Investigating the potential of an Inclusive Business Fund in Bangladesh A Market Scoping Study July 2013

© 2013 Asian Development Bank and SNV

Written by Better Stories, Prime Finance and Asset Management Company and Don Taylor and Phil Harman, SNV Netherlands Development Organisation

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 judgements 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 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel + 63 2 632 4444 Fax + 63 2 636 4444 www.adb.org

SNV Netherlands Development Organisation Dr. Kuyperstraat 5 2514 BA,The Hague, The Netherlands Tel +31 70 344 0244 Fax +31 70 385 5531 www.snvworld.org

or more information on the ADBs inclusi e usiness initiati e, lease isit http://www.adb.org/themes/poverty/inclusive-business-base-pyramid or more information on the SNV’s inclusi e usiness a http://www.snvworld.org/en/inclusive-business.

roach, lease isit

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Table of contents List of figures ........................................................................................................................................... 4 List of abbreviations ................................................................................................................................ 5 Executive summary ................................................................................................................................. 6 Background ........................................................................................................................................................................... 6 Approach............................................................................................................................................................................... 7 Findings ................................................................................................................................................................................. 7

Background to the Study ...................................................................................................................... 11 ADB’s Inclusi e Business initiati e ...................................................................................................................................... 11 SNV and Inclusive Business ................................................................................................................................................. 14 Purpose and methodology of the study .............................................................................................................................. 15

I. Macro-economic environment .......................................................................................................... 19 Consistently strong economic growth ................................................................................................................................ 20 Foreign direct investment has picked up dramatically and has room to increase further .................................................. 21 Foreign direct investment is focused on industry and services .......................................................................................... 22 Financial stability and markets............................................................................................................................................ 25 Financial markets have skewed allocation of capital .......................................................................................................... 26 Current institutional financing situation ............................................................................................................................. 26

II. Poverty, the BOP and the opportunity for Inclusive Business .......................................................... 30 Access to key goods and services ........................................................................................................................................ 31 Labour market..................................................................................................................................................................... 31 Regional variation in poverty .............................................................................................................................................. 32 Distribution of companies by size ....................................................................................................................................... 33

III. Findings: Private sector interest in Inclusive Business in Bangladesh ............................................ 36 Current engagement with the BOP ..................................................................................................................................... 36 Perceived benefits of engaging the BOP for Inclusive Businesses ...................................................................................... 38 Benefits of engaging the BOP, for the BOP ......................................................................................................................... 41 Inclusive Business critical success factors ........................................................................................................................... 44 Key challenges to the growth of Inclusive Business ............................................................................................................ 47

IV. Financing Inclusive Business ............................................................................................................ 51 Analysis of findings of fund manager survey ...................................................................................................................... 55 Fund management obstacles and interest .......................................................................................................................... 61 Co-investor mapping ........................................................................................................................................................... 65 Donor mapping ................................................................................................................................................................... 66

Conclusions ........................................................................................................................................... 68 Need.................................................................................................................................................................................... 69 Interest................................................................................................................................................................................ 70 Readiness ............................................................................................................................................................................ 70

Strategy and recommendations ........................................................................................................... 72 Steps to be taken: ............................................................................................................................................................... 72 Size of investment and enterprise ...................................................................................................................................... 72 Priority sectors .................................................................................................................................................................... 73 Fund details......................................................................................................................................................................... 73

Appendices............................................................................................................................................ 74 Appendix 1: An important macro trend: Bangladesh's demographic dividend ................................................................. 74 Appendix 2: Business environment and economic progress............................................................................................... 76 Appendix 3: Analysis of company sample ........................................................................................................................... 77 Appendix 4. Case studies .................................................................................................................................................... 80 Appendix 5: Current engagement with the BOP ................................................................................................................ 86 Appendix 6: Fund managers ............................................................................................................................................... 95 Appendix 7: Co-investors .................................................................................................................................................... 99 Appendix 8: Overview of relevant donor partners........................................................................................................... 101 Appendix 9. Private sector mapping survey ...................................................................................................................... 104 Appendix 10. Fund manager & co-investor survey ........................................................................................................... 113 Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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List of figures Figure 1. GDP growth in Bangladesh from 1991 to 2011 .................................................................................... 19 Figure 2. GDP growth in Bangladesh from 1991 to 2011 .................................................................................... 20 Figure 3. Net FDI has soared since 2002 (needs fixing) ....................................................................................... 21 Figure 4. Ratio of FDI/GDP ................................................................................................................................... 22 Figure 5. Telecommunications investment has taken over as the major target of FDI ....................................... 23 Figure 6. Allocation of FDI 1996-2010 ................................................................................................................. 23 Figure 7. Trends in GDP at current price (million US$) in Bangladesh, by sector: 1981/82 to 2005/06 .............. 24 Figure 8. Bangladesh has a lower debt/GDP ratio than most comparable nations in the region ....................... 25 Figure 9. Loan defaults in percentage of outstanding loans ................................................................................ 27 Figure 10. Private credit growth, monthly, since February 2012 ....................................................................... 28 Figure 11. Representation of income levels and percentage population size .................................................... 30 Figure 12. Poverty headcount ratio has fallen significantly over the past 20 years ........................................... 30 Figure 13. Employment and growth by sector .................................................................................................... 32 Figure 14. Maps of Poverty Reduction in Bangladesh between 2000 and 2005: Old Zilla level .......................... 33 Figure 15. Distribution of employment by company size, 2003 .......................................................................... 34 Figure 16. Location of industries by division in Bangladesh 2001-03 .................................................................. 35 Figure 17. BOP models according to sector ......................................................................................................... 36 Figure 18. Benefits of engaging the BOP for Inclusive Businesses....................................................................... 38 Figure 19. Benefits of engaging the BOP, for the BOP ......................................................................................... 41 Figure 20. Drivers of business growth ................................................................................................................. 45 Figure 21. Key challenges to the growth of Inclusive Business ............................................................................ 48 Figure 22. Source of finance for Inclusive Business* ........................................................................................... 49 Figure 23. Current funding availability by BOP segment ..................................................................................... 50 Figure 24. Bangladesh stock market trends ......................................................................................................... 51 Figure 25. At 21% of GDP, Bangladesh's stock market is catching up to the BRIC nations ................................. 52 Figure 26. Bangladesh has a lower debt/GDP ratio than most comparable nations in the region ..................... 53 Figure 27. Economic expectations over the short- and medium-term ................................................................ 54 Figure 28. Very attractive vs. most viable industries to integrate low income segment .................................... 56 Figure 29. Most important factors when making a private equity investment in Bangladesh............................ 58 Figure 30. Most important concerns when investing in Bangladeshi companies ............................................... 59 Figure 31. Most important factors when making a private equity investment in a BOP venture ....................... 60 Figure 32. Concerns of fund managers in BOP focussed funds ........................................................................... 61 Figure 33. Obstacles in managing a BoP focused fund ........................................................................................ 62 Figure 34. Most important factor to measure the success of a BoP focused PE fund ......................................... 62 Figure 35. Most attractive exit option ................................................................................................................. 64 Figure 36. Fund manager interest in investing in potential ADB fund ................................................................. 64 Figure 37. Deposit interest rates at Bangkok Commerce Bank ........................................................................... 66 Figure 38. Bangladeshi population age groups in 2012 ....................................................................................... 75 Figure 39. Fertility rates over the past 50 years .................................................................................................. 75 Figure 40. Recent trends of macro-economic indicators ..................................................................................... 76 Figure 41. Global Competitiveness Index ............................................................................................................ 76 Figure 42. Wealth and health .............................................................................................................................. 77 Figure 43. Industry sectors of the market scoping company sample .................................................................. 78 Figure 44. Market scoping companies showing sector, size, growth potential & BOP model ............................ 79 Figure 45. BOP models according to sector ......................................................................................................... 86 Figure 46. Estimated deal sizes according to the different types of financial institutions in Bangladesh ........... 96 Figure 47. Current activities of key bilateral aid agencies and DFIs in private sector development ................. 101

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List of abbreviations ADB



Asian Development Bank

BDT



Bangladesh Thaka

BOP



Base of the economic Pyramid

CSR



Corporate Social Responsibility

EC



European Commission

EU



European Union

FDI



Foreign Direct Investment

GDP



Gross domestic product

IB



Inclusive business

IPO



Initial Public Offering

IRR



Internal Rate of Return

IT



Information Technology

NGO



Non Government Organisation

R&D



Research and Development

SME



Small and Medium Enterprises

SNV



Netherlands Development Organization

SOE



State-Owned Enterprises

UNDP



United Nations Development Programme

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Executive summary This market scoping study examines the potential of setting up an Inclusive Business Fund in Bangladesh. The study answers three questions: 1. Is there private sector interest and are there viable opportunities to support Inclusive Business development in Bangladesh? 2. Is there sufficient capacity and readiness of social, political, and business stakeholders to invest and develop Inclusive Business in Bangladesh? 3. What would be the most appropriate investment strategy to catalyse and further unlock the potential for Inclusive Business in Bangladesh? The answers to the first two questions are yes, with conditions. The answer to the third questions requires separate interventions. These are summarized below and detailed at the end of the body of this report.

Background Bangladesh is poor country (on the list of the UN's least developed nations) has a large population (142 million in 2011), and rapid economic growth (forecast at around 6.3 percent for the five years to 2016). Around 43 percent of the population lives below the international poverty line. The combination of high economic growth and widespread poverty create potential for projects to have a high impact on the living standards of the poor. In particular, well directed and sustainable interventions can potentially direct the economic growth to both help business and help those at the bottom of the pyramid, and have a positive impact on economic growth rather than a negative one. Businesses that make money and make a positive contribution to the bottom of the pyramid are commonly referred to as "inclusive businesses." Within this context, the Asian Development Bank (ADB) in conjunction with SNV Netherlands Development Organisation (SNV) commissioned this market scoping study to assess the relevance, o ortunity and strategy required to de elo a usiness case for “Inclusi e Business” de elo ment and investment in Bangladesh – in other words, business opportunities that deliver market- or above-market returns while making a meaningful and substantial contribution to improving the livelihoods of the poor.

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Approach The analysis used a four-tiered approach that assessed the following: i) the opportunity to develop inclusive business approaches in Bangladesh; ii) the presence or absence of an enabling environment for inclusive business development; iii) the level of interest from the private sector in making their businesses more inclusive of the poor; and, iv) the current state of the private equity market in Bangladesh and potential interest and expectations of institutional investors in financing inclusive business ventures. During the course of this study, 55 private sector businesses and 12 fund managers were interviewed along these lines to answer the three questions of the study.

Findings The information gathered and analysed for this study confirmed that there is a distinct opportunity for Inclusive Business development and related financing in Bangladesh. Whilst the Bangladesh political, economic and social environment has been characterised by political turmoil, weak governance, energy shortages, and the costs of unplanned urbanisation, the country has shown significant resilience and made significant progress in economic development since its independence in 1971. With proper planning for such potential risks coupled with commensurate pricing, ADB could feasibly deploy a fund of around US$ 50 million within a 5-year time frame potentially as part of a broader regional fund. In short, for the ADB, financing a portfolio of inclusive businesses in Bangladesh is distinctly plausible but with a range of conditions that need to be accounted for. Opportunity to develop inclusive business approaches in Bangladesh: 

The economy is in transition. Bangladesh's economy is transforming from a primary industry Jute-exporting economy to a manufacturing economy based on textiles. While this has been caused in part by the scarcity of land, high population density and infrastructure constraints, the significance of the manufacturing and services sector is unusually high compared to countries in a similar stage of development.



Widespread poverty offers high impact social returns. About 43 percent of the Bangladeshi population (more than 60 million people) earn an income of less than US$ 1.25 per day placing them below the international poverty line, and about 48 percent of the population (68 million) earn an income of less than US$ 3 per day making them vulnerable to poverty. The BOP therefore represents the majority of the Bangladeshi population;



Based upon the Multidimensional Poverty Index (MPI), 58% percent of Bangladeshi households suffer from multiple dimensions of poverty (and a further 21 percent are vulnerable to multiple dimensions within education, health and other living conditions.

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Enabling environment for inclusive business development: 

Significant policy reforms in the last three decades have created a more market-based economy, mostly due to a gradual deregulation and liberalisation process aimed at fostering private sector-led development.



Bangladeshis have an existing general awareness of Inclusive Business models providing an excellent foundation for further expansion in the sector. This is partially because NGOs helped drive development by filling gaps in service delivery. This is something that is particular to Bangladesh which has spurred development innovation including micro-finance. There is further potential for the business models developed by some of these NGOs that have borne fruit to be used by the private sector.



The legal structure of foreign investment is well established in Bangladesh. Growth in foreign direct investment over the past ten years has averaged 37.4 percent (albeit from a low base) and is outperforming India (35.7 percent), Pakistan (11.4 percent), Sri Lanka (12.8 percent), Nepal (20.6 percent) and Vietnam (17.5 percent). Textile and clothing manufacturing are the key contributors to expansion in industrial output -- a result of Bangladesh’s referential European Union (EU) import rules.



Bangladesh has a “low cost edge” o er its com etitors articularly in terms of wages. Competitor countries such as China are increasingly seeing upward pressure on wages.



Companies that engage the BOP strongly felt that a poor business climate and regulatory environment, poor infrastructure, and lack of access to capital were the most critical challenges to the growth of their businesses.



Companies engaged in Inclusive Business identify growing consumer confidence, increased domestic consumption and increased access to technology as the three most critical factors to their usiness’ success in Bangladesh.

Private Sector Interest: 

There is considerable interest and engagement in Inclusive Business. About 85 percent of firms surveyed recognize the importance of the BOP in their respective business models, whilst 72 percent are also implementing a specific business strategy and / or goal to engage the lowincome segment. Companies engage the BOP most notably as a supply of skilled and unskilled labour (43 percent), as a consumer base (39 percent), as then as either suppliers or distributors within their value chain (22 percent, and 15 percent respectively).



