The Salala rubber Corporation (Salala) is Liberia’s fourth-largest The Salala plantation and factory are managed by Socfin Consultant rubber producer. The company was formed in 2007 when the Weala Services, another subsidiary of Socfin. The marketing and sale of all rubber Company, a stand-alone rubber processing factory, acquired Salala rubber products has been contracted to Sogescol, a third sub- the Salala plantation to secure and expand its raw rubber supply. sidiary of Socfin. The “new” Salala is currently owned 56% by Socfinaf (formerly The Salala plantation is situated in the middle of Liberia’s rubber pro- Intercultures), a subsidiary of Socfin, and 44% by agribusiness in- ducing belt with ideal soils, climatic conditions, and topography. It vestment company Agrifinal N.V. of Belgium. The Socfin Group is a comprises a total area of 8,500 hectares of land with 90% suitable holding company that owns a number of rubber and oil palm planta- for planting. Salala also sources rubber from private farms and small- tions, as well as management and trading companies. holders to supplement its own production capabilities. SALALA RUBBER’S INCLUSIVE BUSINESS MODEL The processing capacity at Salala’s rubber factory greatly exceeds the Purchasing managers at Salala’s buying stations work with smallholders to volume of coagulated raw rubber (the sap-like extract known as latex) increase yields, while forging relationships that help ensure their loyalty to produced on its own plantation. As a result, Salala relies on third-party the company. Salala provides in-kind support, technical assistance, and in suppliers to meet its processing requirements and maximize efficiency. some instances, credit to smallholder producers. Only 20-25% of the company’s rubber input is sourced from the Salala For example, the company provides smallholders with 1,000 rubber tree plantation, with the remaining 75-80% sourced from third parties. stumps for every 20 metric tons of raw rubber they sell to the company. Since IFC’s investment in 2008, Salala has sourced more than 9,000 dry In 2010 this amounted to over 350,000 stumps. Salala also provides ad- metric tons per annum from independent producers. The majority of these ditional inputs in-kind such as fertilizer, cutting knives, formic acid, rubber producers are smallholders based in Liberia’s rubber belt. These smallhold- tapping containers, wires, and even rice for distribution to laborers—all ers own farms that are typically half a hectare to two hectares in size. at cost. Farmers have the option to pay in cash or on credit. When credit Salala sources raw rubber from smallholders in two ways: is extended to smallholders, repayment is deducted from the price they receive upon delivery of raw rubber to Salala. However, credit is extended • Direct supply: Salala purchases raw rubber at its factory from only on a limited basis to suppliers who are reliable, long-standing part- independent producers within close proximity. ners because the company does not have enforcement mechanisms, such • Indirect supply via buying stations: Smallholders who cannot as contracts, to fall back on in the event a borrower does not pay. reach Salala’s factory sell their rubber at one of 14 remote buying stations. These stations are owned by third-party agents who Salala has also established a rubber tapping school. Through the tapping purchase smallholder rubber on Salala’s behalf in exchange for a school, smallholder farmers receive quality improvement training and commission. When much smaller farmers are unable to reach either technical skills. Salala’s quality enhancement team teaches farmers how Salala’s factory or one of the buying stations, they sell their produce to protect rubber from external contamination, for example, and shows to independent traders and other rubber producers, who then them the correct ratios for mixing acid with wet rubber to make it deliver to Salala’s buying stations. congeal. Smallholders also receive guidance on how to tap rubber from a tree, when to tap it for the first time, how to build coagulation tanks, At the factory or buying station, the rubber is weighed, inspected, and and how to organize tapping activities on a farm. Several hundred farmers paid for in cash. Salala’s purchase price is benchmarked against the world have received agronomy support from Salala’s quality enhancement team. market price and is in line with other players’ purchase prices. 48 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Salala rubber Corporation DRIVERS FOR SALALA RUBBER’S INCLUSIVE BUSINESS MODEL • Production limits on Salala’s own plantation, leading to reliance on third-party suppliers to fulfill raw rubber needs • Prevalence of smallholder rubber farming in rural Liberia • Government policy and declining productivity create a need for smallholder support programs Production limits on Salala’s own plantation because they cannot process the rubber them- lead the company to rely on third-party sup- selves due to the high investment required. pliers to achieve the volumes it needs to keep In the absence of systematic replanting efforts its processing plant operating at full capacity due to the civil crises and the need for income and minimize the unit cost of processing. The during those periods, most timber trees were company has an installed processing capacity of over-tapped, thereby reducing the economic 20,000 dry metric tons per annum, while pres- lives of the trees. Yields from older trees are ently it sources only 2,000 dry metric tons per lower, adversely impacting profitability for annum from its own plantation. the small farmer. The challenges to replanting IFC’S ROLE AND VALUE-ADD Because of huge unmet demand by Salala and or new planting are access to the planting other buyers, and because the soil and climatic material and related land preparation and Liberia is a fragile state undergoing a dramatic conditions are favorable for rubber cultivation agricultural services. Smallholders have limited post-conflict transformation. As a result, long-term in Liberia, rubber is the main agricultural crop capital available to meet these needs. These financing is extremely scarce overall and is limited in rural areas. Virtually all rural households challenges have led Salala to deploy its tree to a few of the largest export-oriented companies. grow some rubber trees. It is therefore logical stump program, offer technical assistance, and However, new rubber plantings require long-term for Salala to procure from them. The transac- provide essential inputs at cost. financing because they only begin to yield after tion makes sense for these smallholders, too, seven years. IFC has filled this gap for Salala, pro- viding a loan of $10 million repayable over 11 years. IFC’s financing was also used to upgrade the com- pany’s processing capacity. This has facilitated its RESULTS OF SALALA RUBBER’S INCLUSIVE BUSINESS MODEL certification under ISO 9001 and the receipt of the quality accolade from Michelin. IFC’s financing also • 75-80% of raw rubber—more than 9,000 metric tons per annum—sourced from supported improvements in social infrastructure, es- smallholders since 2007 pecially worker housing that was in very bad shape • 1,800 smallholders in Salala’s supply chain support an additional 4,000 farm workers and a due to neglect during the civil crises. total of 20,000 people, including dependents • Only Liberian processor of smallholder rubber to be awarded a 10 grade by Michelin IFC is also helping to ensure that Salala’s operations comply with environmental and social standards. Salala currently procures 75–80% of its rubber the Michelin Tire Company. This designation Finally, IFC’s participation provides validation and a requirements—more than 9,000 metric tons recognizes the efficiency of Salala’s production strong signal to the Liberian government, which is per annum—from 1,800 smallholder farmers. process and the low level of impurities in the keen to implement broad-based economic, social, This activity supports the livelihoods of an finished product. This is typically difficult to and environmental development measures. estimated 4,000 farm workers and a total of achieve with rubber sourced from smallholders, 20,000 people, including dependents. It also which tends to contain more impurities than supports a network of small, local companies plantation rubber due to less efficient tapping and entrepreneurs, including 11 transporters of and coagulation. Salala has also achieved ISO wet rubber from buying stations to the factory. 