On August 9th, the Ministry of Industry and Handcraft with the support of the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP) and the Inclusive Business Action Network (iBAN) convened all ecosystem stakeholders in Phnom Penh for the first Inclusive Business forum for Cambodia.
This inaugural forum aimed to inform on the country’s Inclusive Business agenda, present the initial results of a landscape study conducted in early 2019, and propose an Inclusive Business Enabling Environment for Cambodia (IBeeC) Strategy.
Since 2017, various ASEAN countries and governments have been working to create Inclusive Business (IB) models that provide innovative solutions to support the poor and low–income people. These initiatives require first and foremost fostering awareness and defining a detailed framework in collaboration with the government, private sector companies, impact investors, IB facilitators and development partners. Hence, it’s with the experience of an expert such as Dr. Armin Bauer, international Inclusive Business expert and consultant to UN ESCAP, and the support of iBAN that Cambodia is on its way to become the 2nd ASEAN country, after the Philippines, to approve a strategic framework for promoting Inclusive Business. Driven by the Ministry of Industry and Handcraft, the proposed IBeeC strategy aims to be ratified by the government by the end of 2019.
What does it take to be an Inclusive Business?
IB models are defined as commercially viable enterprises that deliver scaled-up innovative and systemic solutions for the relevant problems of the poor and base of the economic pyramid.
Source: Cambodia IB Background Document – United Nation ESCAP and IBAN
Naturally 4 key aspects are taken into consideration while evaluating a company:
- Commercial return and business (incl. ESG standards)
- Scale for business growth and social impact
- Systemic (social) solutions for BoP (Base of Pyramid), i.e. for Cambodia, this is defined using the following levels (per annum) – $250 (very poor), $350 (poor), $500 (low-income); in urban areas the values are a bit higher per level ($250, $400, $750).
- Innovations – business innovation and technology, etc.
To guarantee transparency and objectivity, the accreditation process is based on a composite rating whereby criteria with different weightings are assessed and rated between 1 to 6, with a requisite minimum score of 3.2 for accreditation. The components and weightings of the composite rating are:
- Commercial return (return, growth, profit, bankability, governance, social and environmental safeguard standards): 41%,
- Social impact (reach, depth, systemic change, strategic intend): 46%
- Innovations (business, technology, social/CSR, environmental): 13%
For e.g. it is expected that the companies generate income opportunities not at the market rate but above this threshold for the benefit of the poor. 20% above the market rate being considered as a classic evaluation baseline.
As a result of these criteria, there are very few existing IB models in Cambodia, however with the few companies that are operating they can have a large impact. This is why, in the Inclusive Business framework, the company size matters. The model makes a point of achieving a high level of impact, hence micro businesses would not qualify in the context of the IB definition. Only 20 IB cases were identified in Cambodia, 15 being actual IB models and 5 as potential IB models.
Also, it’s important to note that in terms of innovation expectation, not only should technology be considered, but also business, environment and social innovations (labor standards, CSR, etc.) are deemed equally as critical.
Type of IB Company
IBs can be found in all sectors, and they are particularly established in finance, agribusiness, health, education, urban utilities, and renewable energy. IB is implemented through three distinct approaches:
- IB model is a business line that is a core operation of a company.
- Social enterprise (SE) initiative is a smaller IB line with often smaller impact.
- IB activity is a commercially-oriented CSR investment (mostly of larger firms) that has relevant scale and aims to pilot for the company a new core business line that can potentially scale-up and develop into an IB model.
What are the benefits to be recognized as an Inclusive Business in the context of IBeeC?
IB accreditation can help to expand markets for companies, get incentives and access funding from impact investors.
As per the recommendations, IB should have access to:
- Information sharing, branding, advocacy, seminars, participation in international events
- Incentives (e.g. tax incentives)
- Public procurement
- Technical Assistance facility for business coaching, impact assessment, and some further policy work. Note that companies not yet recognized as IB, but are identified as potential IB can also access the TA facility to raise their standards and become an IB.
- IB fund to de-risk investment opportunities for impact investors and banks
- IB reporting such as SDG and national government and business associations’ reports
What are the benefits of an IBeeC strategy at the national level?
Based on its experience, Dr. Armin Bauer describes IB strategy as a triple win for governments.
- Good for the poor, as it creates income opportunities above the market rate (BoP as supplier, distributor, laborer, shareholder) and provides affordable goods and services that are relevant to improve living conditions (BoP as consumer);
- Good for business, as it creates returns, profit first but not only, reduces costs, develops new markets, engages new producers, huge unserved market, out-of-the-box solutions;
- Good for society and government, as it reduces poverty, effective and efficient alternative to government intervention, it pushes private sector to be socially responsible.
Dr. Armin explains that IB is different from Social Enterprise and CSR, and from mainstream SME which do not have the strategic intent of creating social impact at scale. IB is about structural transformation and with no trade-offs between profit and social impact, leveraging innovation to reduce business risk and enhance social impact (not just doing good on a small scale).
In this context, how IBeeC and Impact Investment come together?
When asked about the unique challenges when it comes to making IB-related investments in Cambodia and what IB suggested policy stood out to her in addressing these challenges, Nexus’ Executive Director Jennifer Louie replied:
“For a relatively large portion of our Cambodia focused portfolio, we seek to support businesses in rural areas of the country. Given our centralized management model, i.e. where all of our team is physically based in Phnom Penh, monitoring these investments becomes exponentially more time intensive. Beyond this, we have also found that applying a standardized model for lending and credit analysis is not feasible and in many cases our borrowers need support in working through loan terms and agreements.
Additionally, as impact investors providing debt financing, understanding repayment risk is equally as important to us as understanding a company’s potential social and environmental impact. Our loan documentation integrates impact measurement and to a degree self–selected metrics that the investees are required to report on periodically, but our intent is to not make this process burdensome. In order to ensure that this is the case, we work closely with the beneficiaries of our loans to design impact measurement tools and to identify the most appropriate metrics.
We are very keen to see how the TA Facility is rolled out. In many conversations that I have had with potential investors, the question of how Nexus is working with investees to develop impact measurement tools and how we may think about supporting them in this endeavor through a TA facility has been raised. I think this type of facility could be immensely helpful on the impact measurement side.”
On the question of how she sees the idea of de-risking impact investors’ potential investment through a fund and which innovative de-risking tools may be helpful, Jennifer explains:
“From my perspective a funded guarantee would be most useful. An important aspect of our work is focused on recycling capital, whether that funding is provided to us via a traditional grant or by a more commercial counterparty. A funded guarantee would allow us to adhere to this principle whilst still taking on additional risk to support IBs. Other tools that focus on driving positive outputs from investees are impact linked products, which from our perspective is a de-risking tool that is most applicable to ensuring specific impact objectives (social and environmental) are achieved while providing enterprises with the right type of incentive. From a financial risk management perspective, there are a number of other impact funds whom we’ve engaged with that are implementing revenue sharing models (with investees) or joint ownership of bank accounts for project proceeds, which don’t necessarily require government intervention.”