A significant majority of companies (76 percent) expressed an interest in accessing financing. In order to accelerate their growth into these low-income market opportunities debt was the most

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preferred form of financing (58 percent) followed by equity (37 percent), and then guarantee (5 percent). 

67 percent of companies requested financial assistance of US$ 1 million to US$ 10 million, which is fairly evenly distributed between those who require between US$ 1 million to US$ 5 million (32 percent), and those who require between US$ 6 million to US$ 10 million (35 percent). An average Internal Rate of Return (IRR) of 16 percent was projected.

Capital Markets and Private Equity Market: 

Private equity is a relatively new concept in Bangladesh reflected in the fact that there are only two private equity fund managers operating businesses in Bangladesh (both relatively new entrants), and country’s first enture ca ital company has only just started up. There are, however, a number companies that invest their own funds in private companies.



Fund managers and co-investors had heterogeneous expectations on the performance of the Bangladeshi economy in the short-term, with nearly half holding positive outlooks for the economy over the next 12 months, and the rest holding a negative or neutral position. This negativity may be due to issues such as a recent currency depreciation, liquidity shortage, rate hikes, and uncertainty over the upcoming national election. Over the next 5 years however, respondents were unanimously positive about the economy;



Fund managers and co-investors strongly view Energy and Agriculture as the most attractive sectors to integrate the low income segment. The power demand-supply gap and government incentives are possible reasons for this. The significant involvement of the Bangladeshi population in Agriculture (most of whom are BOP) is a likely reason for it to be identified as an attractive sector for the low income segment.



The quality of the management team is seen as the most important factor when making private equity investment in Bangladesh. Cash flow, company track record and transparency in business activities are also key factors when investing private equity. With regard to BOP ventures, fund managers consider the viability of the business model and the potential for financial return as the most important factors when making a private equity investment -- just as they would for a non-BOP venture.



The lack of transparency and the lack of existing management skills are seen as the major problems. Poor business strategy and business plan are also key concerns. In Bangladesh business plans are rarely developed, and if done, are often superficial, thereby making it difficult for companies to materialize goals. In BOP focused funds a lack of skills and management experience are seen as the most critical issues.

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Recommendations 

Inclusive business fund: There is strong demand for companies for financing both from smaller companies in the growth phase and larger companies. A fund size of up to $50 million could be deployed. The fund could be either funded in tranches of be part of a regional fund.



Technical assistance: A tailored technical assistance facility is critical. This could include support with innovative business models as well as pre-investment services.



ADB role: The role of the ADB to anchor any fund is important as it provides credibility to other investors. ADB’s leadershi on inclusi e usiness can hel assuage concerns of other in estors who may perceive that companies working with the BOP have increased investment risk.



Staged approach: A staged approach could be considered where companies are initially provided Technical Assistance to improve or establish inclusive business models. This could increase the pipeline for a fund that is established in two to three years.



Deal size: Opportunities range from $1 million to $10 million



Sector: Sector agnostic with a skew to agriculture, textile & garments, food & beverage and Manufacturing.



Currency: The fund should be denominated in US dollars with a currency swap agreement in Bangladesh to allow local currency investments without taking on any currency risk.

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Background to the Study Over the past two decades, the Asia and the Pacific region has sharply reduced its share of population living in poverty to 21% ($1.25 per capita income/expenditure at purchasing power parity of 2005) and 47% ($2), as of 2008. However, poverty and the vulnerabilities associated with it remain entrenched. When a wider definition of poverty is applied (less than US$ 4 per day), almost 3 billion people, roughly 82 percent of the Asian population is considered part of the Base of the Pyramid (BOP) as defined by the World Resources Institute.1 The private sector is the key contributor to the economic boom in Asia. However, it is clear that it has yet to fully realize its potential in creating shared value, which is to promote business models that integrate the low-income segment in unique and innovative ways that generate company growth while creating value for the low-income segment and directly contributing to poverty reduction.

ADB’s Inclusive Business initiative Inclusive growth is one of the three strategic pillars of ADB's Strategy 2020, which aims to broaden economic and social opportunities for lower-income and excluded groups. Inclusive business For the purpose of this scoping study, Inclusive Business is defined by the ADB as follows: Profit making companies that bring systemic impact at scale to the poor and vulnerable people under the US$ 3 international poverty line. These Inclusive Businesses are focused on making a reasonable profit (an IRR of 10-20%), while contributing to systemic impact on the lives of the poor. This can by specifically including the poor as consumers (new markets for affordable goods and services), distributors (new distribution networks), suppliers (new sources of supply / inputs); and employees (previously untapped sourced of skilled and unskilled labour coupled with improvements in labour conditions beyond local labour law compliance). In the Bangladesh scenario, we redefine "reasonable profit" as 10-20% above available interest rates, or 17-37%: The current prime rate (overnight cash rate offered to banks by the central bank) is 7.25%, and has ranged between 4.5% in 2009 and 8.87% in 2008. While the "prime rate" set by the central bank is currently 7.25%, lending rates for private businesses start at around 17% (lower for trade finance) and extend to well above the "ceiling

1

World Resources Institute & International Finance Corporation 2007

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rate" set by the government of 37%. We therefore used an IRR of 17-37% as a reasonable target profit rate for SMEs. Inclusive Businesses, are often medium-sized, well-established, viable businesses who are seeking to accelerate growth by pursuing new market segments and / or distribution channels, and / or are focused on mitigating supply chain, labour and reputational risks whilst at the same time actively pursuing market opportunities. They can also be successful social enterprises with a proven business model that are seeking scale. Inclusive businesses maximize these opportunities and address these risks by integrating the low-income segment into their value chain in such a way that they contribute meaningfully to a com any’s ottom line y increasing rofits and reducing costs on the one hand, and on the other, they provide income and employment opportunities for the low-income segment and / or access to goods and services that improve their livelihoods in a sustainable manner. As such, Inclusive Businesses aim to contribute to systemic impact on the lives of the poor by including the poor as consumers, distributors, suppliers, and employees.

Inclusive Businesses differ from social enterprises and corporate social responsibility activities in their realized profit making motive / ability to offer market returns, as well as the scale of positive externalities generated. Many Inclusive Businesses, particularly those that have attained scale in operations, deliver market returns or above market returns on par with commercial businesses enabling them to access a large spectrum of commercially-oriented funding sources including stock markets.

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 Characteristics of Inclusive Businesses Inclusive Businesses tend to have the following characteristics that integrate both definitional and strategic / tactical considerations: 1.

Strictly for-profit;

2.

Core business is strictly Inclusive Business;

3.

Must include the low-income segment within their business model through one or more of the following ways: as suppliers, as consumers, workers / employees and as distributors;

4.

Must generate financial returns (amount depends on either investment criteria set by an impact investor, company ambition, strategy and business model or a combination of both).

5.

Must generate social returns (scale and scope depends on the investment criteria set by an impact investor, company ambition, strategy and business model, or a combination of both).

6.

Designed from the start with scale in mind to maximize and optimize their route to impact and to maximize the creation of company value.

7.

Do not seek trade-offs between financial and social returns. Rather, they continuously seek solutions through which both can be optimized simultaneously.

8.

Often require blended capital priced for their level of risk and relevant stage of development.

9.

Actively assess and measure both social and economic performance in a standardized manner.

10. Normally evolve from social enterprises seeking to scale their proven (social purpose) business model or mid- to large-sized established companies seeking to create shared value through supply chain, labor-related and/or product innovation. Beyond these standard attributes, for the purpose of a potential fund ADB is seeking to identify Inclusive Businesses that: 11. Achieve a gross financial return in line with the market 12. Measurably and meaningfully impact at least 5,000 people during the investment period. 13.

2

timi e their usinesse alue ro osition in such a way that it also addresses a systemic and rele ant poverty-related issue in a specific geographic context.

14. Demonstrate a clear route to impact. 15. Identify and manage pre- and post-investment risks.

The above criteria has important implications in terms of selecting companies – particularly in terms of the maturity of the investment opportunity and investee, the potential depth and breadth of the social impact, the financial return, and risk.

2

Total impact is case dependent. The number of beneficiaries may vary based on the local context, business model and opportunity

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SNV and Inclusive Business SNV (the Netherlands Development Agency) is a partner of the ADB in this initiative and is managing the studies in Vietnam, Pakistan, Indonesia and Bangladesh. SNV is an international development organisation of Dutch origin committed to eliminating poverty and inequity in emerging markets worldwide. With more than 1,300 staff located in more than 100 offices in 35 countries across Asia, Africa, the Balkans and Latin America, SNV provides a unique blend of integrated services and solutions tailor-made to the specific needs of our public and private sector clients that are critical to their sustainable growth and performance. In Asia, SNV has country offices in Laos, Vietnam, Bhutan, Cambodia, Nepal, Indonesia and Bangladesh. For decades, SNV has developed and leveraged market-based solutions and innovations to accelerate economic development opportunities for the low-income population. One such innovation SNV has upscaled, in partnership with the World Business Council for Sustainable Development is called Inclusive Business. SNV has aggressively positioned, leveraged and up-scaled Inclusive Business in Latin America with a range of strategic partners. These include the WBCSD, Inter-American Development Bank, Andean Development Corporation, and more than 150 national and multi-national companies and also government actors. SNV is now advancing a similar approach in Asia and Africa.

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Purpose and methodology of the study The purpose of this study is to assess the potential for setting up an inclusive business fund focusing on providing capital (debt and/or equity) to inclusive businesses.

Need

Interest

•Do inclusive businesses have access to the capital they need to achieve their objectives? •Are other financial organizations providing capital at rates below what could be considered a reasonable risk-weighted return? •Are the companies in Bangladesh interested in Inclusive Business? •Are they interested in Inclusive Business private equity funding? •What terms and conditions the companies would prefer?

•Is the macro-economic condition favourable to Inclusive Business? •Are the companies ready for Inclusive Business? •Are there enough skill sets in the market on Inclusive Business? Readiness •What is the level of appetite of the key stakeholders?

Strategy

•What are the steps needed to be taken in response to the above? •What size of enterprise and investment should the fund consider? •What are the priority sectors? •What type of instruments would be most suitable?

The main objective of this study is to assess the potential for an Inclusive Business private equity fund in Bangladesh. The analysis focused on exploring the following three topic areas: The analysis used a three-tiered approach that assessed (1) the enabling macro-economic environment for Inclusive Business development in Bangladesh: (2) the level of interest from the private sector in making their businesses more inclusive of the poor; and (3) the current state of the private equity market in Bangladesh and potential interest and expectations of institutional investors in financing Inclusive Business ventures.

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Enabling Environment

•Assess if the current economic, market, political conditions favour the development and growth of Inclusive Business in Bangladesh and the potential impact on the BOP

Private sector interst

•Establish the degree to which companies are currently involved in or willing to be involved in Inclusive Business, what they consider to be the perceived benefits, and what they perceive to be the critical arriers to entry into this “emerging market”.

Private equity market viability

•Assess the current state of the private equity market in Bangladesh, determine the interest of institutional investors in an Inclusive Business private equity fund, and assess expectations for rates of return, risks, sector preferences, deal size, and term.

Approach To successfully design and execute this project, the feasibility study focused on leveraging both primary and secondary sources of information. Primary information (both qualitative and quantitative) consisted of personal interviews with 55 companies (via the Private Sector Mapping component) in Dhaka and the peri-urban area surrounding Dhaka from a cross-section of the Bangladeshi economy and 12 private equity funds, 4 co-investors, and other related stakeholders in Bangladesh. Secondary research and information gathered was sourced from a mix of national government statistics and crossreferenced with independent research and reports from established institutions such as the ADB, World Bank, and World Economic Forum among others. The full questionnaires used can be found in Appendix 2 and Appendix 3. Survey methodology The study relied on primary information from a non-randomised selection of companies and investment funds active in Bangladesh. The results show that opportunities exist, but the small sample size and non-random selection do not lend themselves to meaningful statistical inference about the size of the potential IB investment sector or number of investible companies in Bangladesh. The results presented only refer to the firms involved in this study. On the other hand, most of the investment funds active in Bangladesh were interviewed so the results are likely to be reflective of the broader sector.

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To define a viable pipeline of companies for the fund that are interested in and/or already practicing Inclusive Business, an interview guide was developed to capture important information from the inter iewees, with s ecific em hasis on two aria les (i) com anies’ interest and knowledge of Inclusive Business, or business initiatives that incorporate low-income o ulations, and (ii) com anies’ interest in accessing debt and / or equity financing for the support and growth of their business initiatives that include BOP populations. The interview guide included questions about specific aspects of the companies (employees, size, revenues, market share, products / services); the com anies’ relationship with the BOP (business model, stage of implementation, rationale for working with lowincome o ulations, alliances esta lished for Inclusi e Business im lementation); the com anies’ financing (past and current financing, interest in financing specifically focused on Inclusive Business development, specific characteristics of such financing); as well as whether or not the companies are interested in follow-up information with regard to financial and / or technical assistance for their Inclusive Business models. Data collection instruments were also designed to accompany the interview guide. Considering that the interview guide consisted of mainly close-ended questions, a core data collection instrument was used for quantitative information, which was also utilised for subsequent analysis. An additional data collection instrument was used for more qualitative data. Company sample selection: In order to define a company sample, selection criteria were first determined; these included:       

Number: 55 firms interviewed Size: Medium to large Bangladeshi or multinational companies Legal criteria: Focus on joint stock and limited liability companies Interest in the bottom of the pyramid: Companies should be already working, or have interest in working with the BOP, and see profit potential in expanding in this area Business model: Increased focus on business models with the poor as consumers and / or distributors as well as producers and / or employees were included Industry sectors: Sector diversity with an emphasis on including non-traditional sectors that have the potential for innovation within the Inclusive Business marketplace Interest in financing: As often as possible, these companies should be interested in financing to support a business model that includes the low-income segment

For private equity funds: In order to assess the potential viability of an Inclusive Business focused private equity fund in Bangladesh, interviews were held with 13 fund managers/ equity funds in Bangladesh. The focus of the interviews was to capture important information about (i) industry attractiveness; (ii) investment obstacles; (iii) Bangladeshi economic outlook, and (iv) social investing in Bangladesh. Questions were focused both on the private equity market in general and private equity when applied to BOP markets. The interview guide included questions about the investment criteria, sectoral prospects, risks and opportunities, expected conditions and returns, in addition to interest in managing and Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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prospects for raising capital for an Inclusive Business Venture Fund. As with the case of the company interviews, data collection instruments were also designed and used to accompany the standard interview guide. Investment fund sample collection: In order to define the limited investment fund sample, criteria were determined as follows:  

 

  

Number: 10 to 20 investment funds to be interviewed Size: Medium to large Bangladeshi or multinational (foreign backed or regional) investment funds – ranging from US$ 30 million to over US$ 1 billion under management (average US$ 100 million under management) Legal criteria: Focus on private equity, asset management, and social investment funds Interest in the poor: Funds operating in Bangladesh generally do not list the BOP as a central focus of their investment portfolio – funds were selected based on potential interest and / or experience with ventures that may consider investments in the BOP Business model: A range of asset classes and risk profiles Industry sector: Funds with either a diversified investment or focused sector approach Interest in investing: Where possible, identify funds that have either shown or may be interesting in considering BOP venture investments

Because private equity funds in Bangladesh are generally BOP-agnostic (they are focused on more growth and risk related criteria), funds were also identified based on their perceived track record with companies that engage with the BOP or companies who have or are considering sustainability criteria in their investment strategy.