9001 certification for quality management. Salala is the only processor of smallholder rubber in Liberia to be awarded a 10 grade by IFC’s Investment: $10 million in long-term debt financing Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 49 CASE STUDY Sociedad de Acueducto, Alcantarillado y Aseo de Barranquilla (AAA) COMPANY BACKGROUND Sociedad de Acueducto, Alcantarillado y Aseo de Barranquilla (AAA) 20-year concession that was later extended for another 20 years. The was the first company established under an innovative policy frame- company has since expanded into 12 other municipalities. work for the water and sanitation sector in Colombia. Called the AAA is majority-owned by Interamericana de Aguas y Servicios “mixed capital model,” this framework encourages public-private S.A., a Spanish water systems management and consulting ser- cooperation to expand coverage in poorer municipalities not ef- vices company, at 82.15%. The District of Barranquilla owns a fectively served by traditional public utilities. AAA began providing 14.51% stake with the remaining 3.34% being held by private local water, sanitation, and solid waste management services to the city shareholders. of Barranquilla, in northern Colombia, in 1993 with an exclusive AAA’S INCLUSIVE BUSINESS MODEL When AAA began operating Barranquilla’s water and sanitation system in what the costs are, and how they are billed. The company used radio and 1993, only 66% of households were connected to water, and only 54% television, and hired more than 40 full-time staff—mostly social workers were connected to sewer. Among low-income households, there was vir- familiar with the area—to help educate community members and answer tually no coverage. questions. To integrate itself even further, AAA hired local workers to help dig the pipelines. Under AAA’s concession agreement, the District of Barranquilla (DoB) retained ownership of existing water and sanitation infrastructure, as Turning low-income households into customers has also required innova- well as the responsibility for constructing additional infrastructure as re- tions in customer service. For example, recognizing that many of these quired to expand the network. AAA was to pay royalties and invest in households’ income patterns are variable and many have difficulty saving network maintenance. However, in 1999, the company launched a major until the end of the month, AAA went to great lengths to incentivize them capital investment project with its own funds. At that moment, the value and make it easier to pay on time. Customers without bank accounts of this investment was equivalent to the payment of the royalties until can pay at pawnshops, grocery stores, and department stores, among 2013. The company thus paid in advance the royalties until that year. others. The company also sets up portable bill paying stations in low- The Suroccidente Project aimed to extend water and sanitation services income neighborhoods so that those in arrears can arrange customized to the southwest part of Barranquilla where the city’s poorest citizens live. payment plans, ensuring their service isn’t cut off for long. Customers Over the next four and a half years, the approximately $48 million project who stay current with their bills are recognized as “super clients,” receiv- installed more than 361 km of water pipeline, 378.9 km of sewerage ing discounts and points receivable for goods from local retailers eager to ducts, and 40,000 household water connections in 53 neighborhoods. do business with households known to be good payers. “Super clients” The company also installed water meters in each house. The cost of the also receive special treatment from AAA, including thank-you letters from connection was billed to the household in installments included in each the CEO, which are valuable in seeking credit. These strategies have had a monthly bill. strong positive impact on the company’s collection rate. AAA knew low-income households would be willing to pay for safe water Technology has been critical to good customer service and also to keeping piped into their homes—they typically bought water from tanker trucks costs down. For example, AAA has dramatically improved the way it at very high prices, and suffered from gastrointestinal diseases related to responds to maintenance requests by using custom software to coordi- low water quality and a lack of sanitation services. But turning them into nate field inspectors and work crews via mobile phone. This system has customers took more than physically connecting them to the grid. reduced the time it takes to make repairs by nearly half. Such operating ef- ficiency helps AAA keep its prices within reach of low-income households. Public awareness and community outreach were important first steps. The vast majority of people living in southwest Barranquilla never had access Cross-subsidization also helps the company keep prices within reach. to formal water and sanitation services, and were suspicious of outsiders By Colombian law, water tariffs are designed such that higher-income coming in to offer them. Many people believed that the water meters households pay more for service than lower-income ones. Specific rates meant they would have to pay more, and considered sewage a luxury. are negotiated with federal regulators, company by company, on a “cost- Doubt and mistrust were encouraged by local political interest groups plus” basis. The federal government also provides subsidies based on the connected to the water tanker trucks. number of people being billed and the specific rates being charged. AAA responded with a large-scale public awareness campaign about the benefits of water and sewer service in the home, how water meters work, 50 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Sociedad de Acueducto, Alcantarillado y Aseo de Barranquilla (AAA) DRIVERS FOR AAA’S INCLUSIVE BUSINESS MODEL • Pent-up demand for affordable, safe water in low-income neighborhoods • Policy framework encouraging public-private cooperation in the water and sanitation sector in Colombia Before Barranquilla’s low-income neighbor- areas, the federal government promoted the hoods were connected to the water and sewer “mixed capital model” in which municipalities grid, they bought water from tanker trucks at allow private companies to operate publicly- very high prices and suffered from gastrointes- owned distribution infrastructure in return for tinal diseases related to low water quality and royalties. It also offered subsidies, channeled a lack of sanitation services. AAA saw a market through municipalities, to make serving low- opportunity to provide access to safer, more income households more attractive. In line with affordable water in the home. these policies, the District of Barranquilla (DoB) concessioned existing infrastructure to AAA Colombian government policy also contributed and agreed to pass on the federal government to the market opportunity. To expand water and subsidy. IFC’S ROLE AND VALUE-ADD sanitation services in historically underserved The Suroccidente Project to expand water and sewer infrastructure into Barranquilla’s low-income southwestern region required significant capital expenditures that strained AAA’s finances. With RESULTS OF AAA’S INCLUSIVE BUSINESS MODEL a $24 million partial credit guarantee (PCG) from • 24-hour water and sewer coverage has increased from 66% and 54% in 1993 to 99% and IFC, the company was able to issue two local cur- 96% today, respectively rency bonds with long maturities that would oth- • 1.1 million low-income citizens of Barranquilla connected to water and sewer services, paying erwise have been impossible to obtain, replacing 72% less than they would pay water tanker trucks shorter-term debt it had previously used to finance • Collection rates have increased from 66% in 1996 to 96% today its investment program. The bond issue also helped reduce the company’s currency risk, as some of its In 1993, when AAA began operating, only contributed to its financial success. From net shorter-term debt had been denominated in dollars, 66% of Barranquilla’s population had access losses of $1.86 million in 1996, the company while its revenues were in Colombian pesos. These to piped water 24 hours a day. Only 54% reached a net profit for the first time in 2001, advantages, combined with process improvements had access to sewerage. Today, those figures and has been profitable ever since. In 2010, made to comply with IFC’s strict guarantee cove- are 99% and 96%, respectively. 1.1 million AAA registered net revenues of $150 million nants, have put AAA in a solid financial position— low-income citizens have been connected for and a net profit of $0.4 million. AAA also reg- helping the company serve low-income households t time, 350,000 of them through the the fi rs istered a gross margin of 39% and an EBITDA in a financially sustainable way. Suroccidente Project. Such customers pay 72% margin of 28% in 2010. As of December 2010, In addition to providing the partial credit guaran- per cubic meter less, on average, than they did the company had total assets of $230.3 million, tee, IFC has helped AAA raise its environmental when they relied on water tanker trucks. total liabilities of $131.3 million, and total performance standards. Most recently, IFC Advisory equity of $99.1 million. Thanks to customer service innovations like Services has begun working with the company on convenient bill payment and the “super client” From its original operations in Barranquilla, a utility efficiency program intended to reduce un- recognition program, AAA has increased its col- AAA has expanded into 12 additional munici- accounted water levels, as well as energy losses. lection rate from 66% in 1996 to 96% today. palities in Colombia. The company now serves This program is currently in its first phase of Technology-enabled efficiency gains have also approximately 1.58 million people. implementation. IFC’s Investment: $24 million partial credit guarantee Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 51 CASE STUDY Suvidhaa Infoserve Private Limited COMPANY BACKGROUND Suvidhaa Infoserve Private Limited (Suvidhaa) offers individuals the with experience in retail payments, e-commerce, and technol- means to make electronic payments—online and over their mobile ogy. Suvidhaa’s shareholders include the company’s founder rajde; phones—for a variety of virtual products and services, making pay- angel investor Shapoorji Mistry, chairman of the leading Indian con- ments more convenient and less costly and expanding consumer glomerate Shapoorji Pallonji Group; Northwest Venture Partners in choice in the marketplace. California; reliance Venture Asset Management Ltd. of the reliance ADA Group in India; and IFC. Suvidhaa is headquartered in Mumbai, The company was founded in 2007 by Paresh rajde, an e-com- India. merce entrepreneur. Suvidhaa currently employs over 250 staff SUVIDHAA’S INCLUSIVE BUSINESS MODEL India is predominantly a cash-based economy. Suvidhaa’s innovative busi- wallets on their behalf, if retailers are unable to deposit directly into ness model uses modern information and communications technology Suvidhaa’s account. (ICT) to address the needs of consumers who