Developing the Business Case for Investing in Inclusive Business in Indonesia A Market Scoping Study March 2013 The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. © 2013 Asian Development Bank and SNV Written by Bernardino M. Vega Jr. (team leader), Tiur Rumondang and David Finneran; consultants to ADB and SNV. We thank particularly Robert de Jongh (ADB consultant on Inclusive Business), Phil Harman (SNV), and Armin Bauer (ADB) for their valuable comments and suggestions. The report also includes a brief due diligence on establishing a IB investment fund, done by Noah Beckwith (consultant to ADB). The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), its Board of Governors, or the governments they represent or of SNV. ADB and SNV do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequence of their use. By making any designation of our reference to a particular territory or geographic area, or by using the term “country” in this document, ADB and SNV do not intend to make any judgments as to the legal or other status of any territory or area. ADB and SNV encourage printing or copying exclusively for personal and noncommercial use with proper acknowledgement of ADB, SNV and the authors. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB and SNV. Asian Development Bank SNV 6 ADB Avenue, Mandaluyong City Dr. Kuyperstraat 5 1550 Metro Manila, Philippines 2514 BA,The Hague, The Netherlands Tel + 63 2 632 4444 Tel +31 70 344 0244 Fax + 63 2 636 4444 Fax +31 70 385 5531 www.adb.org www.snvworld.org business initiative, please visit: http://www.adb.org/themes/poverty/inclusive-business-base-pyramid For more information on SNV’s inclusive business approach, please visit: http://www.snvworld.org/en/inclusive-business Developing the Business Case for Investing in Inclusive Business in Indonesia: A Market Scoping Study iii Table of contents List of figures ............................................................................................................................................... 12 List of abbreviations .................................................................................................................................... 13 Executive Summary ..................................................................................................................................... 16 I. Introduction ............................................................................................................................................. 20 The ADB’s Inclusive Business Initiative ................................................................................................... 20 SNV and Inclusive Business ..................................................................................................................... 21 Ford Foundation ...................................................................................................................................... 21 The project - purpose & methodology.................................................................................................... 23 II. The macro-economic environment ........................................................................................................ 25 Introduction ............................................................................................................................................ 25 Indonesia - a frontier market for investment ......................................................................................... 25 Indonesia’s risk assessment in comparison to its neighbors .................................................................. 27 Challenges to investing in Indonesia ....................................................................................................... 28 Indonesia’s economic corridors – developing strategic areas ................................................................ 29 The Indonesian labour market and employment sectors ....................................................................... 31 Private sector expansion ......................................................................................................................... 33 The economic environment in Eastern Indonesia .................................................................................. 35 III. The inclusive business market in Indonesia ........................................................................................... 38 The Base of Pyramid (BoP) ...................................................................................................................... 38 Dimension of poverty.............................................................................................................................. 39 Inclusive business in Indonesia ............................................................................................................... 41 Inclusive Business and social enterprises in Indonesia ........................................................................... 42 Inclusive Business in Indonesia and SMEs .............................................................................................. 43 Role of private sector in poverty reduction & implications for Inclusive Business ................................ 44 IV. Scoping of inclusive business models in Indonesia................................................................................ 45 Introduction and methodology ............................................................................................................... 45 Snapshot - companies interviewed ......................................................................................................... 45 Key sectors involved in inclusive business in Indonesia ......................................................................... 48 BOP engagement model per sector – Indonesia .................................................................................... 48 Potential for inclusive business development within key sectors .......................................................... 50 Barriers to growth ................................................................................................................................... 52 Company case studies ............................................................................................................................. 53 V. Financing Inclusive Business in Indonesia............................................................................................... 65 Introduction and methodology ............................................................................................................... 65 Capital markets overview ....................................................................................................................... 65 Capital markets & inclusive business ...................................................................................................... 68 Current SME sources of capital, challenges and funding gaps ............................................................... 69 Fund manager and co investor key findings ........................................................................................... 71 Potential Co-investors for inclusive business ......................................................................................... 78 Donor partnership opportunities for inclusive business ........................................................................ 80 Donor Mapping – sector priorities and scope for cooperation .............................................................. 81 VI. Conclusion & recommendations ........................................................................................................... 85 Key findings ............................................................................................................................................. 85 Inclusive Business Fund parameters ....................................................................................................... 87 Appendixes .................................................................................................................................................. 94 Developing the Business Case for Investing in Inclusive Business in Indonesia: A Market Scoping Study 10 Private sector mapping survey ............................................................................................................... 94 Fund manager and co-investor mapping survey .................................................................................. 108 List of fund managers, co-investors and knowledge resources ............................................................ 110 Strategic investment framework .......................................................................................................... 115 Profiles of fund managers and co-investors ........................................................................................