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I. Macro-economic environment Bangladesh, officially the People's Republic of Bangladesh, is located in South Asia, bordering India and Myanmar. It has a population of 161 million, making It the world's eighth-most populous country. After independence from Britain in 1947, the country because East Pakistan, separated from the main country of Pakistan by 1,500km of India. This proved to be economically and politically unworkable, and the country split from Pakistan in 1971 following a civil war. After being established as its own country, Bangladesh adopted a secular constitution, despite being 89.5% Muslim. The initial government proved to be unstable, with a series of coups from 1975 to 1981. From 1981 to 1991, the country was ruled by military backed rule. Democracy was restored in 1991 and apart from a brief period of military rule in 2007-2008, has endured in relative stability. The economy began expanding in the early 1980s and has growth has accelerated to around 6% per year (nominal) for the last ten years, or about 4% on a purchasing power parity basis.  Figure 1. GDP growth in Bangladesh from 1991 to 2011

Despite rapid economic growth, Bangladesh remains one of the poorest countries in the world, ranked 152 out of 181 by the World Bank.

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Consistently strong economic growth The combination of high population and low income make Bangladesh a mid-ranking economy, comparable to Vietnam, New Zealand, and Angola. For the moment. The combination of stable government, open markets, and increasing foreign direct investment have contributed to strong and accelerating economic growth. The economy has been experiencing strong growth since the 1990s, with GDP averaging 4.4 percent between 1991 and 1995, 5.2 percent from 1996 to 2000, 5.3 percent from 2001 to 2005, and 6.3 percent from 2006 to 2011. Moreover, the Bangladesh economy is expected to continue to expand with three key factors underpinning GDP growth – labour, capital and technology – all favourable.  Figure 2. GDP growth in Bangladesh from 1991 to 2011 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 1991

1996

2001

2006

2011

Source: World Bank 2012

At the end of 2011 the country’s er ca ita GDP was US$ 735, a significant increase from the US$ 287 at the end of 1991. This represents a compound average per capita GDP growth rate of 4.8 percent. This comes despite rampant corruption (Bangladesh ranks 144 in terms of corruption by Transparency International -- behind Pakistan, Nigeria, and Russia) and a slow, inefficient bureaucracy. This is usually a red flag for investors. However, Bangladesh has a good reputation for protecting investors is ranked 24th in terms of protecting investors by the World Bank DB Index. This has helped attract foreign investment, which has picked up markedly over the past ten years.

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Foreign direct investment has picked up dramatically and has room to increase further Foreign direct investment was negligible 20 years ago. However, Bangladesh has become an attractive place to invest, initially for light industry, and more recently in the telecommunications sector. Net foreign direct investment soared from 2001, peaking in 2008 at the onset of the global financial crisis. Even amid the ongoing crisis/slowdown, net foreign direct investment has stabilized at around the $800 million per year mark. Foreign direct investment is an important source of foreign exchange. With a stock exchange capitalization of just 1.1 billion as recently as 2001, indirect investments beyond a few million dollars were nigh on impossible.  Figure 3. Net FDI has soared since 2002 (needs fixing)

Source: World Bank 2012

Even with the markedly higher level of foreign direct investment since 2002, Bangladesh still has a lower FDI as a percentage of gross domestic product. This suggests that an increase in FDI is both sustainable and likely.

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Figure 4. Ratio of FDI/GDP

Bangladesh still attracts a relatively small amount of FDI as a ratio of its GDP Vietnam

7.52%

India Pakistan

1.43% 1.14%

Sri Lanka

0.96%

Bangladesh

0.91%

Nepal

0.55%

Source: World Bank 2012

This is an important consideration when developing and encouraging inclusive business, because if companies successfully begin inclusive businesses ahead of the foreign direct investment they are more likely to reap the rewards and share the benefits.

Foreign direct investment is focused on industry and services The lion's share of FDI is directed into the growth and capital intensive area of telecommunications. This is particularly pertinent to inclusive business because a lack of infrastructure has been cited as one of the key reasons for not investing in inclusive businesses. In addition, improving education should expand the workforce of skilled workers -- an important requirement for effective use of more sophisticated telecommunications and internet service provision.

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Figure 5. Telecommunications investment has taken over as the major target of FDI 100% 90% 80% 70%

Telecommunication

60%

Gas & Petroleum

50%

Banking

40%

Textiles & Weaving Power

30%

Other

20% 10% 0% 1996-2000

2001-2005

2006-2010

Source: Survey Report, Statistics Department of Bangladesh Bank and Foreign Direct Investment in Bangladesh (1971-2010), Board of Investment.

 Figure 6. Allocation of FDI 1996-2010 Telecommunications

2,339

Gas & Petroleum

1,571

Banking

1,357

Textiles & Weaving

1,333

Power

677

Chemical/Pharmaceuticals

135

Agriculture

80

Insurance

61

Leather products

40

Computer software Metal products

13 9

Millions of USD (15-year cumulative)

Source: Survey Report, Statistics Department of Bangladesh Bank and Foreign Direct Investment in Bangladesh (1971-2010), Board of Investment. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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The combination of foreign direct investment and the stage of Bangladesh's economic development -where economies typically move from an agrarian base to services and industry -- have contributed to rapid economic growth in services and industry, while agrarian sectors such as agriculture, fisheries, and forestry have grown at a much lower pace. Rising wages in competing low cost countries (i.e. China) is likely to help continue to expand the light manufacturing industries -- particularly textiles. In 2009, textile exports accounted for 80% of Bangladesh merchandise exports. The textile and clothing manufacturing will remain the largest contributor to expansion in industrial output in part due to Bangladeshi textile exporters continuing to benefit from preferential EU import rules (duty-free access to the EU is granted if imported components do not exceed 70 percent); an advantage Bangladesh has over its main competitors, notably China, Pakistan, India and Sri Lanka, whose goods are liable for duty in the EU because they are no longer classified by the UN as leastdeveloped nations. 3 The economy, like its neighbouring countries, was traditionally based on agriculture. Even now, agriculture is an important part of the economy, contributing 17% of GDP and employing 45% of the labour force.

 Figure 7. Trends in GDP at current price (million US$) in Bangladesh, by sector: 1981/82 to 2005/06

35,000 30,000

25,000

Services

20,000

Industry Agriculture

15,000

Crop

10,000

Fisheries

5,000

Livestock Forestry

0 1981/82 1991/92 1995/96 1999/00 2005/06 Source: Deb, U. et al 2008 3

Deb, U. et al 2008

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Increased foreign direct investment, combined with export earnings and remittances from overseas workers, has increased the pool of funds available for lending to companies. However, inefficiencies in the capital markets have created significant distortions in terms of interest rates and capital allocation.

Financial stability and markets In addition to GDP growth, which we can consider to be the equivalent of the top line of an income statement, it is becoming increasingly important to consider the country's balance sheet -- sovereign risk. This has been largely ignored in the past because the world has had a long period of economic stability during which time only a few countries (such as Argentina) have gone bankrupt. This period is coming to an end, in Europe at least, and it is becoming increasingly pertinent for investors to ask if they will be able to get their money back out of the country. In this respect, Bangladesh has an enviably low debt/GDP ratio of just 32 percent -- less than half India's 68% and well below the danger level of 100% where countries tend to default.  Figure 8. Bangladesh has a lower debt/GDP ratio than most comparable nations in the region

Debt to GDP ratio 2012 Japan USA India Pakistan Vietnam Thailand Bangladesh China 0

50

100

150

200

250

Source: World Bank estimates 2012 (except for Bangladesh: CIA World Factbook estimate 2012) While the national government's balance sheet looks relatively strong, the same can't be said for banks and other financial institutions due to significant distortions in terms of interest rates and capital allocation.

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Financial markets have skewed allocation of capital A combination of inefficiency, opacity, and corruption has created an unusually diverse spread in interest rates. The current interbank rate of 7.5% provides the base rate for banks' cost of funds. Developed markets tend to operate at an average spread of around 3-4%. That is, if banks borrow at 7.5%, they tend to lend at 10.5-11.5%, on average. However, in Bangladesh, there is a significant spread between preferential loans (typically 10-12%) and regular commercial loans (17% and up). The unusually high spread of 6+ percentage points represents a combination of perceived risk and skewed allocation of funds. The problem with this high spread is that it makes access to capital particularly difficult for small and medium sized enterprises (SMEs) that don't have a long track record or a close relationship with a bank. The result of companies with good relationships with banks getting access to a limited pool of funds at preferential rates is that companies that really should have access to the capital are shut out of the capital markets (other than mortgage lending) or forced to pay prohibitively high interest rates.

Current institutional financing situation The past ten years has seen a significant inflow of institutional financing into the SME sector, both government banks and private banks, with further inflow from non-bank financial institutions and foreign banks.

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Non bank financial institutions 3%

Foreign banks 2%

Specialised banks 7%

Private local banks 53% State Owned Banks 35%

Total: BDT434 billion = USD5.5 billion Source: Bangladesh Bank More recently, since mid-2012, the government has been pushing commercial and private banks to increase their lending to SMEs, asking them to allocate 10% of their loan portfolio to SME lending. This resulted in better access to credit for some SMEs, higher loan default rates for government and private local banks, and a number of banking scandals. This has led to a significant misallocation of capital, which is now manifesting itself in loan defaults.

 Figure 9. Loan defaults in percentage of outstanding loans

Specialised banks

24.1

State banks

17.7

Private banks

Foreign banks

4.9

3.2

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Source: Bangladesh Bank

As of 31st December 2012, 10.03% of all bank loans were in default, up from 7.27% two years before. The vast majority of these loans are from state banks. Bangladesh Bank’s former De uty Go ernment I rahim Khaled ga e four reasons for the high default rates: corruption, mismanagement in state-owned banks, dull business and high interest rates. The reasons are not important to this report. But the results are.  Figure 10. Private credit growth, monthly, since February 2012

Growth in private sector credit slows down

19.6

19.7

19.5 18.2

20.3

19.9

19.9

18.4

year on year growth (%)

18.4 17.4

16.6 14.8 14.0

Source: Bangladesh Bank Reducing credit and increasing scrutiny is a typical knee-jerk reaction following a banking scandal anywhere in the world. This could go three ways: 

Improved risk management and the development of discounted cashflow lending,



Higher collateral requirements, or



A return to business as usual when the dust settles.

If this does indeed lead to improved risk management and cashflow lending (loans based on expectations of future cash generation by the company), Bangladesh companies will be able to reap

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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significant benefits from improving their corporate governance and reporting. The impact on the fund would be positive as this would expand the pool of companies with decent enough corporate governance to lend to or invest in. On the other hand, if this reverts to higher collateral and/or back to business as usual, the need for a fund will increase.

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II. Poverty, the BOP and the opportunity for Inclusive Business In Bangladesh, poverty, the BOP and the general population are closely related given the fact that about 43 percent of the Bangladeshi population (over 60 million people) may be identified as being under the international poverty line of US$ 1.25 per day, and 48 percent of the population (68 million people) earn an income of less than US$ 3 per day, making them vulnerable to poverty.  Figure 11. Representation of income levels and percentage population size

52% More than US$ 3 per day

48% Less than US$ 3 per day

43% Less than US$ 1.25 per day

Bangladesh has made significant progress in poverty reduction over the past 20 years. One key reason for is family planning empowering women. In 1975, eight percent of women of child-bearing age were using contraception (or had partners who were), in 2010 the number was over 60 percent. Similarly, the fertility rate has fallen from 6.3 In 1975 to 2.3 today. This is contributing to the "demographic dividend" as outlined in the appendices .  Figure 12. Poverty headcount ratio has fallen significantly over the past 20 years 60

Absolute poverty down by 44% in 18 years

50 40 30

millions of people below the poverty line

20 1992

1996

2000

2005

2010

Source: World Bank Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Access to key goods and services The Bangladeshi quality of life can be gauged according to the quality of access to key goods and services such as latrines, drinking water, electricity, and information and communication technology. Some key findings from a 2010 Bangladesh Household Income and Expenditure Survey (HIES) include:4  



   

At the national level most of the heads of households (38.5 percent) live in a house made of CI sheet / wood in the walls, whilst 16.7 percent live with walls made of mud / brick / wood; In 2010, 18.4 percent of households had access to a sanitary latrine, 17.1 percent with a pucca (water sealed) toilet, 20 percent with a katcha (temporary) toilet, and 4.4 percent use open space (this is a significant reduction from 11.3 percent in 2005); Access to drinking water is mostly positive, with 85.4 percent of the population using tube well water, 10.6 percent supply water, and only 4 percent using other sources of water such as ponds, rivers, canals and wells; The use of supply water increased by 3 percent in 2010 with respect to 2005; In 2010, 55.2 percent of households reported to have access to electricity at the national level (42.5 percent rural, 90.1 percent urban); Households containing telephones total 2.1 percent nationally and 63.7 percent of households use mobile phones; 3 percent of households nationally report to have ownership of a computer with use of e-mail facility reported 1.4 percent of households.