transact in cash, and thus In a typical Suvidhaa transaction, an individual consumer purchases a find their purchasing options limited to those available in their immedi- product or service in cash at a Suvidhaa Point. The owner accepts the ate vicinities. By the same token, Suvidhaa serves companies wishing to consumer’s cash, and uses the Suvidhaa POS application to submit the reach these consumers, who would otherwise have had to travel long payment online out of his or her pre-paid electronic money wallet. The distances and forego wages in order to purchase their products. As of Suvidhaa system then manages the flow of electronic money from the mid-2011, Suvidhaa offered online and mobile payments for the prod- Suvidhaa Point to Suvidhaa to the product or service provider, processing ucts and services of 250 businesses in categories such as utilities, travel, payments, settling accounts, and fulfilling transactions via a receipt or e- banking and financial services, entertainment, telecommunications, and ticket issued to the consumer by the Suvidhaa Point owner. Each transac- education. Many of these products and services are “virtual” and don’t tion generates a commission, which is shared by Suvidhaa, the Suvidhaa require physical distribution—including rail, air and bus tickets, life insur- Point owner, and the distributor. Suvidhaa also earns revenues through ance premiums, domestic remittances, mobile phone airtime and more. sign-up and subscription fees charged to Suvidhaa Point owners. The company reaches consumers through a two-tiered franchised distri- Scale is important for an electronic payments provider like Suvidhaa, bution network. Closest to the consumer are Suvidhaa Points, where pur- and the company is working to build a ubiquitous retail network. It chases and payments can be made. Between the Suvidhaa Points and the counts over 42,000 small-scale retailers as part of this network. In ad- company are Suvidhaa distributors, which serve as intermediaries. dition, Suvidhaa is forging partnerships with the government and busi- Suvidhaa Points are small-scale retailers whose primary business is to sell nesses that have strong delivery channels in place. For example, Suvidhaa groceries, travel services, mobile phones, airtime or insurance. They must has been appointed an official partner in the National e-Government own or purchase at their own cost a computer, a printer, and broadband Program of the Indian government, allowing the company to offer online Internet service to run Suvidhaa’s Point of Sale (POS) software, connect payments through 68,000 rural Common Service Centers providing e- to its proprietary Service Commerce (s-commerce) technology platform, government services. Suvidhaa has also partnered with the government- and make transactions. To make online payments on behalf of customers owned telecom company Bharatiya Sanchar Nigam Ltd. to work through paying in cash, retailers must also deposit INr 5,000-10,000 with Suvidhaa 234,000 Public Calling Offices. Also, through a partnership with Financial in advance, which is then stored in an electronic money wallet ready to be Information Network and Operations Ltd. (FINO), Suvidhaa offers elec- transferred online at the time of payment. retailers may conduct transac- tronic payments through over 8,600 FINO agents who provide financial tions up to the amount in this wallet, which they may increase at any time. services to individuals with low incomes. Moreover, Suvidhaa is working with leading companies such as Essar Oil, Tata Consultancy Services, and Suvidhaa Points are selected by Suvidhaa distributors. Typically Suvidhaa others to offer its e-payment services through kiosks on their premises. distributors are independent retailers selling groceries, fast-moving con- sumer goods or telecommunication products. With an average staff of Suvidhaa is also helping to bridge both the digital and rural-urban divides five and strong finances, each distributor is responsible for approximately in India through Suvidhaa Points offering mobile phone-based payments 200 Suvidhaa Points. Suvidhaa distributors hand-hold retailers by advis- to consumers in rural areas with limited or no access to electricity, PCs, or ing them on managing day-to-day operations, cash and credit, and other the Internet. topics. They can also accept cash and top-up retailers’ electronic money 52 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Suvidhaa Infoserve Private Limited DRIVERS FOR SUVIDHAA’S INCLUSIVE BUSINESS MODEL • Business opportunity to facilitate the spread of e-commerce in India • Market demand for electronic payment solutions to reach consumers that transact in cash • Demand from employers for electronic payment services for employees to reduce productivity losses • rapid mobile phone penetration presents an opportunity to reach consumers in rural areas E-commerce offers consumers advantages like At the same time, product or service providers convenience, greater choice and easier access. are looking for ways to transact with geograph- In India, however, only 8% of the population ically dispersed consumers that lack access to uses e-commerce due to limited or no electric- financial services and modern ICTs, and there- ity, as well as low PC and Internet penetration fore pay in cash. Employers, too, are looking for (7% and 10% respectively). Only 60% of the ways to facilitate electronic payments for their population has a bank account and only 28% employees. Employers seek to reduce produc- of the adult population has a credit or debit tivity losses incurred when employees must take card. And mobile phone-based “wallets” that time off to pay bills, purchase travel tickets, and IFC’S ROLE AND VALUE-ADD enable unbanked consumers to pay electroni- make other such transactions. In 2010, IFC invested $5 million in equity in cally are at a nascent stage of development. As Finally, with over 827 million mobile phone Suvidhaa, contributing needed long-term invest- a result, India is predominantly a cash economy, subscribers in India, the mobile phone-based ment capital to an early-stage company. IFC’s in- with 91% of all transactions conducted in cash. business-to-consumer sales channel holds great vestments in Suvidhaa and similar companies are Suvidhaa has found a business opportunity in promise. Businesses seeking to leverage mobile intended to help fuel growth in the electronic pay- offering an alternative e-commerce system phones to reach underserved consumers need ments industry as a whole, recognizing that the capable of improving efficiency, reducing cost, an intermediary like Suvidhaa to address the associated efficiency and financial inclusion gains and increasing consumer choice and conve- complex distribution and electronic payment have significant implications for economic growth nience under these difficult circumstances. logistics involved. worldwide—and for development in emerging markets in particular. In addition to financing Suvidhaa, IFC is contrib- uting global expertise and knowledge that it has RESULTS OF SUVIDHAA’S INCLUSIVE BUSINESS MODEL gained from its portfolio of companies in payments • More than four million individual Suvidhaa customers as of mid-2011 processing and e-commerce, as well as relation- • 42,000 Suvidhaa Points offering payments in 1,700 cities or towns in 28 states of India ships with mobile network operators, financial in- • 250 product or service providers in 20 industries using Suvidhaa to transact with customers stitutions and other relevant service providers. IFC is also supporting Suvidhaa to strengthen its corpo- Suvidhaa has more than four million customers their core products. Consumers have benefited rate governance, which is critical for an early-stage —including 300,000 unique customers added from greater choice of products and services; company seeking to expand operations and sources each month in the first half of 2011 alone— increased convenience; and reduced costs in of finance. that make online payments using one of ap- the form of travel time, foregone wages, and proximately 42,000 franchised Suvidhaa Points the need to pay higher, non-standard commis- in more than 1,700 cities or towns spanning sions to middlemen. Product and service pro- 28 states. Suvidhaa expects to have a total of viders have reduced their operating costs using 250,000 Suvidhaa Points by 2015, including an Suvidhaa to reach and engage customers, and estimated 70,000 in rural areas. Suvidhaa has gained access to new customers. enabled electronic payments for 250 product Suvidhaa has received various international and service providers in 20 industry categories. and national awards, including the red Herring Suvidhaa has brought benefits to small-scale re- 100 Asia Award for its technology platform tailers, consumers, and product or service pro- and socio-economic business model in 2009. viders alike. Small-scale retailers with average Suvidhaa’s founder also received the Institute revenues of $75 to $100 per month have been of Chartered Accountants of India’s Business able to increase revenues by offering Suvidhaa Achiever Award in 2009-10 for leadership in IFC’s Investment: services. In addition, retailers have seen greater taking the company to scale in a short period $5 million in equity customer traffic, which has helped drive sales of of time. