46240-001: Inclusive Business Support
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Technical Assistance Consultant’s Report Project Number: 46240-001 May 2018 Asia-Pacific: Inclusive Business in the Association of Southeast Asian Nations (Cofinanced by the Government of Sweden) Prepared by Markus Dietrich This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design. 2 ACKNOWLEDGMENTS The Association of Southeast Asian Nations (ASEAN) was established on 8 August 1967 and is currently composed of 10 members—Brunei Darussalam, Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. The ASEAN Community Vision 2025 places the realization of a people-oriented and -centered community at its core. Governments and businesses in ASEAN are increasingly interested in finding new, innovative ways to make economic growth in the region more inclusive and sustainable. In 2017, the Government of the Philippines chaired ASEAN, and made inclusive business (IB) one of its deliverables toward the ASEAN vision of a region that is “outward-looking, living in peace, stability, and prosperity, bonded in partnership in dynamic development, and in a community of caring societies.” This study emerged from cooperation between the Department of Trade and Industry of the Philippines, Asian Development Bank (ADB), and the ASEAN Secretariat. This study, addressed to policymakers of ASEAN and the ASEAN Business Advisory Council, describes the markets for IB in ASEAN economies, and recommends further actions by ASEAN, the ASEAN Business Advisory Council, and ASEAN members to promote IB. This study was written by Markus Dietrich, consultant, ADB. Technical advice came from Armin Bauer, former coordinator of the ADB IB Initiative; Felicitas Agoncillo-Reyes (assistant secretary, Board of Investments, Department of Trade and Industry of the Philippines); Aissa Hermoso (IB focal point, Board of Investments, Department of Trade and Industry of the Philippines); and Priya Thachadi, Southeast Asia IB expert. Gratitude is also extended to Yukiko Ito , Imelda Marquez, Jeffrey Gerobin and Mary Grace Santos (consultant) of ADB, and Nora’in Ali, ASEAN Secretariat, for their guidance in preparing this study. This report was funded by the Government of Sweden through its support for ADB’s Inclusive Business Initiative. 3 EXECUTIVE SUMMARY Economic growth is strong in the Association of Southeast Asian Nations (ASEAN) region, but income levels are still low compared to other emerging markets. The ASEAN Community Vision 2025 seeks to address critical issues of those living at the base of the pyramid (BOP) and places the realization of a people-oriented and -centered community at the core of its vision. Inclusive business (IB) is not only business for and with people, it is the deliberate promotion of inclusive growth, as it puts poor and low-income people (i.e., the BOP) at the core of its business model by providing higher income opportunities and affordable and relevant products and services at scale. The BOP in ASEAN numbers 348 million or 56% of the total population and forms a market of at least $320 billion. It represents a massive pool of potential customers, suppliers, distributors, and retailers who can be engaged by private companies with IB approaches. This collective spending power as estimated in 2010 represents a sizeable opportunity for businesses that are seeking to enter new markets and to expand their customer base. IB is currently practiced across ASEAN, albeit at varying levels, and exists in all major industry sectors. The models with the highest impact and scale are found in agribusiness. Many companies actually practice IB models without knowing so or classifying themselves as IB companies. There is therefore a need for better clarifying IB and social enterprise initiatives that achieve profit through business models aimed at generating social impact for society and separating them from traditional businesses models with profit first (or only) motives. This study estimates that the number of mature, investment-ready IB models has reached 90 and projects this number to triple to over 300 by 2025. Based on this projection, the number of commercially viable social enterprises is expected to increase from 200 to more than 900 in 2025. Taking all IB approaches in the region, the number is projected to grow by about 350% in ASEAN, from about 400 to more than 1,400 IB approaches. Financing IB through impact investing in ASEAN is projected to reach $6.3 billion by 2025. The study estimates $1.8 billion in IB investments in ASEAN by 2016 and projects this number to increase to $6.3 billion by 2025. Large opportunities for investment in IB are expected in Indonesia, the Philippines, and Thailand. Despite the fact that there are also many social enterprises in need of investment, investment opportunities are much higher in IB models because they are larger in scale and have greater commercial viability, whereas social enterprises more often require smaller investments and grant funding. This study also estimates that IB created more than 500,000 new income opportunities by 2016 and served 21 million people in the BOP. This is projected to increase to 1.8 million income opportunities and over 70 million served by 2025. Based on the G20 definition of IB, the study distinguishes between IB core business models (mostly promoted by medium-sized to large companies), IB activities (often commercially oriented corporate responsibility work that is not the scaled-up core business of a company), and social enterprise initiatives (typically small in impact and investment, and mostly promoted through for-profit social enterprises). While IB models account for only 22% of the investments, they are responsible for 70%–90% of the impact due to their larger size. The private sector is increasingly engaging with IB in ASEAN; however, progress to scale, replicate, and mainstream IB has been slow to date. The majority of impact investments comes from development finance institutions and banks. Existing impact funds highlight that despite the 4 large size of existing BOP markets, the sourcing of IB deals, particularly larger IB deals of more than $1 million, is still a challenge. Many impact investors focus on early-stage capital, and often provide grant-financed incubation support with capital investments, and only a few focus on more established companies to help them grow further, mature, and reach scale. Corporate venture funds are a new and promising source of funds in the impact investment space in ASEAN. Similarly, in the banking industry, impact investing remains a tiny niche business for most banks. Of the 150 larger banks in ASEAN, only about 18 banks do some form of impact investing, and this is estimated to be less than about 3% of their investment business. Also, only a small amount of the wealth of high net-worth individuals is used for impact investments. Given their poverty eradication mandates, long-term view, and cost of capital, development banks, however, are well placed to invest in IB and leverage private capital. Governments have also begun to set up IB promotion institutions, policies, and programs to develop an enabling ecosystem for IB. IB contributes to the development agendas of ASEAN. IB can support many aspects of the ASEAN Economic Community Blueprint 2025, as IB is the private sector’s contribution to more equitable and inclusive economic growth in ASEAN. IB contributes significantly to all four characteristics of the blueprint: creating a highly integrated and cohesive economy; making a competitive, innovative, and dynamic ASEAN; enhancing connectivity and sector cooperation; and developing a resilient, inclusive, people-oriented, and -centered ASEAN. Indeed, IB contributes to the ASEAN Strategic Action Plan for Small and Medium-Sized Enterprise (SME) Development, 2016–2025. The study found that IB is strongly aligned with the policy agenda in all five strategic goals: (i) Strategic Goal A: Promote Productivity, Technology, and Innovation. Productivity increases are evident in IB models in the agribusiness sector where they are the main contributor to significant income increases for smallhold farmers. (ii) Strategic Goal B: Increase Access to Finance. Access to finance is also a key topic for IB for own-funding and funding for value chains that include micro and SMEs. (iii) Strategic Goal C: Enhance Market Access and Internationalization. Market access and internationalization for micro and SMEs can be ensured through companies with IB models due to their integration into the value chain. (iv) Strategic Goal D: Enhance Policy and Regulatory Environment. Developing an enabling policy and regulatory environment for IB are major initiatives of the international community to facilitate and to scale up the private sector’s contribution to inclusive growth. (V) Strategic Goal E: Promote Entrepreneurship and Human Capital Development. Social enterprises offer unique and meaningful entrepreneurial opportunities, especially to youth and women in the ASEAN region. The promotion of entrepreneurship and human capital development is undertaken by IB companies through technical assistance programs inherent in the business model. This report has six major recommendations: (i) ASEAN should promote IB as part of its inclusive growth