The above data represent both challenges in increasing access to basic goods and services to a broader cross section of the Bangladesh population and opportunities for companies with innovate business models that better service the BOP.

Labour market The Agriculture, Forestry & Fisheries Sector (26 million people in 2010) is still the most significant in terms of employment, followed by Trade, Hotel & Restaurants (8.4 million people) and then Manufacturing (6.7 million people). However, in terms of employment growth between 2002-03 and 2010, the largest percentage increases can be found in Finance and Business Services & Real Estate (70 percent increase), Construction (42.3 percent increase), and Manufacturing (35.8 percent increase). The increase is the manufacturing base and the services sector such as retail and tourism offers opportunities for the poor to move into the formal labour market. In absolute terms, most of the employment is still coming from agriculture and manufacturing.

4

Bangladesh Bureau of Statistics 2010, Report of the Household Income & Expenditure Survey 2010, Bangladesh Bureau of Statistics Division, Ministry of Planning, Bangladesh

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 Figure 13. Employment and growth by sector Rural industries (agriculture, forestry, fisheries) continue to provide the largest number of jobs

Source: Bangladesh Bureau of Statistics 2010

Regional variation in poverty Poverty in Bangladesh is characterized by regional variation. According to a 2011 UNDP report, Bangladesh ranks 112th in respect to human poverty. Of the 75 percent of the Bangladeshi population that li e in rural areas, a out 18 ercent are also classified as “hard-core oor” on a daily calorie intake asis ( elow 1,805 Kcal / erson), and a out 40 ercent as “ oor” ( elow 2,122 Kcal / erson). Factors such as tendency to natural disasters, distribution and quality of land, access to education and health facilities, level of infrastructure development, employment opportunities, and dietary and hygiene practices are all determinants of geographical regions of poverty in Bangladesh.5 In general, the eastern part of Bangladesh has had the most significant reductions in poverty, which may be largely attributed to its near proximity to Dhaka zilla (district), which is the economic hub of Bangladesh and receives the lion's share of foreign direct investment. In contrast, the western part of Bangladesh has seen a much smaller reduction in poverty, with no pattern of convergence among the 64 zillas (see Figure 11).

5

Bangladesh Bureau of Statistics & UN World Food Programme 2004

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Figure 14. Maps of Poverty Reduction in Bangladesh between 2000 and 2005: Old Zilla level

Year 2000

Year 2005 Source: World Bank 2007

At a national level, monthly household nominal income was estimated by the Ministry of Finance, Government of Bangladesh at US$88.27, however in the rural areas it is estimated at US$74.70 and US$128.21 in the urban areas. Average monthly household expenditure on the other hand, is estimated at US$ 75.16 at the national level, US$ 65.18 in rural areas, and US$ 104.56 in urban areas. In 2005, per capita nominal expenditure at the national level was US$ 70.40, US$ 63.29 in the rural areas, and US$ 101.89 in the urban areas. Whilst improvements are being made, they are often in the urban areas, and with Bangladesh urbanising fast, a new suite of urban social problems arise. For example, Dhaka, capital of Bangladesh has an estimated population of some 15 million people which makes it one of the 10 largest cities in the world, however it remains highly poor and crowded, and many of its inhabitants live in slum areas.

Distribution of companies by size The vast majority of companies in Bangladesh are micro to medium (less than 100 employees), focusing on services. This is a particularly relevant factor with regards to the potential of different types of funds. Rural-urban distribution and employment Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Small manufacturing enterprises are almost evenly distributed between rural and urban areas both in terms of number of establishments (52% and 48% respectively), and employment (51% and 49% respectively). In the case of medium manufacturing enterprises, there is a higher incidence of both urban establishments and urban employment (57% for both counts). Rural location for medium units constitutes 43 per cent in terms of both establishments and employment. As the vast majority of the population is rural, a focus solely on large companies is less likely to contribute to improved welfare for the rural poor, even when the companies are considered to be inclusive businesses. 85% of all employment is provided by small and medium sized companies. As these appear to be a proxy for the rural poor, the potential impact of an integrated business fund will be directly related to how well the businesses assisted with the fund can help the micro businesses.  Figure 15. Distribution of employment by company size, 2003

1,680 1,317

8,272

Small (1-9) Medium (10-99) Large (100+)

Unit: thousands of employees Source: A.K.M. Helal uz Zaman, Md. Jahirul Islam, Small and Medium Enterprises Development in Bangladesh: Problems and Prospects, ASA University Review, Vol. 5 No. 1, January–June, 2011

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 Figure 16. Location of industries by division in Bangladesh 2001-03

Even in Dhaka, the vast majority of people are employed by small sized enterprises Dhaka Small

Medium

Large

Chittagong Rajshashi Khulna Sylhet Barisal 0%

20%

40%

60%

80%

100%

Note: Small is defined as 1-9 employees, Medium as 10-99, Large as 100+ Source: A.K.M. Helal uz Zaman, Md. Jahirul Islam, Small and Medium Enterprises Development in Bangladesh: Problems and Prospects, ASA University Review, Vol. 5 No. 1, January–June, 2011 The Barisal Division, which covers the west delta region, is one of the poorest of Bangladesh's 7 administrative regions, and is a traditional rice basket -- it used to be known as the Crop house of Bengal. Agriculture is still the dominant industry. Barisal also has the second highest literary rate of Bangladesh's 7 administrative regions after Dhaka. These three factors make it an obvious target for inclusive business. However, with only around 4% of the population employed by large companies, engagement with SMEs will be critical to success.

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III. Findings: Private sector interest in Inclusive Business in Bangladesh Incor orating the oor into a com any’s usiness with new and sometimes untraditional usiness models presents challenges, which, when overcome, can open opportunities for the businesses and the communities in and with which they work. This section discusses the benefits and challenges of working with the BOP, as identified by the companies which were interviewed. Given this BOP market opportunity and context, a market scoping exercise was undertaken to assess and validate if and how the private sector are taking advantage of this BOP market opportunity in Bangladesh, and the perceived benefits and obstacles. The 55 companies included both private and listed companies as well as local affiliates of multinational corporations as well as social enterprises. The range of industries was selected based on potential growth in these sectors at the BOP. Growth industries were considered the primary focus as these are the industries where companies will require capital infusion. A detailed analysis of the company sample is included in the appendices.

Current engagement with the BOP Whilst all four modes of engaging the BOP – as consumers, distributors, suppliers, or employees are evident across multiple sectors, the employee and consumer models are most strongly represented.  Figure 17. BOP models according to sector Manufacturing Other Pharma/Biotech Energy Consumer products/retail Banking & Finance Agriculture/Agribusiness 0%

20% Employee

40% Supplier

60%

80%

Distributor

100% Consumer

Source: SNV & BetterStories Private Sector Interviews 2012 Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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The type and range of BOP engagement models vary considerably from sector to sector. In banking and finance for example, the BOP is primarily engaged in just two ways; as consumers of the financial services, or within micro-finance organisations, also as employees. Such microfinance companies are spread throughout the country and may typically employ between 5 to 100 staff often directly from the BOP in district offices, although the salary level of such micro-finance employees may be a matter of contention in consideration of Inclusive Business principles of engagement with BOP employees. Beyond micro-finance, which isn't strictly IB, financial institutions are also expanding their mobile networks, which potentially bring more useful payment solutions and other banking solutions to the rural communities. In comparison to the more limited BOP engagement models seen in banking and finance, within the consumer products and retail sector the full range of BOP models are engaged – as suppliers of goods, deliverers of goods, employees, and as product consumers. An analysis of each of the four observed modes of engaging the BOP – as consumers, distributors, suppliers, or employees is provided in the appendix.

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Perceived benefits of engaging the BOP for Inclusive Businesses For most businesses that we interviewed, engaging the bottom of the pyramid is akin to corporate social responsibility (CSR). Most of the companies don't even consider normal business priorities of profit, costs, and market, at least according to the survey results. Rather, they see engaging with the BOP as an opportunity to improve the company's reputation while helping out one's fellow man. For most Inclusive Businesses that engage the BOP population a range of benefits are identified that include broad social gains such as being able to play a part in contributing to sustainable development and creating shared value, through to specific company benefits such as improving company reputation and brand, and offering a cheap labour force.  Figure 18. Benefits of engaging the BOP for Inclusive Businesses

From the company's standpoint, the main reasons for engaging the BOP is to look better, or seem like a better global citizen Contribute to sustainable development Improved reputation/brand equity Create shared value NR

Normal business priorities

Cheap labour supply Improved sales New, highly profitable consumer market

If your company is planning to engage with the BOP, what are the benefits to the company? Please rank the top 3 benefits.

Stable supply of critical inputs in supply chain Improved results for CSR report Favourable engagement with national gov't Improved profits Other

rank 1

Lower transaction costs in supply/distribution 0

5

10

rank 2 15

rank 3 20

25

30

Source: SNV & BetterStories Private Sector Interviews 2012

Contribute to sustainable development The majority of Inclusive Businesses surveyed who are engaging with the BOP population believed that the overriding benefit was to be able to contribute to sustainable development. Whilst this is a core objective of most non-profits, for most private sector companies it is more likely to be connected to ancillary CSR objectives enacted by management.

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Despite their answers, however, we found that several companies engage the BOP as a part of their core business: •

Singer Bangladesh focuses on being involved with projects that have a good long term ision. Its own “Singer Sewing Academy” for exam le, em owers rural and im o erished women in the early stage of life as well as students through the provision of training in sewing skills. This not only benefits the BOP population who receive skills training and an potential income stream, but also the company who benefits through the sale of their products back to the BOP population as consumers.

•

Lal Teer manufactures innovative hybrid varieties of seeds for BOP farmers that are resistant or tolerant to pests, diseases, drought and salinity and suited to the climate and soil of tropical countries. The company is also undertaking research increasing the milk giving capacity and higher yield of meat of cattle and buffalo. The company has a strict environmental guidelines governing the use of chemicals, waste management, and water and energy use, and offers a range of education and literacy initiatives such as the provision of scholarships through to the operation of a college.

•

Advanced Chemical Industries (ACI) has also integrated the ideals of sustainable development into its business ethos. Identifying food security as a basic issue affecting the people of Bangladesh, ACI went into business with the goal of ensuring the people have access to food by working to ensure the farmer producers can grow their crops and manage their farms with the best agricultural products available.

Improved reputation Whilst providing a quality product or service is typically considered to be the overriding criteria to develop a good brand reputation, Inclusive Businesses also feel that they are able to gain an improved reputation in the eyes of the consumers by making specific efforts to engage with the BOP population. By hiring and looking after the BOP as employees, and proactively engaging with the BOP in the supply and distribution chain, and by developing highly tailored products and services that directly meet the needs of the BOP consumer, Inclusive Businesses believe their reputation is enhanced within the marketplace which will in turn create brand equity. Engaging the BOP helps to build acceptance of a company amongst that sector of the population as it is seen as aligning with their specific needs rather than just seeking to make profit out of them which in turn leads to more sales of their product to target BOP consumers. Genuine and deep engagement with the BOP that leads to the development of a reputation of a usiness that is committed to caring for the country’s most needy can also assist usinesses to gain the buy-in from regulators and value chain partners to help further business development or expansion aspirations.

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Some companies such as BD Food, also recognise the return benefits of including the BOP in the production system as they become conscious about good quality food and then become converted consumers of the com any’s own roducts, whilst also informing others of the com any’s quality products. Create shared value Creating shared value doesn't actually sound like business, but in the business of caring and curing, the perception of shared value can be better marketing than paid advertising. Inclusive Businesses in Bangladesh believe that caring about the low income group is not only beneficial for the BOP population but is also good for their own businesses. GlaxoSmithKline (GSK) for exam le, has a glo al strategy called “Action for Access” that hel s im ro e access to medicine, accines, and healthcare infrastructure in “de elo ing” countries. Under the programme, medicine can typically be 25 percent cheaper than prices paid elsewhere. Whilst the com any’s rofit margins might e reduced in com arison to “de elo ed” countries, the com any gains access to a significantly large and growing marketplace of consumers. Some 20 percent of profits made in Bangladesh are re-invested into healthcare infrastructure projects; essential for effective healthcare delivery, with educational support programmes, medicine donations, healthcare projects, and community olunteering days (“ range Days”) other rojects acti ely ursued y the com any to benefit the BOP. Cheap labour supply It is perhaps not surprising that many Inclusive Businesses consider the BOP population who are by definition low-income earners, as a cheap supply of labour for their companies both as employees and through the supply chain. Whilst most Inclusive Businesses specifically pointed out that they paid minimum wage or the average industry award wage, the benefit of employing a cheap labour force was acknowledged by many, and often seen as critical to the success of the business. Many companies such as Lanka Bangla Finance and Panna Group identify strong domestic competition as a major challenge to their success. Keeping wages low is therefore one way in the company can remain competitive in the marketplace. For many Inclusive Businesses that employ the BOP a trade-off needs to be made; whilst companies can obtain a cheaper labour force, companies such as Viyellatex Limited acknowledge that additional training and capacity building is required due to the BOP population that they are engaging typically possessing more limited education and skills compared to other segments of the population. For Inclusive Businesses, engaging the BOP as employees is typically not about automatic wage increases, but about improvement of capacities, performance, productivity, and loyalty thereby leading to a higher potential income as a result of the improved worker performance, improved quality, higher productivity, and minimisation of costs (e.g. from recruitment, reduced production, percentage of losses or errors etc). Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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New market, improved sales, stable supply of critical inputs in supply chain New market access interest, improved sales and critical inputs in supply chain were other strongly cited benefits for Inclusive Businesses in engaging the BOP. For companies, the 68 million low-income earners represent a considerable consumer market for their products and services who can potentially drive sales growth if tapped into effectively. Moreover, the BOP are suppliers of critical inputs into company products and services; not surprising given some 26 million Bangladeshis working in agriculture, forestry and fisheries, for example, and most of whom also represent the BOP. Without access to the products supplied by the BOP Inclusive Businesses would be paying higher prices for the same locally made products or alternatively have to import them at a higher cost, which is many cases may also make the business unviable.