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 53 CASE STUDY Tribanco COMPANY BACKGROUND Tribanco is a financial institution established by Grupo Martins in Grupo Martins is the largest wholesaler and distributor in Latin Brazil in 1990. Headquartered in the city of Uberlândia in the state of America with more than 50 years of experience in the region. It dis- Minas Gerais, Tribanco maintains a full banking license and as such tributes food, electronics, home improvement supplies and pet food is monitored by the Central Bank of Brazil. It provides financial and to more than 300,000 micro, small and medium enterprises (MSMEs) management assistance to Grupo Martins’ retail clients and does not in Brazil. Grupo Martins created Tribanco as part of a broader strategy service the general public. to maintain market positioning against large foreign retailers entering the Brazilian market and to better service its own retail customers. TRIBANCO’S INCLUSIVE BUSINESS MODEL Tribanco serves as a financial intermediary in the Grupo Martins distribu- eligible to receive shopper cards. Although Tribanco assumes non-pay- tion chain, offering financial and management solutions for retail clients ment risk, those stores with higher repayment rates receive lower transac- that are predominantly family-owned micro, small, and medium-sized tion fees. Thus, retailers are incentivized to choose wisely and help ensure enterprises (MSMEs). Martins’ philosophy is that its own growth will be shoppers repay. driven by its customers’ growth. Thus, it sees itself as a logistics company Tricard has issued 4.04 million credit cards to shoppers, 40% of whom in the business of helping its customers become more competitive, rather earn monthly incomes below $280 and 71% below $450, to provide than a traditional distribution company. Tribanco proactively visits more them with short-term access to credit to buy needed food and products. than 90% of Brazilian towns, identifies the most entrepreneurial of the The repayment rate is 96.5%, likely due to the fact that Tricard holders small stores it services, and then partners with them to provide renovation tend to be regular customers who live in the area. They recognize that if loans, training, and other services to enable them to grow. they do not pay, they will have their cards taken away and may also have Tribanco offers several credit and non-credit services to retailers, including: to find new, less convenient stores to purchase groceries. • Extending check-cashing services and loans to retailers for retail owners and managers also benefit from capacity-building and purchases or store renovations training on store management and marketing practices such as creat- • Issuing Tricard customer credit cards for retail outlet shoppers ing displays and offering customer promotions. Training is predomi- • Offering capacity-building and business training to retailers nantly offered through distance learning, although some retailers also Tribanco has about 150,000 MSME clients borrowing in the short term for have access to more formal, classroom training. In some instances this is purchases made from Martins, borrowing on average $312 each time. In tied to performance incentives; for example, retailers earn points based addition, approximately 15,000 clients each year borrow for other needs, on their purchases which they can redeem for free classroom training with an average loan size of $8,600. Lending is offered as a way for stores through Martins retail University. Further, Grupo Martins employs mixed to purchase inventory on credit and make store improvements such as training models to address the needs and geographic constraints of their lighting, displays, and technology. A small team of loan officers, who are customers. For example, Grupo Martins has used a bus that converts into full-time Tribanco employees trained in credit risk assessment and analy- a classroom to travel around to rural areas, providing online courses and sis, works directly with stores to help them access credit through Tribanco in-person instruction. and to educate retailers and customers on financial services outside the In 2009 Tribanco started to work with insurance through Tribanco Grupo Martins system. Seguros, issuing over 4,500 insurance policies to low-income customers. Additionally, 9,000 MSMEs participate in Tricard, Tribanco’s branded Tribanco also partners with financial and non- financial institutions to credit card program. After receiving training from credit officers on cus- offer other services for its clients, for example collecting customer checks tomer creditworthiness, retailers decide which of their customers are by the National Postal Service or issuing private label credit cards. 54 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Tribanco DRIVERS FOR TRIBANCO’S INCLUSIVE BUSINESS MODEL • Business opportunity to provide micro, small and medium retail clients with access to financing to maintain operations and improve profitability • Competitive need for Martins to differentiate itself and maintain strong market presence against large, foreign retailers entering Brazilian market Tribanco has enabled Grupo Martins to dif- cases, expand. This in turn helps Grupo Martins ferentiate itself from large foreign retailers maintain its own growth and market presence and maintain its market position as one of the as the distributor to these retailers. Further, largest distributors in Latin America. By offer- Grupo Martins is offering customized, value- ing credit services and training to retailers, it is added services to its customers which serve to helping them remain profitable and in many strengthen brand loyalty. IFC’S ROLE AND VALUE-ADD RESULTS OF TRIBANCO’S INCLUSIVE BUSINESS MODEL IFC extended a credit line of $10 million to Tribanco • Serves over 150,000 MSMEs nationwide with credit and financial services in 2004 and an additional $15 million in 2009 to • Issued over 4.04 million credit cards to consumers accessing 9,000 retail shops enable it to diversify debt sources and gain longer- • Greater financial inclusion among the two thirds of the Brazilian population without access term flexibility in financing. Additionally, Tribanco tobanking services today collaborated with IFC to strengthen its role as a financial intermediary to retailers. Tribanco now serves about 150,000 MSMEs na- Tribanco’s credit assessment approach address- tionwide, offering credit and financial services. es the market failures deriving from the current IFC complemented its investment with a $200,000 It has issued 4.04 million credit cards to con- financial system, which perpetuates lack of advisory services program to develop Tribanco’s in- sumers shopping at 9,000 outlets. This model access among the working poor. Specifically, ternal training capabilities. Investments have helped has enabled small shops to enhance their profit- regular banking credit assessment models give Tribanco introduce a “credit-centric” culture and ability, long-term survival, and growth. In turn, low scores to lower income people even if hire and train more full-time credit agents; develop it has enabled Grupo Martins to develop a com- they have a steady source of income. With an marketing, finance and credit assessment training petitive advantage versus large foreign retailers alternative credit assessment model that relies modules for credit officers; incorporate sustainabil- entering the Brazilian market, build customer upon the storeowner’s input, Tribanco is able ity training (social responsibility and environmental loyalty, maintain a strong market presence. to address this asymmetry of information and awareness) in the curriculum; and partner with a provide credit to its customer base. In doing third party to carry out monitoring and evaluation Brazil is one of the least “banked” middle- so, it provides the working poor with a way programs. income countries, and lack of access to finance to smooth irregular cashflows over the short negatively impacts the country’s economic term and promotes greater financial inclusion productivity and social inclusion.14 Operating in the long term. Finally, since Tricard is often in the most remote and neglected urban and an individual’s first credit card ever, it enables rural areas of Brazil where little to no access to consumers to build credit histories and access fi nanc ial services exists, Tribanco is therefore greater financial services in the future. enabling people to save, manage risk, increase earnings, and pursue profitable business opportunities. IFC’s Investment: $25 million in long-term debt financing 14 Kumar, Anjali (2004). “Access to Financial Services in Brazil.” Washington, DC: The World Bank. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 55 CASE STUDY Uniminuto COMPANY BACKGROUND Corporación Universitaria Minuto de Dios, or Uniminuto, is a rapidly Uniminuto is a subsidiary of Minuto de Dios, a Catholic organiza- growing not-for-profit tertiary education institution established in tion founded by Father rafael García Herreros in 1955 to help the 1990 in Bogotá, Colombia. Uniminuto offers affordable, high-quality neediest populations regardless of faith. Minuto de Dios implements technical, technological and university education. Its largest presence low-income housing, health, small and medium enterprise finance, is at the principal Bogotá campus where 30% of its students attend agribusiness, media and education programs in 1,000 municipalities school. Its national network reaches 35,000 students in 34 locations in 17 out of 32 departments in Colombia. in 11 municipalities, as well as 500 students enrolled in distance learn- ing programs. UNIMINUTO’S INCLUSIVE BUSINESS MODEL Uniminuto’s mission is to offer high-quality, easily reachable, complete construction, and are tailored to reflect regional industry mixes, with and fl ex ible higher education to support the development of highly certain sites offering hotel management and agro-ecology. Short-term competent and ethically responsible individuals in Colombia. Uniminuto courses in skills demanded by prospective employers, such as web design offers undergraduate, technical, specialty and master’s courses, targeting and occupational health, are also offered. Finally, Uniminuto offers low lower-income students with courses emphasizing employability, afford- staff-to-student ratios and programs such as pre-term workshops and ability, and accessibility through multiple sites