What Role does Government play in Enabling Inclusive Business in Asia?
By: Mareike Grytz (GIZ – IBAN), and Armin Bauer (ADB)*
Why is IB important for governments?
Inclusive businesses are private sector solutions to problems faced by poor and low-income people. As a result, inclusive business (IB) models contribute to solving public problems. In the context of making economic growth more inclusive, government and public sector in Asia are increasingly interested in engaging the private sector for delivering on their responsibility to provide relevant and affordable services and ensure decent and well-paid jobs for the poor and low-income people.
Why accreditation is necessary
Not all companies engaging the poor are Inclusive Business companies. Most companies work with the poor through business models that do not create systemic impact on their living conditions and income. Government can only justify support for private business when those companies serve public goods. Industry support policies are typically targeted to publicly defined priority sectors or to small and enterprises because it is assumed that these create jobs for the poor. However, targeting priority sectors does not necessarily mean that the poor are included, and being of small or medium scale does not necessary mean having business models productive enough to create sustainable deep impact on their income. Furthermore, IBs are not sector specific but their business logic is to create solutions for the poor’s problems; many such solutions are cross sectoral. Hence, for governments to support IB, it needs to distinguish such companies from other companies also engaging the poor. An accreditation system would be a good tool for identifying the IB companies, because it comprises a transparent ex-ante impact assessment based on criteria pre-agreed by sector or subsector between state and business. Those criteria are typically related to the business return, the social impact (emphasizing reach, depth and systemic change) and the innovativeness and sustainability of the business model. Business associations can also play a strong role to foster “branding” of IB and enhancing information and knowledge about IB.
Policy alignment and other incentives for IB
The accreditation system will encourage more companies to promote IB models. Once such IB models are identified, the government can target its support by either prioritizing these IB companies in existing industry support programs, or by creating new incentives. Government can (a) promote IB accreditation and award systems, as well as peer learning, (b) help with sharpening the business plan of existing models to increase social impact, (c) facilitate licensing and regulations (including public procurement) for better market participation of IB, and (d) provide specific financial incentives and risk mitigation measures for investments. Some countries in Africa and Latin America, and in high-income economies (e.g. Australia, France, Germany, Hong-Kong, Japan, Singapore, UK, USA) have developed specific policies to promote IB models, IB activities (through social enterprises) and IB initiatives (through CSR). Governments in Asia are increasingly interested in developing their own policies.
The government of the Philippines is perhaps the most active proponent of IB promotion in Asia. It is currently establishing an IB and Social Enterprises (SE) accreditation system as part of the registration system of the Board of Investments under the Department of Trade and Industries. In the Philippines, the accreditation is based on a composite rating tool, the criteria of which were developed in partnership between government and business associations. The criteria include: (a) the business case (35% of the final scoring of the business model), (b) the social impact (50% of weights), assessed by reach [scale and targeting], depth [extent of improvement], and systemic change contribution, and (c) innovation to solve social (and environmental) problems (15%). In addition, the government has placed Inclusive Business as a key strategic area under its Industry Priority Plan (IPP). A study financed by ADB recommended areas in the industries' support policies which could be aligned to target better the needs of IB companies. For example, the government has a program to provide agricultural tool to farmers. However, this “Shared Services Facility (SSF)” is criticized as the program allegeldy does not reach the right farmers in the value chains of larger companies; hence only few farmers took loans through the SSF and a large share of the available funding had to be given back to the treasury. The government is now in the process of changing this program to involve IB companies (i.e. those that pay higher than the market rate) to have better and deeper reach and hence larger and more systemic income generating impact, as well as higher repayment rates.
Making CSR more strategic can also help
The greatest concentration of inclusive business investments in Asia actually operates in India. The country has a very active inclusive business, social enterprise and CSR movement. The government has an active policy to prioritize investments in low income services (such as housing, education, health, microfinance) and in job creation for the poor. Furthermore, there are large sums of CSR funding available under the 2% mandatory profit sharing for CSR law, which are currently being pooled and reinvested for more strategic IB investments. It is estimated that that about 6,000 Indian companies will be required to undertake CSR projects in order to comply with the new guidelines; thus the CSR spending in India could triple to $2.7 billion a year. Some banks in India approach companies to use their CSR funding more strategically for investing in IB models. Another possibility is for companies to use their CSR more strategically to develop core business for themselves; a large agribusiness company in Pakistan is an example for this approach.
What governments in Asia do
Many other governments are implementing policy to support the growth of inclusive business. The table above provides an overview of the policy initiatives in key Asian countries. The table shows that governments in Asia still emphasize CSR or smaller scale and less impact oriented often not-for-profit social enterprises (SE), over IB promotion policies. Countries with strong SE regulations/emphasis are Thailand, Philippines and Sri Lanka, Bangladesh, while CSR is strong in India, Indonesia, Republic of Korea and Japan. The Philippines is the country with activity in most areas including IB, with Japan taking second place.
The role of government in promoting the growth of inclusive business in Asia will be discussed in detail at the ADB’s 2nd Inclusive Business in Asia Forum in Manila. The session ‘Promoting an enabling environment for IB – What Governments can do’ on Thursday the 18th of February at 11 am will see an exchange of information and ideas between the governments of different Asian countries.
*Mareike Grytz is Knowledge and Communication Manager at the Inclusive Business Action Network, GIZ and Armin Bauer is Principal Economist in ADB and Coordinator of ADB’s Inclusive Business Initiative.