Benefits of engaging the BOP, for the BOP Inclusive Businesses see a range of benefits for the BOP that range from employment and income enefits through to the B P o ulation’s a ility to access roducts and ser ices that are tailor-made to their needs. Many Inclusive Businesses indicated that they are also contributing to sustainable development commonly through CSR activities, access to technical assistance, know-how and vocational training.  Figure 19. Benefits of engaging the BOP, for the BOP

Employment benefits, income, and services seen as key benefits for BOP Employment opportunities Increased income for suppliers/distributors Access to technical assistance/training Access to new products and services Access to basic services Access to credit Improved nutrition

Question: If your company is plans to engage with the BOP, what benefits to the BOP do you aim to achieve? Please rank the top 3 benefits.

Access to new markets Access to technology Access to financial services No response Secure and long-term customer

Rank 1

Access to housing

Rank 2

Rank 3

Other 0

5

10

15

20

25

30

Source: SNV & BetterStories Private Sector Interviews 2012

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Employment opportunities Due to a range of factors the BOP population face a number of challenges to successfully gaining employment in the formal labour market, these might include cultural barriers such as women traditionally being required to not leave the family home, through to limited education and skills qualifications, or geographical barriers such as rural isolation. With a majority of Inclusive Businesses engaging the BOP population as employees through a range of innovative strategies, the BOP is able to obtain employment when they ordinarily might not be able. Fashion and lifestyle product retailer, Aarong, engages a BOP population of some 65,000 people through its 13 production centres that have been specifically located in areas accessible to the BOP population. Fair Price International (FPI) trains underprivileged rural girls who have not been able to complete their studies or ha e oor li ing conditions as “Info Ladies” who tra el from door-to-door by bicycle to communicate general information to the many of the women of the BOP who are unable to leave the house. Inclusive Businesses who prioritise the employment of the BOP population such as Apex Adelchi Footwear Limited will typically provide in-house technical skills development training to enable the people to work in their company when they ordinarily would not be able.  Case study: Grameen Shakti Background: ounded y Professor Mohammad Younus, Grameen Shakti is one Bangladesh’s most successful market-based renewable energy social development programmes, reaching millions of rural villagers across the country. Based upon the development of Solar Home Systems and other renewable energy technologies, Grameen Shakti claims to be one of the largest and fastest growing rural-based renewable energy companies in the world. As of December 2009, Grameen Shakti has installed more than 320,000 Solar Home Systems in Bangladesh’s rural areas, equating to almost 9,000 Solar Home Systems installed per month. The company has also introduced Improved Cooking Stoves and Bio-gas to rural households, identifying a need for a fuel efficient and cost effective source of energy for simple purposes such as home cooking. Waste from the Bio-gas process can also be used as fertilizer to assist indirectly in food security. The company attributes its success to its unique approach which blends market and social forces together in order to ring the world’s most u -to-date technology to the impoverished rural people of Bangladesh. Serving the BOP: Grameen Shakti aims to bring green energy, improved health, income and green jobs to the rural BOP population of Bangladesh. Grameen Shakti works directly with the low income segment as consumers of their renewable energy products. The company estimates that they have accessed at least 1,000,000 families with their Solar Home System up to 2012. An integral part of the company sales strategy to the BOP is to offer soft credit and step-by-step installments of payment to make their products more affordable to their customer base. Product pricing is extensively researched in order to ensure the average family will have the capacity to make the installment payments without significantly impacting on their household budget. The technology offers villagers a permanent and clean source of energy for their basic power requirements that is cost-effective. Growth potential: Due to the high cost of research and development, Grameen Shakti initially had conservative expectations for growth, selling only 228 Solar House Systems from 1996 to 1997. Since then the volume of Solar House Systems installed has skyrocketed, taking the company three years to reach four digit sales of their product, four years to reach five digit sales, and a subsequent four years to reach six digit sales. By the end of 2012 the company had installed 1,000,000 Solar Home Systems. The company has had similar success with its Bio-gas Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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plants; installing only 30 units in 2005, the company has since installed 24,206 Bio-gas units by 2012. The company is expecting similar growth with its Improved Cooking Stoves. Whilst there is considerable demand for all three of Grameen Shakti’s renewable energy products, the company has expressed that it is experiencing supply chain management setbacks. The company also identified insufficient skilled manpower as an obstacle to serving the level of demand. Access to finance is also seen as an obstacle to growth due to the prohibitively high interest rates offered by commercial banks. Financial needs: Whilst Grameen Shakti claims to be financially self-sufficient, they are seeking a low interest loan of around $600,000 for use in training field workers and labourers.

Increased income for suppliers or distributors Intrinsically linked to employment (frequently for women), Inclusive Businesses also identify increased income for BOP suppliers and distributors as a key benefit of their engagement. Due to efforts made by the Inclusive Businesses these suppliers and distributors are able to earn a higher income than they would otherwise typically be able to obtain from a non-inclusive business. Rahim Afrooz Superstore for example, has increased the income of its suppliers by building the capacity of small and medium suppliers in ways to increase the volume of production, thereby leading to an increased, steady and more reliable income for the BOP suppliers. This may equally be achieved by working with the BOP to improve the scale, productivity, quality and variety of the goods or services supplied. Many companies that employ door-to-door distribution strategies take in previously unemployed members of the BOP population thereby not only providing them with a job, but also a new source of income. FPI on the other hand contributes to increasing the income of suppliers by purchasing products directly from B P su liers such as farmers through their many “telecentres” at fair rices. By remo ing the middle men, FPI is able to ensure a higher price is paid to the farmer, and the consumer gets a lower price for the good. Moreover, because FPI also provides farmers with information about the mechanics of the supply chain including market price updates, suppliers are better protected from exploitative middle men. Access to new products & services tailor made to their needs that contribute to their livelihoods The provision of new products and services specifically tailored to BOP consumers is commonly seen by Inclusive Businesses as a core benefit. Renata Limited, a company with a core business in medicine, develops inexpensive products that can be accessed by BOP consumers such as antibiotics and birth control ills. The com any’s successful a y s rinkles product was also specifically designed to address the nutritional needs of children at the base of the pyramid. Likewise, financial institute INAFI has undertaken extensive research of the BOP population to ensure its micro-insurance and remittance services specifically respond to the needs of the BOP population that includes outpatient, inpatient and compensation at an affordable rate and a streamlined service that Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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ena les claims to e settled quickly. INA I’s strategy therefore ro ides the B P o ulation with access to micro-insurance that they could not obtain elsewhere. Access to technical assistance, know-how & vocational training Identified as a benefit to the BOP population by a significant number of Inclusive Businesses is their access to technical assistance, know-how and vocational training. With such training BOP employees, distributors and suppliers are empowered with new livelihoods, more efficient ways of working that result in increased productivity and potentially higher incomes. GETCO Agro Vision for example, runs awareness raising, capacity building and training programmes for BOP farmers relating to their products and services. In order to introduce new hybrid varieties of different types of vegetables farmers are educated in routine training sessions in the field. The training undertaken by FPI of underprivileged rural girls as “Info Ladies” to ro ide information to BOP farmers and their families and also retail FPI products not only gives the Info Ladies a job and income, but also builds their confidence, and increases their sales and entrepreneurial skills. In addition, the farmer benefits with better know-how on how to use the product and ways in which to improve his / her farming practice, thereby achieving better results and a higher income. TdK (Bangladesh) Limited, manufacturer and exporter of leather and jute products, specifically identifies skills training of BOP employees in its business strategy in order to grow its number of suppliers and employee base. This not only helps the company, but serves the BOP with skills and jobs that they may not ordinarily have been able to access. Access to basic services Inclusive Businesses also strongly identified access to basic services as a key benefit that can companies can help contribute to the BOP. As a whole, the BOP are typically characterised as having varying but generally inadequate levels of access to basic services such as water, sanitation, health and education. Typically Inclusive Businesses will customise these products and services in consideration of the challenges and issues that are specific to the BOP, for example, the production of low-tech alternative cook stoves, low cost solar cells, or low-priced micro-insurance with efficient turnaround with claims. Inclusive Businesses who target the BOP, therefore identify these gaps as potential business opportunities. By engaging the BOP, Inclusive Businesses are therefore not only helping to develop and deliver goods and services based upon a strong business model for growth, but are also helping the BOP to increase their quality of life.

Inclusive Business critical success factors Inclusive Businesses see a growing consumer confidence as the largest opportunity for business expansion. This is followed by rise in domestic consumption, increased access to technology, company innovation, export opportunities, and new customer segments.

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These can be roughly divided into:  Increased market size (growing consumer confidence and consumption, export opportunities, and new customer segments in the base of the pyramid); and  Improved company operations (increased access to technology and Company innovation) Breaking the critical success factors down in this way helps to prioritize assistance to companies operating in the BOP.

 Figure 20. Drivers of business growth

Market size and company operations are seen as the main drivers of growth (or prerequisites for growth) Growing consumer confidence Rise in domestic consumption Increased access to technology Company innovation Increasing export opportunities

Increased market size

New customer segments in the BOP Favourable business climate

Improved company operations

Increased access to capital

What do you see as the 3 main opportunities to accelerate the growth of your company? Please rank the top 3 from highest to lowestbarrier.

Lower input costs Government incentives

Rank 1

M&A opportunities for company to expand

0

5

10

Rank 2

15

Rank 3

20

25

30

35

Source: SNV & BetterStories Private Sector Interviews 2012

Increased market size •

Growing consumer confidence

Bangladesh’s consistently growing GDP that has a eraged a out 5 ercent o er the last 15 years has carried with it a growing middle class and an increasing ability and interest to spend. Moreover, with many local Bangladeshi companies maturing into competiti e ex orters, “Made in Bangladesh” has never held so much acceptance, credibility and pride in the minds of local consumers than it does today.

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Bangladeshi consumers are more willing to spend – and spend on locally made products – than they have ever been before. •

Rise in domestic consumption

With the growing middle class and increasing purchasing capacity of people at the BOP, domestic consum tion is rising strongly. Dhaka, the ca ital of Bangladesh was formally known as the “City of Mosques” ut is erha s now etter known as the city of sho ing malls. The country is caught up in a spending spree, with new restaurants, superstores, chain retail shops and markets seemingly being opened up every day all over the country. With a rise in absolute income, the Bangladeshi people have increased discretionary income and increasingly purchasing lifestyle products and experiences such as domestic and overseas vacations. Indeed, the economic trends are that this will not only continue, but will increase as the population gradually shifts from a young age-group bracket (two-thirds of the population are under 35 years old) to working age. The rise in consumer confidence and spending, particularly on locally made products, creates natural opportunities for Inclusive Business in employment, distribution, and consumption. •

Growing export opportunities

Bangladesh has also been enjoying a growth in exports. Whilst it still remains largely dependent on remittances and ready-made garments, companies feel confident that there is a high potential for a number of sectors including Information Technology, Pharmaceuticals, and Agro-processing to become increasingly export oriented over the next few decades. Whereas Bangladesh has traditionally been an importer of electronics until five years ago, typically assembling parts to produce finished ones, companies such as Walton, have identified significant export opportunities within the Middle East, whilst Pran Foods with their agro-processed products have found export markets in India, Bhutan and Myanmar. Increased access to technology Bangladesh is fast moving to adopt all the latest technologies that it can get; it is estimated for example that 85 percent of its population now owns a mobile phone -- 100 million active users -- and 20 percent have internet access. For businesses, process automation is becoming increasingly popular and local software developer companies are rising in number to help meet the challenge. Bangladeshi companies increasingly see sourcing the latest technology as critical to doing businesses. Technology is not only helping companies in Bangladesh to develop new products and increase sales, but the rising pool of talent and technological know-how is also helping the country to build a reputation in the region of being a new Research & Development Hu , attracting some of the world’s leading innovative companies. Samsung, for example, has opened a Research and Development (R&D) centre in Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Dhaka, and Google has started direct recruitment of Bangladeshi engineers. Local companies like Incepta Pharmaceuticals are also investing hugely in new product development, technology transfer and alternative medicine. Com anies also see technology as a huge “leveller” for the B P who can access ser ices through technology that would ordinarily be out of reach. Mobile money service bKash for example, utilises mobile phones and mobile stalls to enable people to undertake financial transactions without having to access a bank. The exponential growth of the company is testimony to the transformative power of technology to the BOP and their willingness to adopt new approaches, as well as the clear economic benefits that it can have for companies when used well to target a clear socio-economic gap. Company innovation & Whilst companies see innovation as integral to success and new ground is being broken, there are considerable opportunities yet to be harnessed. With a little facilitation there is the opportunity for significant gains. Technology company Onnorokom Group, for example, locally developed an electronic voting machine that has helped save the government a huge amount of foreign currency by negating its need to import the costly technology from overseas.

Key challenges to the growth of Inclusive Business Inclusive Businesses identify a range of barriers to the growth of their companies that range from the challenges of a poor business climate and regulatory environment, through to the effects of poor infrastructure, and a lack of access to capital. Most of these challenges are environmental and beyond the ability of a single company to address. However, the third highest ranked barrier -- and equal highest priority -- was access to capital, which can indeed be partially addressed by a fund. The fourth highest ranked barrier -- high cost of inputs -- becomes a strong reason to engage in inclusive business. Corporate governance will most likely be addressed to some extent through changes need to access capital.