around the country and a basic skills tutoring to support students from lower socioeconomic distance learning platform. groups. Uniminuto operates independently and through formal collaborations Uniminuto has been able to ensure geographic reach through a network with other universities or government entities. It owns five teaching of classroom facilities in different regions and through distance learn- sites and leases several other sites. It also receives fees to administer 18 ing. Its Bogotá campus is housed in an urban part of the city close to government-sponsored sites located in marginal urban or remote areas the surrounding region and serviced by public transportation. In addition, and works with two independent tertiary schools to provide education Uniminuto works through 34 sites, each reaching from 107 to 2,920 services through a management agreement. Its main source of revenues students. In 2007, Uniminuto won a public tender to establish a “virtual is tuition fees, although it also receives grants and government funding. campus” in partnership with other local institutions. Today, a quarter of courses are available through distance learning, reaching 500 students. Uniminuto courses emphasize quality and flexibility through a modular The organization works with experienced universities, such as Mexico’s structure with early, compulsory levels covering core material and later Monterrey Tech, to develop distance learning materials — for example, levels covering more advanced material, leading to higher qualifications. for teacher training in rural regions. This enables individuals to move from level to level, and exit with qualifi- cations at more than one point. Uniminuto maintains quality standards by Another important element of the Uniminuto model is its pricing. meeting mandatory accreditation requirements and is working to achieve Through innovative cost-sharing arrangements and the use of technol- higher institutional accreditation by 2012, a rare achievement attained by ogy, the organization is able to keep tuition rates affordable. For example, fewer than 10% of tertiary schools in Colombia today. business undergraduate studies are priced at less than $1,000 a semester compared to an industry average of $1,450. rates are also differentiated Since the end goal is for students to find employment, Uniminuto’s of- by site so that they align with ability to pay in different regions. Finally, ferings emphasize technology and focus on providing students with the Uniminuto offers financing through a subsidiary, Cooperativa Uniminuto. skills needed to find full-time employment after graduation. It works with The cooperative manages longer-term loans provided through Colombia’s business, government and non-governmental organizations to ensure public student loan agency ICETEX, allocates the organization’s own that curricula meet potential employers’ needs. In fact, more than half funds to offer additional short- and medium-term financing, and helps of Uniminuto’s programs are vocationally-oriented. Course offerings rep- students apply for external loans. resent key productive sectors in Colombia, including agribusiness and 56 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Uniminuto DRIVERS FOR UNIMINUTO’S INCLUSIVE BUSINESS MODEL • Market need for accessible, affordable tertiary education, which aligns with the parent organization’s mission to aid the neediest populations • Insufficient public supply of higher educational institutions and expensive private supply • Insufficient quality technical and technologically-oriented offerings among other providers to prepare students for employment after graduation Uniminuto addresses a social need for increased capital district of Bogotá compared with 10% access to tertiary educational services, particu- in less urban areas. Although there are 283 ter- larly among lower-income and geographically tiary education providers in the country, private isolated students. Today, tertiary education op- offerings are concentrated in major urban portunities vary greatly based on students’ areas and are very expensive. Public offerings socioeconomic status and proximity to major are insufficient to meet demand. In addition, urban centers. Approximately 1.5 million whether public or private, tertiary education in students are enrolled in tertiary education in Colombia today largely overlooks the technical Colombia, which is a gross coverage ratio of and technological skills for which there is a clear IFC’S ROLE AND VALUE-ADD 34%, lower than other middle-income coun- need in the labor market — and which would In 2009, IFC disbursed $4 million of a total com- tries in Latin America. Coverage ratios differ give students an edge in finding full-time em- mitment of up to $8 million equivalent to support greatly by region and are close to 50% in the ployment after graduation. Uniminuto’s five-year plan to expand in the tertiary education market in Colombia. With this invest- ment, IFC is providing Uniminuto with the funds it needs to finance physical expansion with new classrooms, offices, and laboratories; information RESULTS OF UNIMINUTO’S INCLUSIVE BUSINESS MODEL and communications technology improvements; • Approximately 32,000 students educated in 2009, including 16,000 women and 18,000 and institutional strengthening. IFC’s investment is students from the lowest two quintiles of the population by income also expected to strengthen Uniminuto’s ability to • 45% average annual growth rate in student enrollment from 2006 to 2009 secure long-term financing from other sources in • 41% revenue growth from 2006 to 2009, with double-digit growth expected through 2013 the future. Uniminuto appears to be addressing a clear on average 10% for tuition and 19% for total With experience in the region and knowledge market need, with 45% average annual costs15— highlighting both the role that afford- of the tertiary education industry, IFC is able to growth in student enrollment from 2006- ability plays in limiting education opportunities provide Uniminuto with expertise in university 2009 — significantly greater than the average in the region and the market opportunity for project implementation and help the organization 5-7% growth rate for tertiary education in a low-cost provider. Uniminuto competes well build new university partnerships. Also, IFC guid- Colombia. In 2010, the student population by keeping costs down and facilitating student ance on insurance and environmental manage- reached 35,000 students, over 50% of whom loan financing. In fact, the financing subsidiary, ment supports the organization’s planning and risk were female. Uniminuto is currently expanding which assists over 70% of students in access- management processes. its physical and technological infrastructure and ing loans, managed the issuance of 14,249 institutional capacity, planning to reach over loans valued at US$7.7 million during the 45,000 students in 2011. second semester of 2009. That same year, the organization was able to reach 18,000 students Uniminuto’s enrollment growth reflects the from the lowest two quintiles of the population ant value it is creating for students. signifi c by income, and it plans to grow this figure to World Bank studies estimate that the average 25,000 by 2011. Colombian family spends just under 30% of GDP per capita per year on tuition for tertiary From 2006 to 2009, Uniminuto’s net revenues education, and 64% for total costs including grew from $8.5 to $27.6 million, with an expenses. This is significantly higher than in EBITDA that represented an acceptable level high-income countries, where families spend given the organization’s focus on affordability and its expansion into non-traditional regions. It experienced a net revenue growth of 41% IFC’s Investment: 15 Murakami, Y. and A. Blom. 2008. “Accessibility and Affordability of Tertiary Education in Brazil, between 2006 and 2009, with double-digit $8 million in long-term debt financing Colombia, Mexico and Peru within a Global growth anticipated through 2013. Context.” World Bank Policy research Working Paper 451. Washington, DC: The World Bank. Pages 4, 13, 16. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 57 CASE STUDY VINTE COMPANY BACKGROUND Founded in 2001, VINTE is a homebuilder specializing in affordable, comprised of VINTE and its five operating subsidiaries: (i) Promotora sustainable housing for low- and middle-income families in Mexico. de Viviendas Integrales, engaged in promoting the housing devel- As a vertically integrated company, VINTE’s operations span land ac- opments; (ii) Urbanizaciones Inmobiliarias del Centro, engaged in quisition, housing design, housing development planning, construc- research and development on housing, including technological, en- tion, marketing, and sales. VINTE’s shareholders have a collective vironmental, and design features; (iii) Edificaciones e Ingeniería del vision to raise housing standards in Mexico while providing innova- Centro, engaged in urbanization and construction activities; (iv) tive, value-added affordable housing. Conectividad para el Habitat, engaged in the distribution of com- puters, Internet, and related services; and (v) VINTE Administración, Vinte Viviendas Integrales S.A.P.I. de C.V. is the holding company Diseño y Consultoría, engaged in human resources management. that consolidates all of VINTE’s operations. The holding company is VINTE’S INCLUSIVE BUSINESS MODEL VINTE is a niche player in the low- and middle-income housing market, Customers are generally salaried workers such as schoolteachers, bus with a customer offering that is differentiated by the use of innovative drivers, factory and office workers with annual household incomes technology and modern infrastructure services. Its research and develop- ranging from $6,000 to $27,000. Most are young working adults, and ment in cutting-edge technologies is helping