Inclusive business support: to minimise risk or push boundaries?
“Sometimes a bit of outside energy is needed to shift from business as usual. TAF supplied the initiative and a bit of rocket fuel for us to try out a new service for our smallholder customers.”
The common understanding of ‘technical assistance’ is of publicly-funded, externally-provided support deployed to minimise the risk of investments into difficult sectors and markets. Agriculture in Africa is regarded as a particularly tricky combination of sector and geography. Supporting SMEs to strengthen their core business capacity in the short term, and improve their strategic positioning and growth in the longer term, is therefore considered a valid use of development funds, with the jobs, taxes and revenue created all leading to a net social return on public investment.
The case for ‘subsidising’ larger businesses with technical assistance is less understood and more divisive in the development community. Are we distorting the market by ‘backing winners’? Is it justified to deploy public funds to larger for-profit private sector companies? As Program Director of the Technical Assistance Facility (TAF) of the Africa Agriculture Fund (AAF), implemented by TechnoServe, I am often faced with these questions, both internally from our own funders as well as from external parties.
Our position is that whilst size of a business is not necessarily a proxy for its competence (a small company can also be very competent and mature), larger companies generally have more advanced systems and processes and are therefore able to address their own core operational issues, especially when strategic support is also being provided by the Fund Managers. This does not mean that they are not attractive targets for technical assistance, just that the use of public funds needs to be channeled to where there is potential for the business to deliver an unequivocally powerful pro-poor impact in its operating environment, be it to employees, suppliers or customers. It is often the case that the commercial return on investment from such an initiative is uncertain or too long-term to be prioritised as a strategy by a company, given other competing quick yielding investment priorities. This is where there is a rationale to deploy development funding and is what we define as inclusive business technical assistance.
TAF developed a matrix to show how different size companies need different types of technical assistance, with recommendations for engagement in the figure below:
TAF provides technical assistance to companies in the diagonal ‘sweet spot’ across the matrix, shaded in green. At the micro level we have supported group training and capacity building of micro-enterprise egg distributors, at the SME level we have supported businesses with core business assistance such as quality management systems for bat guano fertiliser and at the large business level we have been involved in a range of different inclusive business initiatives to link bottom of the pyramid (BoP) producers and consumers who engage with agribusinesses.
The inclusive business ‘sweet spot’ kicks in where we find large companies that can benefit people at the BoP but face a number of challenges as they progress from initial ideas to business at scale. In these cases, external technical assistance can help companies to come up with ideas on how to unblock bottlenecks and create business models that are sound, investible and ultimately sustainable and scalable. These new ways of working allow profitable engagement of the poor in a company’s value chain, thus growing the businesses customer/supplier base and building future commercial competitiveness.
In the initial stages, this does not always involve less risk. On the contrary, in many cases TAF is encouraging companies to take risks they would not otherwise take, or test out new ways of doing business they would not otherwise consider. For example, the concept of localised soil testing and improving fertiliser blends for smallholders was long something that the AAF portfolio company Meridian had envisioned, but had not initiatied due to the risks and uncertainty associated with investing in the smallholder market segment. Through an inclusive business project, TAF negotiated a cost-sharing model for the upfront investment in soil testing (required to develop new blends) and a farmer extension unit that could be deployed through the company’s retail branches to provide associated agronomy advice to promote uptake of improved products and practices.
In year one, while the risk and costs were still considered beyond commercial viability, soil testing and extension was provided through an external service provider[1]. In year two, after seeing some initial success from the extension unit, the model transitioned into a fully fledged business unit integrated into the company but co-financed by TAF. The manager of the new Meridian Farm Services Unit, Caitlin Shaw, reflects on the vision of the unit to ‘up the game’ of extension services and the imperative of the unit to become commercially viable:
“Meridian’s Farm Services Unit is pioneering a model of integrating traditional extension services into a commercial business unit without compromising value. We want to deploy extension officers who act as ‘smart salesmen/women’ who can demonstrate to a farmer that good agronomic practices coupled with customised Meridian products give them the best return for their money. This strategy requires a significant investment in recruiting the next generation of dynamic extension workers, training them in soil health, agronomy and customer services as well as implementing a performance management system that links them to results. Equipped with mobile soil testing kits, our extension officers with are referred to as “agronauts” – a term we feel conveys the intention of harnessing the latest in science and technology to support farmers to make practical data-driven agronomic decisions.
Our goal is to increase the profits for the farmers by providing quality extension services that will earn their trust and ultimately lead to a deeper partnership and loyalty that will, in time, deliver more sales for our business. Technical assistance from TAF is helping us test and demonstrate whether this model is commercially viable as traditionally extension services have been provided for free by the public sector. We will be measuring and reporting on the impact on the farmers (yields, incomes) as well as on the business (sales, market share) to show that we are meeting the objectives and targets that will justify the cost of the unit.”
Match funding for both core and inclusive technical assistance is important to incentivise management engagement and ensure commitment to the use of project outputs and growth plans. However, obtaining match funding for inclusive business projects from the private sector can be challenging given their higher cost and less immediate impact on the bottom line. TAF therefore requires companies to demonstrate their ‘skin in the game’ by providing some form of matched resourcing but has found it important to be flexible on the type of match – be it capital costs, funding for training or hiring new staff. Our judgment and ability to conduct case-by-case cost-benefit/cash flow analysis and negotiate with the private sector are key here. Top management buy-in is not always reflected in the proportion of match contribution and can be assessed separately.
Finally, getting the right inclusive business model may need multiple pilots and reiterations. Regular steering committee meetings can ensure that problems are addressed swiftly, mission creep is avoided and that both social and commerical objectives are being measured, analysed and the business model adapted accordingly. Structured and implemented in this way, TAF strongly believes that public financing can be instrumental in pushing the boundaries of the private sector to achieve both social and commercial objectives.
[1] The Africa Fertilizer and Agribusiness Partnership
This blog is a part of the June 2017 series on advisory support for inclusive businesses in partnership with USAID and the African Agricultural Fund’s Technical Assistance Facility, both of which deliver advisory support and have new analysis of it just launched (AAF’s TAF) and forthcoming (USAID).
Read the full series for more lessons from seven different providers of advisory support and stories of success from entrepreneurs.