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 Figure 21. Key challenges to the growth of Inclusive Business

Access to capital is a key challenge for growth, as is the cost of inputs; labour costs are not Poor business and regulatory climate Poor Infrastructure Lack of Access to Capital Lack of government incentives High cost of inputs Poor corporate governance

What do you see as the 3 main barriers to the growth of your company? Please rank the top 3 with 1 being the most significant barrier

Lack of access to competitive technology Competition from domestic companies Saturated customer base

Rank 1

Competition from international companies

Rank 2

Rank 3

High labor costs

0

5

10

15

20

25 30 No. Respondents

Source: SNV & BetterStories Private Sector Interviews 2012

Poor business climate and regulatory environment According to the Inclusive Businesses surveyed, there is significant room for improvement in terms of the business climate. Companies are being held back by a lack of inclusive public policies addressing key bottlenecks or alternatively policies that do not help create an enabling environment for Inclusive Business investments to flourish. In Bangladesh national and local government bureaucracy and a general lack of predictability or consistency in the application of regulations is constraining the development of the private sector. Government can attract much more direct foreign investment and encourage investment from local and non-resident Bangladeshis alike by streamlining the bureaucracy an adopting a more consultative and participatory approach to changes in regulations. Poor infrastructure Many Inclusive Businesses believe that the growth of their industries, in particular Manufacturing and Real Estate, has been stalled over last few years largely due to a lack of sufficient power, energy and good telecommunications.

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With sufficient electricity and gas to power new plants and factories Bangladesh would be able to make significantly faster progress in terms of creation of new jobs and rising income, directly benefitting the BOP population. Lack of access to capital Both the low-income population as well as companies have difficulty in accessing finance when entering into Inclusive Business engagements. Alternatively, there may be limited flexibility in the terms of the provision of capital making it difficult for companies to invest in Inclusive Business projects. For the BOP, there can be difficulties in accessing secure loans and other forms of financing that would allow them to participate in an Inclusive Business model or improve their livelihoods. Companies have, on the one hand, complained about a lack of capital, but on the other stated that they have always been able to find the money when needed. This may have been largely true for most of the big-sized companies and as well as the relatively small ones.  Figure 22. Source of finance for Inclusive Business* Grant 16% Equity 32% Guarantee 7%

Debt 45% * Representative only of those who responded to the question

Source: SNV & BetterStories Private Sector Interviews 2012

Banks and financial institutions in Bangladesh have traditionally favoured large companies with a strong track record of performance making bank loans the most used source of capital. Smaller companies can also access bank credit if they have real assets to use as collateral. Those that don't have collateral can't access bank credit because banks don't offer cashflow based lending. These companies have usually managed to obtain micro-finance from NGOs or credit from friends and families.

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Innovative, fast-growing and medium-sized companies can therefore often suffer from a lack of capital at the time of critical growth. Often, such as within the IT sector, banks do not have the capacity to assess such companies, or on other occasions do not realise the sector potential, which was the case of the Pharmaceuticals sector at the beginning. The concept of equity capital is also far from being understood or hailed by companies in Bangladesh. Many of the large family-run businesses have a lack of references to conceptualise the role of equity capital which has hampered its widespread adoption. As a result, whist there is clearly great potential (a number of big players are currently eyeing Bangladesh as the next market to explore), this has resulted in fewer players in the Bangladeshi equity capital market. Note on limitations of this study This is a non-random sample of companies known to be engaging the BOP in some way. As a result, many of them already have accessed funding from non-traditional sources, such as NGOs, government grants, and funds. Based on how these companies engaged the BOP, up to 63% of companies had access to funding for their BOP ventures.  Figure 23. Current funding availability by BOP segment

Source: SNV & BetterStories Private Sector Interviews 2012

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IV. Financing Inclusive Business Bangladesh has a robust equity market that can provide a useful guide to the potential opportunities and risks of establishing such a fund in Bangladesh. At the same time, the latest research by JP Morgan and the Global Impact Investment Network indicates an emerging industry around impact investing in other parts of the world that provides useful information with regard to the establishment of an impact investment fund in Bangladesh. In addition, Bangladesh has a rapidly growing stock market which by itself isn't necessarily an avenue to IB, but does provide a larger public database of companies operating in inclusive businesses.  Figure 24. Bangladesh stock market trends 350 300

Number of listed companies (left axis) Market cap in $USD billion (right axis) Market cap/GDP in percent (right axis)

25 20

250 15 200 10 150 5

100 50

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: World Bank 2011

As part of the market scoping effort, interviews were conducted with 13 fund managers / equity investors in order to assess the viability of an ADB-anchored Inclusive Business fund in Bangladesh and to identify key factors such as attractive industries in which to invest as well as possible constraints. An additional four interviews of potential co- investors was also conducted with both corporate entities and high net-worth individuals, in order to gain a further insight into interest in the Inclusive Business fund. The full questionnaire can be found in the Appendix 3. Information imparted from participants was then coupled with a review of relevant literature in order to build a broader picture of the Bangladeshi private equity market and trends.

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Bangladesh has a robust and growing equity market Like most emerging markets, the stock market of Bangladesh is dominated by equity securities. There are only three listed bonds in the bourses of Bangladesh. Growth in the equity portion of the market is strong with a compound average growth rate of 35.3 percent from 2001 to 2011. At the same time market capitalization as a percentage of GDP has also increased from 2.4 percent in 2001 to 21.3 percent in 2011. The number of listed companies has increased each year from 2001 to 2009. This fell dramatically in 2010 as small companies with poor transparency or corporate governance -- as well as normal attrition -- were delisted by the listing authorities.. Listing authorities and the government of Bangladesh have now prioritising transparency and corporate governance as key areas for improvement. Market capitalization of 2009 increased by 122 percent as delisted companies constituted only a small portion of total market capitalization of the country.

 Figure 25. At 21% of GDP, Bangladesh's stock market is catching up to the BRIC nations

40

India

95 38

Brazil

63

2010

27

China

Bangladesh 2011

2004

55 21

Ratio of stock market capitalization to GDP (percent)

Sources: Bloomberg, IMF Despite its rapid growth over the past ten years, Bangladesh stock markets are still in their infancy, with a market capitalization to GDP ratio of just 21%% in 2011 -- about a quarter of that of slightly more advanced emerging markets.

Sovereign risk is very low for an emerging market Just a few years ago, investors hardly took sovereign risk into account -- checking out Standard & Poors' or Moody's ratings was enough due diligence to suit most investors. Events in Europe have brought into sharp relief the dangers of ignoring sovereign risk or depending on the guidance of ratings agencies.

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One of the most important indicators of sovereign risk is the ratio of government debt to GDP. Given that governments can typically tap into 10-30% of GDP as tax revenue and then save just a fraction of that to pay down debt, a debt/GDP ratio begins to get become a concern at around 50% and is usually out of control at 120%. The public debt to GDP ratio in Bangladesh is 32 percent in contrast to India and Pakistan which have ratios of 68 percent and 62 ercent res ecti ely. In addition, Bangladesh’s external de t to GDP ratio is 21.6 percent (less than 50 percent is typically considered safe), and the country has the capacity to continue investing in infrastructure and industry without expanding its external debt thanks to its high level of remittances from overseas workers. Low external debt and high level of remittances combine to reduce the sovereign risk for fixed income investment in Bangladesh, increasing the availability of funds with lower yields. This provides a strategic advantage for an Inclusive Business Fund in Bangladesh. Infrastructure and industry investments in Bangladesh are likely to bridge the economic divide often caused by geographic distances and lack of easy and affordable communications.  Figure 26. Bangladesh has a lower debt/GDP ratio than most comparable nations in the region

Debt to GDP ratio 2012 Japan USA India Pakistan Vietnam Thailand Bangladesh China 0

50

100

150

200

250

Source: World Bank estimates 2012 except for Bangladesh (CIA World Factbook estimate 2012) Portfolio investment still in its infancy A major issue with the Bangladeshi equity market is its high volatility -- typical of immature stock markets -- which results in portfolio investment being very low. Equity research is also not well established, being a minor market -- about 1% the size of Google in 2005. Nevertheless, as the market capitalization continues to grow, it is reasonable to expect more in-depth market research and stock market information to be developed. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Positive economic expectations Fund managers had mixed expectations on the performance of the Bangladeshi economy in the shortterm. Of the 12 interviewees, seven were positive about the economy for the next 12 months, five were negative and four were neutral. The negativity may attributable to the current global economic downturn and uncertainty over the upcoming national election. With regard to the state of the economy over the next 5 years, all interviewees held positive views, with a general belief that progress would be made in removing road blocks such as a lack of access to energy for businesses.  Figure 27. Economic expectations over the short- and medium-term

Source: Fund Manager & Co-Investor Interviews 2012

Unlike many developing countries, private equity is a new concept in Bangladesh. Only two private equity fund managers are operating businesses in Bangladesh, both of which are relatively new entrants. There are also a number of other investment companies that invest their own funds in private companies. Bangladesh has also only recently seen the establishment of its first venture capital company ut this situation is likely to grow quickly gi en Bangladesh’s strong economic erformance. A summary of the funds interviewed is included in the appendices.

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Analysis of findings of fund manager survey The 12 fund managers were asked to rank different sectors according to how attractive they considered them and how viable they considered the sectors for investing in the BOP. Fund managers were also polled about their concerns about investing in these companies and what they considered the most important points to consider when making investments. Our analysis shows that: 

There was a direct correlation between what fund managers considered attractive investments and what they considered to be viable for involving the bottom of the pyramid



Energy and agriculture are the most attractive sectors for both investment and involving the bottom of the pyramid. IT, Hospitality & tourism, Manufacturing, Pharmaceuticals and biotechnology, Education, Food & beverage, and Retail are also considered to be attractive.



Management team quality was the only thing more important than corporate governance when making private equity investments in Bangladesh.



Corporate governance (transparency, clarity of financial reporting, board oversight) is fund managers' number one concern when investing in Bangladeshi companies.



The two most important factors to consider when making private equity decisions in BOP ventures were standard business investment decisions that apply to all companies: Viability of the business model; and Financial returns.



At the end of the day, this is still a business decision and should be based first and foremost on the viability of the business and potential for financial rewards.

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 Figure 28. Very attractive vs. most viable industries to integrate low income segment

There is a clear correlation between industries that fund managers consider attractive and that are most viable for IB

Agriculture Energy IT Hospitality & tourism Manufacturing Pharma & biotech Education Food & beverage Retail Transport & logistics Banking & finance Water & sanitation Textiles & garments Real estate Oil, gas, and resources Life insurance Forestry

Most viable to integrate BOP Most attractive

0

2

4

6

8

10

12

Source: Fund Manager & Co-Investor Interviews 2012

With the single exception of Agriculture, fund managers ranked the attractiveness of the industry as an investment within one vote of the viability of the industry for involving the bottom of the pyramid through inclusive business. Agriculture is the very unsurprising standout, being the largest employment segment in the country and is generally associated with the bottom of the pyramid. Energy and agriculture are the most attractive sectors Nine out of twelve survey respondents identified the energy and agriculture sectors as the most attractive for profitable investment. Bangladesh has an acute energy shortage and much of the population -- mainly the BOP -- doesn't have access to grid power. The power shortage is one reason why the Energy sector is seen as lucrative for investment. According to the Bangladesh Power Development Board, the average demand for electricity is 7,500 MW per day while electricity production is only 5,000 MW. The government of Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Bangladesh is encouraging the establishment of power plants by guaranteeing fixed returns to power companies and is also providing subsidies to power companies for fuel price and exchange rate fluctuation risks. IT, Hospitality & tourism, Manufacturing, Pharmaceuticals and biotechnology, Education, Food & beverage, and Retail are also considered to be attractive industries for investment Information Technology (IT) has enormous potential to involve the BOP thanks to the rapid spread of mobile telephones and the build-out of the mobile network. As of June 2012, Bangladesh had 100 million mobile phone users, making it the 12th largest mobile phone market in the world. The textiles & garment, manufacturing and food & beverage sectors are also voted as being viable industries to integrate the low income segment. Manufacturing (including that of textiles & garments) is a boom industry in Bangladesh, employing some 6.7 million people, and receiving preferential treatment by EU countries. The selection of Food and Beverage Products as a viable industry for the low income segment may e a least artly due to Bangladesh’s gains in GDP growth and increased a ility to s end amongst other things. Education and Pharmaceuticals & biotechnology are generally attractive in a country with the demographics of Bangladesh -- reaping a demographic dividend -- where a combination of a young population and markedly lower birth rate mean people can spend more on each member of their family in terms of education and health. Transparency second only to management team quality in importance when investing in private equity in Bangladesh The quality of the management team is generally considered to be the key factor when deciding to invest in a company. This was reflected in the survey. Importantly, transparency was ranked second. This is a very different result from what we would expect to see in the developed markets of North America and Europe where transparency is expected. Companies with less transparency in their business activities will require a higher level of due diligence by the fund managers. This is a particular concern in Bangladesh.

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 Figure 29. Most important factors when making a private equity investment in Bangladesh

Transparency second only to management team quality in importance when investing in private equity in Bangladesh Management team quality

13

Transparency in business activities

8

Company track record

6

Cashflow

6

Growth history & projections

4

Anticipated return

3

Strategic fit with fund

2

Corporate responsibility

2

Brands/Products

2

Speed at which value can be created

1

Operational/Cultural fit

1

Other reputable investors

0

When considering the following most important factors in making a private equity or related investment in Bangladesh, please select and rank the top three below (1 being the most important):

Number of votes

Source: Fund Manager & Co-Investor Interviews 2012

The same skills that are most important are also the key concerns: Management and Transparency Fund managers viewed transparency and a lack of business skills as the main concern when making an investment in Bangladeshi companies. Poor business strategy and planning can also be viewed as business skills, while corporate governance and financial reporting are both closely related to transparency. The companies that can demonstrate good management and good corporate governance will clearly get better access to capital as professional fund managers take over from state development banks. This should result in positive outcomes through encouraging better corporate governance and merit-based promotion.