the company to introduce many are first-time homebuyers who grew up in Mexico City’s informal innovations that save homebuyers on ongoing home maintenance costs. housing settlements with marginal access to clean water, electricity, sani- For example, homes are designed to reduce gas bills by 75%, and in 2011 tation, roads, schools, and parks. Home prices start at $23,000 and reach VINTE added the option of rooftop solar cells for energy generation, thus $74,000, with more than 50% of homes between $23,000 and $39,000. signifi cantly reducing electricity bills. Individual wall meters to measure Government-sponsored programs have been instrumental in enabling electricity, gas, and water consumption enable homeowners to both save VINTE’s customers to access housing finance. The Institute of the National money and reduce their environmental footprint. VINTE also provides Housing Fund for Workers (Infonavit)—a mutual savings and mortgage modern infrastructure services that are not offered by other affordable lending agency that aims to improve the quality of life for Mexican housing builders. Homes are equipped with a computer and Internet, workers and their families—is the main source of housing loans. Private facilitating access to security cameras in each housing cluster as well as sector employers are required by law to register themselves and their a housing development website that provides information about energy employees with the fund. Thereafter, employers allocate 5% of their em- management and community affairs. ployees’ monthly payroll to their individual Infonavit accounts. These reg- Another key aspect of VINTE’s differentiated offering is its focus on en- istered employees, whose incomes start at the minimum wage, may then abling homeowners to manage the housing developments, particularly apply for a mortgage loan through Infonavit. Once a person meets the maintaining communal areas and putting in place measures to increase standard eligibility criteria, he or she has the right to use the funds accu- security. Following the sale of a housing development, VINTE has a year- mulated in his or her account and to obtain a new home mortgage loan. long transition period during which it helps homeowners managing the Infonavit qualifies prospective homebuyers based on points awarded for development, teaching residents basic property management skills and income, monthly contributions, age, and number of dependents, among community values. The end result is that VINTE’s housing developments other factors. The accumulated funds are used as a down payment or stand out from the competition in terms of both design and mainte- credit guarantee, and subsequent monthly installments are used as loan nance. After-sales services such as home maintenance and re-sale assis- payments. Individuals who don’t exercise the option to obtain a mort- tance are other important elements of VINTE’s offering. gage automatically have their contributions added to their pension fund at retirement age. Infonavit originated more than 475,000 new loans Currently, VINTE designs, constructs, and sells eight types of homes, from worth on the order of $9 billion in 2010. entry-level to middle-income. A typical entry-level home is about 450 square feet, and consists of a kitchen, living-dining area, two bedrooms and Similar to Infonavit, the Housing Fund of the Government Worker Social one bathroom. A middle-income home consists of a kitchen, dining room, Security and Services Institute (Fovissste) originates more than 90,000 living room, three bedrooms and two bathrooms. VINTE’s housing develop- loans (worth approximately $3.5 billion) annually for employees of federal ments also feature gated courtyards, schools, water treatment plants, play- and local governments, as well as public universities and local agencies. grounds, and recreational areas. Similar to condominium fees, residents pay Infonavit and Fovissste, together with other federal public entities, now community fees for maintenance of these communal facilities. grant more than 80% of all mortgages in Mexico. Approximately, 75% of VINTE’s customers received loans through Infonavit and Fovissste in 2010. VINTE targets customers who are planning to live in the housing devel- opment—not those who want to buy a home to rent to other tenants. 58 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY VINTE DRIVERS FOR VINTE’S INCLUSIVE BUSINESS MODEL • 40% of housing demand is concentrated in central Mexico, a significant market opportunity for a niche player • Stable supply of government-backed mortgages for low- and middle-income housing customers Mexico has 26.7 million households, of which other factors, the central region experienced 17.8 million own homes considered to be in ad- stable demand and is viewed as a high growth equate condition. Around 75% of the estimated region. shortage of 8.9 million houses is concentrated In addition, the government of Mexico’s support in the affordable housing segment. By 2030, for housing finance is incentivizing homebuild- Mexico’s population is expected to reach 121 ers to target the affordable housing segment million people, creating demand for 11 million given the availability of mortgages through additional new houses. This market opportunity Infonavit and Fovissste. The government sees is a key driver of VINTE’s business model. In the housing sector as an instrument for social particular, VINTE, as a niche player, is focusing IFC’S ROLE AND VALUE-ADD and economic development, and has set a on the central region of Mexico where 40% of target of six million mortgage credits under Despite improvements in housing sector finance housing demand is concentrated. Unlike some its 2007 to 2012 national development plan. in Mexico, medium-sized homebuilders continue other regions, which experienced a reduction Most of this plan’s measures focus on families to face limited access to medium- to long-term in demand for affordable housing during the earning less than $920 per month. working capital. Their options are limited to financial crisis as a result of unemployment and construction project-specific bridge loans offered by local mortgage banks (sofoles) and com- mercial banks, which are rigid and expensive. Homebuilders have to finance land reserves and initial development with their own cash or through RESULTS OF VINTE’S INCLUSIVE BUSINESS MODEL equity injections. • 8,500 affordable homes sold as of 2010 In 2008, IFC provided a revolving loan of an • Net revenues increased by more than 70% between 2008 to 2010 amount and tenure generally not available to • Winner of six national housing awards local homebuilding companies. IFC also provided As of 2010, VINTE had sold more than 8,500 VINTE is successfully competing with the largest an equity investment that will facilitate the com- homes. Due to its after-sales services and sus- publicly-traded Mexican homebuilding com- pany’s initial public offering process. In 2010, IFC tainable designs, each of VINTE’s home models panies. Between 2008 and 2010, VINTE’s net approved a partial credit guarantee to help VINTE has increased in value over time, reaching up to revenues increased by more than 70% while issue long-term bonds in the domestic Mexican 10% annually—becoming valuable assets for its EBITDA almost doubled in those two years. capital markets. VINTE successfully issued bonds in low- to middle-income families, as well as for VINTE currently has eight housing develop- the Mexican domestic market in March 2011, the the mortgage providers that supported VINTE’s ments—three finalized and five under construc- first developer to do so in the last two years. The customers. VINTE’s G7 Habitat or “Housing of tion—in four different states of Mexico: five in issuance was oversubscribed amount. This round the Seventh Generation,” which encourages Tecamac, Estado de Mexico; one in Pachuca, of financing is supporting the company’s growth effi c ient use of water, gas, and lighting, has Hidalgo; and one in Playa del Carmen, Quintana strategy and helping VINTE build more quality and enabled homeowners to save money on their roo; and one in Queretaro, Queretaro. VINTE affordable entry-level housing benefiting large utility bills. The company has won six national also owns land reserves in Tula, Hidalgo and in numbers of its target clientele: low- to middle- housing awards—the most recent one for Cancun, Quintana roo. Both sites will target income families. building environmentally-friendly communities. low-income families with an average home price below $25,000. IFC’s Investment: $10 million in equity, $12.5 million in long-term debt financing, and a partial credit guarantee of up to $14.3 million Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 59 CASE STUDY YellowPepper COMPANY BACKGROUND Incorporated in Panama as YellowPepper Holding Corporation and Serge Elkiner, a pioneer in mobile payment solutions, founded founded in 2004, YellowPepper is the leading mobile financial YellowPepper and has grown the company to 135 staff in ten coun- network in Latin America and the Caribbean. In 2007, the company’s tries. YellowPepper’s staff have backgrounds in three major areas: focus shifted from delivering value-added services via mobile phones (i) banking and payments, (ii) Internet, e-commerce, and technology, to an exclusive focus on mobile financial services. YellowPepper has and (iii) payment network deployment. YellowPepper’s shareholders successfully executed its vision of a future in which any person can use include a mix of early-stage angel investors, a Latin American strate- a mobile phone at any time to buy goods, receive remittances, pay gic group, and IFC. The company operates in nine countries: Mexico, bills, repay loans, and more. Its network enables banks, businesses, Colombia, Peru, Ecuador, Guatemala, the Dominican republic, and consumers—both banked and unbanked—to use mobile phones