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 Figure 30. Most important concerns when investing in Bangladeshi companies

Management skill and Transparency are the two biggest risks when investing in Bangladesh 9

Lack of transparency

8

Lack of management skills

7

Poor business strategy & plan

6

Poor corporate governance

5

Significant reputational issues

4 4

Conflict of interest Unclear financial reporting

3

Difficulty to exit

2

Limited or no company track record

1

Lack of other investors & finance streams Issues with current shareholders No CSR

What would be the most important concerns/risks when making investments in Bangladesh? Please select up to 3 of the following concerns/risks

0 0 number of votes Source: Fund Manager & Co-Investor Interviews 2012

At the end of the day, this is still a business decision and should be based first and foremost on the viability of the business and potential for financial rewards. While investing in the bottom of the pyramid may be beneficial to society, fund managers made it very clear that it is still a financial investment in a company, which has to be viable and profitable. This works heavily in favour of IB because companies that are providing a valuable product or service will gain access to capital and be able to grow at an accelerated rate.

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 Figure 31. Most important factors when making a private equity investment in a BOP venture

As with any investment, the viability of the business and financial returns are the most important factors to consider for investing in a BOP venture Viability of the business model

12

Potential for financial returns

11

Potential for social returns

6

Track record of company with BOP

5

Clear pathway to exit

3

Strategic alignment with investment strategy

3

Overall company reputation/brand

2

Quality of product/service

2

Percent contributinon of IB to company

1

Innovation potential

1

Presence of other reputable investors

1

Prospects for growth

1

When considering (or if you were to consider) the most important factors in making a private equity investment in an Inclusive Business venture in Bangladesh, please select and rank the top 3 most important factors.

number of votes

Source: Fund Manager & Co-Investor Interviews 2012

With the business models of Inclusive Businesses being different to the “ usiness as usual” a roach, whereby companies work to create both social return and financial return, the challenge of achieving both objectives is considered by fund managers to be difficult, and a concern when making an investment decision into an Inclusive Business. There are also some difficulties in measuring social returns (there is no universally accepted metrics in which to measure it), which make it all the more challenging to meet a goal of generating social return when investing in an Inclusive Business. Finally, the track record of the investee company is also seen as a significant consideration. If a company does not have sufficient experience investing in inclusive businesses it will be difficult to generate a proper mix of financial and social returns.

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At the bottom of the pyramid, management skills and experience are critical Fund managers unanimously responded that a lack of skills and experience of management is a critical issue when investing in Bangladeshi companies focused on the BOP. As Inclusive Business is first and foremost a business, management skills and experience are critical for success. In Bangladesh however, there is typically a deficit in the skills and knowledge required to manage an Inclusive Business.  Figure 32. Concerns of fund managers in BOP focussed funds

Management skills and experience are fund managers' greatest concerns Lack of management skills & experience

12

Lack of grand funds/TA facility

5

Limited company track record with BOP

5

Unclear financial reporting

5

Poor business strategy & plan

4

Difficulty to exit

3

Weak prospects for financial return

3

Weak prospects for socail impact

3

Risks associate with BOP

2

Significant reputational issues

2

Lack of other investors & finance streams No Corporate Social Responsibility

Which of the following issues would you consider the top 3 greatest concerns when making inclusive business investments in Bangladesh?

number of votes

1 0

Source: Fund Manager & Co-Investor Interviews 2012

Fund management obstacles and interest The investors surveyed were asked about their concerns about setting up a fund, what the obstacles were, and whether they were interested in managing the fund. Ten out of twelve investors believe that fund managers in Bangladesh do not have the required experience to manage a BOP focused equity fund. That may be a potential obstacle. Given, though that eight out of 15 fund managers and co-investors expressed an interest in running the fund, it may be partly a case of self-interest determining the answer. Nevertheless, this does highlight the fact that fund managers in a BOP focused fund will have to spend significant amount of time researching the companies and getting to know the management.

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In this regard, offering a combination of interventions and training prior to any investment would increase the benefit to the fund managers, the fund principals, and the companies themselves. A pipeline of companies will be critical success factors In the chart below, we have highlighted the lack of viable pipeline companies, even though this is a middle ranking item in the survey. The point is that if a fund is put together and a management team put in place, then the first three obstacles -- fund management expertise, negative perception, and investor interest -- become moot. The first things the fund will need will be technical assistance support and a pipeline of viable companies.  Figure 33. Obstacles in managing a BoP focused fund

Fund management expertise and perception on returns beat out investor interest as largest obstacles to setting up a fund Lack of fund management expertise

10

Negative perception on returns

9

Lack of investor interest

7

Lack of techinical assistance support

4

Lack of viable pipeline companies

4

Lack of government incentives

4

Lack of standard metrics

4

Lack of multilateral funder interest

2

Perceived risks far outweigh returns

2

Ethical reasons

0

If you were to create an Inclusive Business-Focused Private Equity Fund in Bangladesh, what would be the greatest obstacles to effectively capitalizing and managing a successful fund (please select

number of votes

Source: Fund Manager & Co-Investor Interviews 2012

Measures of success for a BOP focused private equity fund In the survey, fund managers were asked how they would measure success of a BOP focused private equity fund. The answer contrasted with that shown in  Figure 31 on page 60 in which financial returns and viability of the business were clearly ahead of social returns. What we can conclude from this is that individual investments must be first and foremost financial investments that provide a positive medium to long term financial return. However, the fund overall should focus on those profitable companies that engage the BOP in socially positive ways.  Figure 34. Most important factor to measure the success of a BoP focused PE fund

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Most managers consider social returns to be at least as important as social returns

Greater Social return, 25

Equal social and financial return, 50

Financial return only, 17

Social return only, 8

0%

20%

40%

60%

80%

100%

Source: Fund Manager & Co-Investor Interviews 2012

Initial public offering the most attractive exit option Forty percent of interviewed fund managers considered a stockmarket Initial Public Offering (IPO) as the most attractive exit option. This provides a relatively straightforward way to exit from large investments with a significant profit. The growing volume of publicly traded shares on the stock market makes this option increasingly viable. Twenty seven percent of fund managers thought secondary sale (i.e. selling the investee company to another private equity fund), as the most attractive option. Trade sale (selling the investee company to other strategic seller), was considered as the third most attractive way to divest from a company. As there are only two private equity fund managers operating their business in Bangladesh and merger and acquisition is not o ular, these two o tions are ehind IP in the fund managers’ choice. nly 13 percent of fund managers considered refinancing as an attractive way to exit from an investment. Refinancing may not be a very good option for large investments. The broad range of exit strategy preferences are as likely determined by the industry and type of investment as the market or the company. For example. a small investment of $1 million

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 Figure 35. Most attractive exit option Refinancing 13%

IPO 40% Trade sale 20%

Secondary sale 27%

Source: Fund Manager & Co-Investor Interviews 2012

Despite the perceived lack of fund management skills, most fund managers are interested in managing the fund Of the fund managers and co-investors interviewed, eight would be interested to manage a potential ADB Inclusive Business fund, with a further two potentially interested based upon specific terms and conditions. Five fund managers and co-investors were not interested to manage the fund. Having an anchor investment by ADB was strongly identified as being required in order to provide credibility and trust and attract further investors. This is as one would expect: money is available to be made and fund managers want to make it.  Figure 36. Fund manager interest in investing in potential ADB fund Depends on terms & conditions, 2

Uninterested, 5

Interested, 8

Source: Fund Manager & Co-Investor Interviews 2012 Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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The key is not in finding someone to manage the fund for a 2-3% commission, however. While a good fund manager is essential, it is significantly more important to ensure that the fund manager has access to the right information. In the world of Bangladeshi business, which is considered to be far less transparent than more developed markets, it is going to be very useful -- and financially rewarding -- to be working with the companies entering the inclusive business area well before they are ready to accept funding.

Co-investor mapping As private equity and inclusive business are relatively new concepts in Bangladesh, it may be difficult to raise funds within the country for this type of fund. However, some of the interviewed investors did express interest in investing a portion of an ADB sponsored private equity fund, with some investors also providing a conditional willingness to invest in the fund. These four investors interviewed were: • Industrial and Infrastructure Development Finance Company Limited • Prime Prudential Fund Limited • Caravel Management, LLC. • Professor Mahbub Ahmed Coinvestor details are summarized in the appendices. Interviews with co-investors found that: 1. Investors generally expect a financial return of above the risk-free weight of 12.5% that can be earned in a one year fixed deposit. 2. Business viability and potential for financial returns are the key reasons to invest in IB 1. Investors generally expect a financial return of above the risk-free weight of 12.5% that can be earned in a one year fixed deposit. In relation to financial return, 50 percent of co-investors are interested to invest in the fund only for generating financial return. These investors are treating the fund as they would any other investment opportunity and are not as interested in the social return created by the fund. These investors expect to make a profit of well above the risk-free rate. The current commercial rate for one year term deposits is 12.5% in Bangladeshi taka and 6.5% in US dollars.

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 Figure 37. Deposit interest rates at Bangkok Commerce Bank Fixed Deposit Receipt Interest Rate i) FDR for 01 (One) month.

12.00%

ii) FDR for 03 (Three) months.

12.50%

iii)FDR for 06 (Six) months.

12.50%

iv)FDR for 01 (One) year.

12.50%

v)FDR for above 01 (One) year.

12.00% Source: Bangkok Commerce Bank website

A smaller portion of co-investors (25 percent), would however invest in the fund for social returns. These investors have other businesses from where they generate their desired financial return and are willing to invest in this solely to create a social impact. The remaining 25 percent of investors are interested in counting both financial and social return. These investors do not mind to get a lower financial return compared to the return of other investments. They will forgo financial return in order to make a positive impact on society.

2. Business viability and potential for financial returns are the key reasons to invest in IB Funds and fund managers consider that the investment itself should follow normal investment criteria - management, growth and profit, track record, etc. This aligns closely with what potential co-investors are suggesting about the fund's targeted internal rate of return. Moreover, the discipline of investing in the most profitable companies helps avoid misallocation of capital -- one of the drivers of high interest rates -- and rewards companies do business well. It should be noted that while there are plenty of companies that work with the BOP in some form or other, finding a company working with the BOP, making profit, and actually needing finance can be difficult without partners or associates on the ground working closely with the inclusive businesses who understand the business properly and has a good idea of the management capability.

Donor mapping The donor scan section aims to provide a map of the activities and priorities that donors are engaged in within private sector development in Bangladesh. The scan seeks to assess the current state of play and interest of donors in partnering with a potential ADB Inclusive Business Fund as either a co-investor or in the provision of a technical assistance facility.

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A rapid assessment indicated that the donor landscape in Bangladesh is mature, with 21 multilateral organizations, 26 international NGOs, and 61 embassies / country initiatives / bilateral missions, making a total of more than 100 donor organisations in the country. There are also a significant number of Bangladeshi NGOs. In order to gain a detailed insight into the industry, eight key informant interviews were conducted which focused on issues such as the viability of an Inclusive Business Fund in Bangladesh, the possible sectors such a fund should focus on, obstacles to establishing an inclusive business fund, and the likelihood of raising capital for the fund. These interviews were supplemented with desk research to broaden the number of donors covered and to gain more in-depth information. The overview of relevant donor partners is in the appendices. Summary of findings Donors are targeting Information, Communication & Technology (ICT), in addition to Agriculture and Textiles. The ICT sector in Bangladesh has potential to develop due to comparative advantages like cheap labour (the average wage for a programmer in Bangladesh is about half of that of an Indian programmer). Bangladesh is producing about 7,000 ICT related graduates a year from 21 public universities and 51 private universities. A large number of Bangladeshi students are also studying overseas in computer related subjects, especially in India. As wage levels rise in India, Bangladesh has an opportunity to attract more outsourcing of back office operations. In addition, Bangladeshis generally have better English skills compared to Chinese and Vietnamese which is a significant advantage for global companies. Most donors saw a technical facility linked to the fund as essential. There was a general view that the technical assistance needed to be flexible, and could range from marketing and helping to introduce sustainable standards in agriculture and textiles, through to pre-investment support on corporate governance. The needs of smaller firms are also likely to vary greatly form larger ones. As such, local providers should be used to provide services whenever possible. There is a growing interest in private sector engagement and inclusive business within the donor community in Bangladesh. This is driven by the growing belief that market based solutions are more sustainable and deliver at scale. The strong performance of the Bangladesh economy fuelled by a growing business class also makes the investment landscape more promising. A number of potential partner including DFID were very keen to learn more about the proposed fund due to its potential alignment with their own country priorities, although it is too early for donors to express commitment to supporting an Inclusive Business fund in Bangladesh.

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Conclusions Referring to our approach, we can make several broad conclusions about the environment, interest, and viability.

Enabling Environment

Private sector interst

Private equity market viability

•The current market and business conditions favour the development and growth of Inclusive Business in Bangladesh and has a wide range of potential impacts on the BOP •Companies currently have limited and selective involvement with inclusive business. •Most see the benefit as largely soft benefits, such as reputation and creating shared value. •Few saw involvement in IB as a direct path to improved profits. • Critical barriers include understanding of IB and Corporate Governance •The private equity market in Bangladesh is almost non-existant. However, the traded equity market is growing strongly and offers a clear exit strategy. •Key concerns with investing in Bangladesh IB companies are the perceived lack of management skills and poor corporate governance. •Returns should exceed the risk-free rate of 12.5% and deal sizes should be between $1-$10 million.

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The detailed conclusions are based on the original questions to be answered by this study:

Need

Interest

•Do inclusive businesses have access to the capital they need to achieve their objectives? •Are other financial organizations providing capital at rates below what could be considered a reasonable risk-weighted return? •Are the companies in Bangladesh interested in Inclusive Business? •Are they interested in Inclusive Business private equity funding? •What terms and conditions the companies would prefer?

•Is the macro-economic condition favourable to Inclusive Business? •Are the companies ready for Inclusive Business? •Are there enough skill sets in the market on Inclusive Business? Readiness •What is the level of appetite of the key stakeholders?