Bolivia, Haiti, and Panama. YellowPepper has over 3.2 million active to conduct many of the financial transactions that are commonplace users and handles over 14 million transactions per month. in the developed world. YELLOWPEPPER’S INCLUSIVE BUSINESS MODEL YellowPepper offers mobile financial services to banks, mobile network M-wallets are issued by banks in association with YellowPepper and operators (MNOs), utility providers, and fast-moving consumer goods MNOs. They can be purchased from correspondent-banking agents that (FMCG) companies, enabling them to transact with banked and un- YellowPepper engages and develops in the country of operation. Small banked customers, distributors, and suppliers. Its products and solutions businesses or “mom-and-pop shops,” which make up a significant pro- include (i) traditional mobile banking (m-banking) services to reach individ- portion of these agents, must undergo extensive background checks as uals with bank accounts, (ii) mobile wallets (m-wallets) to reach individuals well as financial rules and regulations compliance training before they are without bank accounts, and (iii) an innovative business-to-business (B2B) able to sell m-wallets. mobile payments network. This mobile payments network targets FMCG Customers open m-wallet accounts with correspondent banking agents companies and their distribution channels, which range from hundreds by purchasing m-wallet kits and completing the necessary paperwork, to thousands of small “mom-and-pop” shops throughout Latin America. providing their addresses and identification information. Initial cash de- YellowPepper’s key strength is the ability to allow any participating bank, posits made with the agents are credited to the customers’ new m-wal- MNO, FMCG company, or individual to connect in a fast, efficient, and lets. They then receive text messages notifying them of their available bal- reliable manner. At the core of the network sits YellowPepper’s platform, ances. Thereafter, they can visit an agent to deposit additional cash or to acting as a clearinghouse for financial transactions conducted through withdraw cash by sending a text message request. These cash-in, cash-out mobile phones. This enables consumers, businesses, and banks to inter- services are vital for the m-wallet ecosystem to run smoothly, making the act, issue, manage, and accept electronic payments. role of the small shop owners serving as agents very important. YellowPepper’s m-banking solutions enable banks to deliver financial YellowPepper’s B2B product facilitates mobile payments and collections services via mobile phones to existing bank account holders. Customers between large enterprises, particularly FMCG companies like Coca-Cola can easily and conveniently access their bank and credit card accounts, and SABMiller, and their suppliers, distributors, and retailers—particularly check account balances, transfer funds, receive fraud alerts, and make small-scale retailers. This product enables these retailers’ tenderos, or various types of payments readily available through their mobile phones. shopkeepers, to pay their wholesalers for goods upon delivery using m- wallets rather than cash. In Ecuador, for instance, YellowPepper is working YellowPepper’s m-wallet is a virtual, pre-paid account accessed using a with six FMCG companies whose products constitute 85% of the product mobile phone. This product targets individuals who do not currently have inventory of these small shops. The shop, the company, and the bank bank accounts and do not participate in traditional financial networks. use text messaging to transact through YellowPepper’s network. The shop M-wallet customers access the YellowPepper network via user-friendly no longer needs to keep large sums of cash on hand to pay for goods; interfaces, such as text messaging and USSD, to remit money, pay utility distributors, in turn, reduce cash collection costs, security risks, delayed bills, recharge mobile phone airtime, and pay for goods. In addition, the payments, accounting errors, and counterfeit currency. m-wallet offers unbanked customers integration into formal financial net- works. These services provide convenience, security, and efficiency, thus freeing up valuable time for income-generating activities while reducing the risks of cash transactions. 60 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY YellowPepper DRIVERS FOR YELLOWPEPPER’S INCLUSIVE BUSINESS MODEL • YellowPepper’s core mission is to integrate unbanked consumers into the traditional financial system via mobile phones • Two market characteristics in Latin America and the Caribbean—a high (78%) mobile phone penetration rate and a low (35%) financial access rate—present a significant business opportunity • The proven market need for a neutral, universal network that enables financial transactions among a wide variety of stakeholders YellowPepper’s inclusive business model is Furthermore, YellowPepper is fulfilling a market driven by the company’s mission to bring the need for a neutral, universal network that banking system to unbanked consumers via enables financial institutions, MNOs, wholesal- the mobile phone. Two market characteristics ers, retailers, consumers, and others to conduct create a significant business opportunity for financial transactions using mobile phones. By YellowPepper in doing so. On one hand, the doing so, YellowPepper is laying the foundation 580 million people living in Latin America and for a robust mobile financial network in which IFC’S ROLE AND VALUE-ADD the Caribbean have approximately 439 million businesses, governments, and consumers can In 2008, the international financial crisis had mobile phones, a 78% mobile phone penetra- transact with each other more easily, efficiently, greatly reduced the appetite for risky investments tion rate. On the other hand, an estimated 377 and affordably. in emerging markets, thus posing critical challeng- million people, 65% of the region’s population, es for many innovative, early-stage companies that lack access to adequate financial services. needed capital to support their growth. To address this challenge, in 2010, IFC made a $3 million equity investment in YellowPepper and helped secure an additional $2 million from a strategic Latin American group. The total $5 million invest- RESULTS OF YELLOWPEPPER’S INCLUSIVE BUSINESS MODEL ment facilitated the company’s expansion in Latin • 3.2 million monthly active users in nine countries for m-banking services America. • 38,000 m-wallet users in Haiti, completing an average of three transactions per month IFC’s investment in YellowPepper, and other com- • More than 40 corporate partners in the region panies like it, is intended to fuel growth in the elec- YellowPepper’s network has 3.2 million monthly republic, Colombia, Mexico, and Ecuador) use tronic payments industry as a whole. The resulting active users in nine countries, conducting over YellowPepper’s B2B mobile payments solution usability, efficiency, and financial inclusion gains 14 million financial and informational transac- to transact with small businesses in their supply have significant implications for global economic tions per month. In early 2011, over 38,000 or distribution chains. Currently, over 700 growth, particularly in emerging markets. customers in Haiti were using m-wallets issued small businesses benefit from this solution and In addition to its equity investment in YellowPepper, by Scotia Bank in association with YellowPepper YellowPepper expects this number to grow to IFC is contributing its global business knowledge, and mobile network operator Digicel. In over 500,000 by 2013. best practices, and experience in mobile payments. Ecuador, with Banco Pichincha, YellowPepper’s It has facilitated links between YellowPepper and YellowPepper has received media recognition m-wallet targeting unbanked customers with its Latin American financial services and telecom- and several awards. In 2011, YellowPepper average household incomes of $700 is expected munications clients for partnerships. In addition, was shortlisted for the Financial Times-IFC to reach hundreds of thousands of customers IFC’s best-in-class corporate governance, strategic Sustainable Finance Award and received the in a short period of time. YellowPepper plans advice, and fundraising efforts have supported USAID/HIFIVE Grant for Establishing Mobile to launch m-wallets in Peru, the Dominican YellowPepper in helping to make financial inclusion Financial Services in Haiti. In late 2010, republic, Colombia, and Mexico in 2011. in the region a reality. the company received the Inter-American More than 40 banks and companies in Latin Development Bank’s Beyond Banking Award for America and the Caribbean, including Western providing access to financial services through Union, Coca-Cola, and Credibanco VISA, have non-traditional channels and for reaching the selected YellowPepper as their strategic partner unbanked. for mobile financial services. Over 17 compa- nies in five countries (Peru, the Dominican IFC’s Investment: $3 million in equity Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 61 CASE STUDY Zain Madagascar (now Airtel Madagascar) COMPANY BACKGROUND Zain Group is a mobile network operator reaching more than 65 million Mohammed Ibrahim. Two years later, MTC acquired the remaining customers in 25 countries in the Middle East and Africa. Founded 15% of Celtel and rebranded itself as Zain. in Kuwait in 1983 under the name Mobile Telecommunications In Madagascar, Zain reached more than 1.4 million customers by Company (MTC), by 2005 the company had controlling stakes in September 2009, a 60% increase on 2008. Zain Madagascar is 66% operations in 14 African countries where it reached 18.5 million owned by Zain and 34% owned by Malagasy nationals, as per the subscribers. In March of that year, MTC acquired 85% of Celtel, a requirements of its operating license and local legislation. leading pan-African mobile telecommunications company founded by ZAIN’S INCLUSIVE BUSINESS MODEL In 2007, Zain Group announced a new growth strategy known aiming to To develop the VPP model, Zain partnered with IFC to leverage its experi- reach more than 70 million customers by 2011 largely by tapping new, ence with shared phone programs around the world. It is based on a series predominantly rural and underserved African markets. And while Zain did of grassrootslevel partnerships, originally brokered by IFC, with six local see new acquisitions as one channel for growth, it was also highly com- microfinance institutions (MFIs). The MFIs are involved to reach as many mitted to expanding its existing operations. rural locations as possible. To be sustainable, the location must have a market sizable enough to support both Zain and the MFIs. In Madagascar, where the company essentially competed in a duopoly with Orange, Zain projected that its growth would come from the acquisi- With limited financial support from IFC, these MFIs fulfill critical program tion of customers brand-new to mobile telecommunications. The country functions, namely: was largely unserved, with a penetration rate of less than 5%. In this • Providing access to the information and relationships required to context, the company outlined a network expansion plan to bring cover- partner with rural micro-entrepreneurs age to areas with no prior access. As part of the plan, Zain developed 105 • Financing micro-entrepreneurs to purchase and operate VPP new towers, reaching 372 at the end of 2008. This gave Zain the widest equipment geographic network coverage in the country. • Training and building the capacity of village phone operators Zain also worked to extend its reach to consumers who could not afford While ZAIN provides overall management for the program and ensures their own phones through a Village Phone Program (VPP). The VPP can regulatory compliance, its MFI partners are responsible for identifying and be understood as part of a broader inclusive business model in which screening village phone operators (VPOs). The MFIs give VPOs the financ- network expansion makes coverage possible in geographically remote ing to purchase a Village Phone Startup kit containing everything needed areas and economies of scale help keep prices low enough for base of the to start a Village Phone business, from handset to solar charger to SIM pyramid customers to afford. card, which provides the MFIs with interest income. The kits cost approxi- mately $150 after a subsidy of $100 per kit from the Malagasy govern- The VPP is designed as a cost-efficient addition to existing network in- ment — which has been instrumental in extending the opportunity for frastructure, effectively extending coverage beyond the point at which a entrepreneurship to even lower-income entrepreneurs. Zain’s MFI partners conventional network rollout would be too expensive. The VPP is a shared also provide VPOs with technical support and collect data for monitoring access model in which a mobile phone is used as a public phone operated and evaluation purposes. by a micro-entrepreneur. Each village phone comes with equipment that allows it to capture a Zain network signal remotely, significantly reducing VPOs are responsible for maintaining VPP equipment, promoting their initial capital expenditure and virtually eliminating the operational expen- businesses, and maintaining accurate call records. VPOs generate income diture associated with standard network expansion. This is important in selling airtime to their communities — for which they keep about 25% of rural areas, where such costs are higher and where networks serve small the price. Prices are set at the lowest possible point that allows both Zain numbers of low-paying subscribers. and the VPOs to make money. VPOs may have additional revenue streams as well, such as phone recharging and sales of prepaid cards to customers who own their own phones. 62 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Zain Madagascar (now Airtel Madagascar) DRIVERS FOR ZAIN’S INCLUSIVE BUSINESS MODEL • To increase the number of Zain customers • To remain competitive and increase market share as the Malagasy telecommunications market grows • To fulfill the Zain Group’s commitment to corporate social responsibility by expanding access to telecommunications services and economic opportunities The primary drivers for Zain Madagascar’s and Zain Madagascar with 43%. Telma, a priva- inclusive business model were to increase tized provider, entered the market in December customer numbers and competitiveness in a lib- 2006. By June 30, 2007, Zain had added more eralizing telecommunications market. In 2006, than 70,000 subscribers, but lost almost 10% the market was characterized by significant market share compared with the previous year. pent-up demand, with mobile penetration at In response to these trends, in order to maintain a mere 4.4% — but projections showed that and improve its market share, Zain Madagascar the figure could reach 14.5% by 2016. At the developed an aggressive rollout of services into same time, the Malagasy Telecommunications IFC’S ROLE AND VALUE-ADD previously unserved markets. As part of this Law of 1997 had stipulated free competition rollout, the Village Phone Program aimed to IFC provided Zain Madagascar with long-term as a basic principle, and the Madagascar Action establish 7,000 Village Phone Operators reach- funding unavailable in local financial markets Plan had prioritized the need to expand basic ing 2.5 million new rural customers within three through a $25 million loan. IFC also mobilized infrastructure including telecommunications years. In addition to the market drivers for VPP, an additional $21 million loan from international throughout the country — making the telecom- the Zain Group is committed to corporate social commercial banks and other development finance munications market more competitive over responsibility, and the program offered an op- institutions. With its financial experience and time. Until late 2006, the market was essentially portunity to increase its social and economic comprehensive appraisal and monitoring pro- a duopoly— Orange with 56% market share impact in a commercially viable way. cesses, IFC’s participation provided other potential lenders a degree of comfort that was critical given the risks associated with the Malagasy operating environment. RESULTS OF ZAIN’S INCLUSIVE BUSINESS MODEL Beyond investment, IFC’s experience in telecom- • 60% increase in subscribers, from 1.087 million to 1.425 million, between September 2008 munications markets in Africa provided Zain with and September 2009 access to key benchmarks and an external perspec- • Increase in market share from 36% to 38% over the same period tive on potential risks. IFC also brought important • 6,600 village phone operators in business earning an average of $16 a month assets to the Village Phone Program, including ex- • 1,130,000 calls from village phone operators using 565,000 minutes per month perience linking large corporations with local entre- preneurs and a knowledge base on shared phone Zain Madagascar’s overall inclusive business US dollars, operators earn on average $16 ad- program planning and management built over suc- model, in which network expansion brings ditional revenue a month. Operators are chosen cessive engagements with similar models in other coverage to geographically remote areas among people who already have business activi- African countries. Through the VPP, IFC helped Zain and economies of scale help keep prices low, ties such as groceries, agriculture, and hairdress- develop a business model that grew its customer enabled the company to increase subscribers ing, so for them the Village Phone business base in underserved rural and peri-urban areas, by 117% from 2007 to 2008, from 574,000 to comes as another source of income in addition augmented the income of women and previously more than 1.2 million. The company now has to their existing business. Each operator serves unemployed youth, achieved financial sustainabil- the widest geographic coverage of any mobile on average five to six customers per day. ity, and is now positioned to become a separate network operator in the country. Zain Madagascar’s growth has also contributed business unit. The Village Phone Program has helped facilitate to overall growth in the telecommunications customer acquisition in more rural, lower- sector, where increasing penetration — at a income segments that previously had no access rate of 9% in 2008 — has fueled competition to mobile telecommunications. VPP has also and helped maintain affordability. Studies created business opportunities for 6,600 village have shown that increasing penetration is phone operators as of March, 2010. Operators also associated with GDP growth and poverty IFC’s Investment: buy airtime at a price of 4 Madagascar Ariary reduction. It is estimated, for instance, that a $25 million in long-term debt financing (MGA) per second and sell at a price of 300 10% increase in mobile phone density leads to MGA per minute — which translates into a a 0.6% increase in per capita GDP.16 margin of roughly 25% for the operator. In 16 Waverman et al. 2005. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 63 This page intentionally left blank. 64 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio This page intentionally left blank. Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 65 This page intentionally left blank. 66 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio For more information, contact IFC’s Inclusive Business Group: Toshiya Masuoka tmasuoka@ifc.org Eriko Ishikawa eishikawa@ifc.org +1 (202) 473-9538 ifc.org/inclusivebusiness IFC 2121 Pennsylvania Ave., NW Washington, DC 20433, USA Ifc.org/inclusivebusiness 2011