Strategy

•What are the steps needed to be taken in response to the above? •What size of enterprise and investment should the fund consider? •What are the priority sectors? •What type of instruments would be most suitable?

Need Companies don't have access to the capital they need to achieve their objective, and consider this as one of their key challenges to growth. This stems from the fact that banks in Bangladesh don't offer cashflow based lending to small and medium sized companies. Limited funding is also available from a range of NGOs, based on specific sector and/or geographic preferences.

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Access to capital is a key challenge for growth Poor business and regulatory climate Poor Infrastructure Lack of Access to Capital Lack of government incentives High cost of inputs Poor corporate governance Lack of access to competitive technology Rank 1

Competition from domestic companies

Rank 2

Rank 3

What do you see as the 3 main barriers to the growth of your company? Please rank the top 3 with 1 being the most significant barrier

Saturated customer base Competition from international companies High labor costs 0

5

10

15

20

25 30 No. Respondents

Interest The companies interviewed were all interested in engaging the BOP. However not many saw it as Inclusive Business. Some saw it as corporate social responsibility, while others saw it as a function of their core business. There wasn't a broad appreciation of precisely what Inclusive Business is. A significant majority of companies (76 percent) expressed an interest in leveraging financing streams in order to accelerate their growth into low-income market opportunities. Not all were open to private equity financing -- most preferred debt to equity (58%) and some preferred a guarantee (5%). As a rule, they preferred low interest soft loans at well below both the bank lending rate of 17% and the risk free rate (bank deposit rate) of 12.5%. We can't criticise them for that -any business in the world would prefer these terms. These were open ended questions and didn't force companies to choose between market rate loans and equity, which would change these findings.

Readiness With the Bangladesh economy booming, a government supporting international financing, and the explosion in telecommunications throughout the country, the macro economic conditions highly

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favour Inclusive Business. The main drawback is the high level of regulation and inefficiency within the government. In general, the companies interviewed were ready for Inclusive Business, all having some involvement with the bottom of the pyramid already. However, one area where investors in particular are concerned about the readiness of Bangladesh companies is with their corporate governance. The companies surveyed for this study were drawn from a non-random sample of Bangladesh businesses so the level of corporate governance cannot be extrapolated into the broader business population. Based on the concerns voiced by fund managers and investors, Bangladesh companies need to make significant improvements to their corporate governance -transparency, financial reporting, board oversight -- before they will be ready to accept funding. In addition, fund managers highlighted a possible shortage of true IB companies in the pipeline. Without more companies engaging the bottom of the pyramid through Inclusive Business as a core strategy -- rather than an offshoot of corporate social responsibility -- it may be difficult for any sizable fund to be fully invested in true IB companies. In terms of skills, there is a general perception that Bangladesh companies are lacking in business management skills. Specifically referring to Inclusive Business skills, these are as non-existent as the understanding of what Inclusive Business actually is. The companies surveyed had skills in dealing with the BOP which could be easily adopted to IB with some training or intervention. The level of interest of all key stakeholders was not assessed. The managers surveyed were universally interested in Inclusive Business. We have to assume that shareholders will be interested in any venture that is going to make a decent profit. Other key stakeholders -- employees and customers -- don't have a lot of say in business decisions.

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Strategy and recommendations Steps to be taken: Develop inclusive business awareness and offer technical assistance •

Bangladesh companies and related stakeholders need to understand that Inclusive Business is self-sustaining and profitable. An awareness building campaign is necessary to convince companies that involving the BOP in Inclusive Business is profitable and offers significant growth opportunities.

•

A tailored technical assistance facility is critical. This should include support with innovative business models and pre-investment services, particularly with regards to corporate governance,

Set up a fund •

There is clear potential for an IB fund. The ADB should set up a US dollar fund to invest in inclusive businesses in Bangladesh.

•

The fund should explore the possibility of a currency swap with either the Bank of Bangladesh or a commercial bank to neutralize currency risk.

•

The fund should be flexible enough to invest according to the opportunities available rather than be fully invested immediately. This could be done either through staged funding of the facility over 3-4 years, or making the fund a part of a regional IB fund.

•

The ADB should anchor the fund as lead investor. This is critical as it provides credibility to other in estors. ADB’s leadershi on inclusi e usiness can hel assuage concerns of other investors who may perceive that companies working with the BOP increase investment risk

Take a staged approach Offer technical assistance through ADB or other NGOs with business models and corporate governance over a period of 2-3 years before injecting equity into the company. This gives the company time to grow large enough to need the funding, will help the company develop a level of corporate governance that fund managers require, and give fund managers more confidence in the company's business model.

Size of investment and enterprise Enterprises should be large enough for a significant investment to still be a minority stake and small enough for any investment to have a significant impact. The minimum enterprise value should be

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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around $5 million and the maximum enterprise value $50 million. Enterprise value is defined as market value (or estimated market value) plus net debt. The size of each investment should be US$1 to US$10 million. Smaller investments than $1 million will burden the fund with high due diligence costs. The study also found that $10 million would cover the Inclusive Business needs of most, with working capital and capital investment (e.g. machinery, building etc.) being the most commonly required form of use.

Priority sectors In terms of prioritizing investments, the fund should focus on inclusive businesses that offer superior returns first and foremost. The sector priorities should be used to look for possible investments rather make investment decisions. The priority sector should be agriculture because of the high percentage of BOP engaged in agriculture and it was considered the most attractive sector for investment, both overall and for inclusive business. Secondary sectors include Energy, IT, Hospitality & tourism, Manufacturing, Education, Food & beverage, and retail. These sector priorities should not preclude the fund from investing in any other sector where an Inclusive Business offers superior potential.

Fund details The fund should be a US dollar fund with, if possible, a currency swap agreement with a bank to make all investments in Bangladesh taka.

Proposed fund size Investment time frame IRR Financing instrument Investment exit strategy Investment exit time frame Total tenure of fund Target segment & deal size Investment geographic focus IB priority sectors & BOP engagement Fund denomination Fee structure

US$ 50 million (either staged funding or part of a regional fund) 5 years 15 percent Private Equity/Debt Initial Public Offering (IPO) 5-7 years 12 years US$ 1 million to US$ 10 million Any of Bangladesh’s se en di isions Sector agnostic with a skew to Agriculture, Energy, IT, Hospitality & tourism, Manufacturing, Education, Food & beverage, and retail US dollar with currency swap Management fees (2.5 percent of total committed capital), Carried interest (20 percent of returned fund above initial capital)

Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Appendices Appendix 1: An important macro trend: Bangladesh's demographic dividend

74

Appendix 2: Business environment and economic progress

76

Appendix 3: Analysis of company sample

77

Appendix 4. Case studies

80

Appendix 5: Current engagement with the BOP

86

Appendix 6: Fund managers

95

Appendix 7: Co-investors

99

Appendix 8: Overview of relevant donor partners

101

Appendix 9. Private sector mapping survey

104

Appendix 10. Fund manager & co-investor survey

113

Appendix 1: An important macro trend: Bangladesh's demographic dividend Bangladesh is about to reap a demographic dividend. That is, 1. A high number of youth achieving working age and entering the workforce 2. Lower fertility rates mean parents can spend more time and finances educating each child. Sixty ercent of Bangladesh’s o ulation is under 30 years of age, with its median age eing 24 years old (34 percent under 15 years of age). This ratio is similar to other Developing Countries, and lower than countries such as Korea, Taiwan, and Singapore which have already gone through this phase.

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 Figure 38. Bangladeshi population age groups in 2012 ≥ 60 years old 7% 50-59 years old 7%

15-49 years old 52% ≤ 14 years old 34%

Source: Ministry of Health & Family Welfare 2012

Fertility rates in Bangladesh have fallen dramatically over the past 30 years, infant deaths also fallen. This enables parents to spend more time and money educating their fewer children, which historically has led to high economic growth (Japan in the 50s and 60s, Korea and Taiwan in the 70s and 80s, China and Vietnam currently).  Figure 39. Fertility rates over the past 50 years

Fertility Rates have fallen by two thirds since 1970 8 7 6 5 4 3 2 1 0

Source:

Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population

Prospects: The 2010 Revision

There are also other specific advantages to Inclusive Businesses of a large young population such as their quick adoption of technology bringing new scalable opportunities such as financial inclusion through mobile platforms.

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Appendix 2: Business environment and economic progress Lack of infrastructure, corruption and bureaucracy are big hindrances to doing businesses in the country. Nonetheless, Bangladesh ranks 24th in terms of “Protecting In estors” which is est in the South Asia region according to the DB Index of the World Bank. It has also shown enviable resilience to external economic shocks such as the US recessions in 2002 and 2008 and the economic crisis of South East Asia in 1997, but is facing a slow down due to internal crises such as the stock market crash of 2009 to 2011, large bank loan scams in 2012, and a significant energy shortage from 2009 to 2012. Climate and environment induced shocks such as flooding are also significant challenges that impact on the economic progress of the country.  Figure 40. Recent trends of macro-economic indicators

*

Indicator

Unit / Growth

Real GDP Inflation Credit to private sector Export Import Remittances Current account balance Foreign exchange reserve Exchange rate (average)

Growth (%) YoY growth (%) YoY growth (%) US $ Billion (Growth %) US $ Billion (Growth %) US $ Billion (Growth %) US $ Billion (% of GDP) US $ Billion (in months of Imports) Taka / US $ (Depreciation %)

2008-09 (Actual) 5.7 6.7 14.6 15.6 (10.3) 22.5 (4.1) 9.7 (22.4) 2.4 (2.7) 7.5 (3.8) 68.8 (0.3)

Jul-Mar, 2012 #Reserve 29 May 2012 %Average rate 29 May 2012

2009-10 (Actual) 6.1 7.3 24.2 16.2 (4.1) 23.7 (5.5) 11.0 (13.4) 3.7 (3.7) 10.7 (5.1) 69.2 (0.6)

2010-11 (Actual) 6.7 8.8 25.8 22.9 (41.5) 33.6 (41.8) 11.7 (6.0) 1.0 (0.9) 10.9 (3.7) 71.2 (2.9)

2011-12 (till April) 6.3 10.8 * 19.4 19.8 (8.4) 29.8 (8.7) 10.6 (10.4) * 0.45 (0.5) # 9.5 (3.0) % 81.9 (15.0)

Source: Bangladesh Bank 2013

Des ite these significant challenges, the largely ositi e outlook in ratings y Moody’s and Standard & Poor remains unchanged. Moody's rating has put Bangladesh on a par with the Philippines, three steps ahead of Pakistan, and one step higher than that of Sri Lanka, but below India. Easy repatriation of profit (no stringent condition applicable), no investment ceiling overall (even to particular industries),6 a huge untapped area for investment in infrastructure development, and a lower cost of labour have made Bangladesh an attractive business case for foreign and local investments. Moreover, Bangladesh has received positive forecasts from a range of international economic analysts; JP Morgan has included Bangladesh among the ‘ rontier our’ for its im ressi e economic and usiness otential; Goldman Sachs has du ed it one of the “next ele en nations to watch” for romising economic growth; and Morgan Stanley has predicted that the FDI inflow to Bangladesh will reach US$ 5 billion by 2015. Despite these positive outlooks, the Global Competitiveness Index 2011-12 indicates Bangladesh still has some way to go.  Figure 41. Global Competitiveness Index Global Competitiveness Index GCI 2011–2012 GCI 2010–2011 (out of 139)

6

Rank 108 107

Score 3.7 3.6

Bangladesh Bank 2013

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GCI 2009–2010 (out of 133) Basic requirements (60.0%) Institutions Infrastructure Macroeconomic environment Health and primary education Efficiency enhancers (35.0%) Higher education and training Goods market efficiency Labour market efficiency Financial market development Technological readiness Market size Innovation and sophistication factors (5.0%) Business sophistication Innovation

106 3.6 112 3.8 112 3.3 134 2.2 75 4.7 108 5.0 99 3.7 126 2.8 81 4.1 100 4.0 67 4.1 122 2.8 49 4.3 113 3.0 98 3.5 124 2.6 Source: World Economic Forum 2012

 Figure 42. Wealth and health Indicator

Year

Bangladesh

India

Pakistan

Income per person $ * PPP

1990

540

874

1200

2011

1909

3663

2786

Life experience at birth, years

1990

59

58

61

2010

69

65

65

Infant (aged <1) deaths per 100 live births

1990

97

81

95

2011

37

47

59

Child (aged <5) deaths per 1,000 Live births

1990

139

114

122

2011

46

61

72

Child (aged <5) deaths per 1,000 Live births

1990

800

600

490

2010

194

200

260

Child (aged <5) deaths per 1,000 Live births

1990

64

59

48

2008

94

66

80

Child (aged <5) deaths per 1,000 Live births

1991

38

49

no

2009

77

74

61

Child (aged <5) deaths per 1,000 Live births

1990

62

60

39

2007 36 44 31 Source: World Bank; UNCIEF; WHO; National Statistics purchasing-power parity

The significant decrease in infant mortality rates over the past 21 years has resulted in a significant skew towards a younger generation, commonly referred to by economists to as "demographic dividend" because of the medium-term benefits to the economy.

Appendix 3: Analysis of company sample The company sample included a diverse range of industries, company sizes, and types of relationships with the BOP. As shown below, the 55 companies interviewed covered the following sectors: Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Manufacturing (25 percent; 14 companies); Banking & Finance (13 percent; 7 companies); Food & Beverage Products (11 percent; 6 companies); Energy (11 percent; 6 companies); Agriculture (9 percent; 5 companies); Information Technology (9 percent; 5 companies); Pharmaceuticals & Biotechnology (7 percent; 4 companies); Retail (5 percent; 3 companies); and, finally, other industries represent the remaining 9 percent of companies in the sample.  Figure 43. Industry sectors of the market scoping company sample Retail 5% Manufacturing 26%

Pharmaceuticals & Biotechnology 7% Agriculture 9%

Information Technology 9% Banking & Finance 13%

Others 9%

Food & Beverage Products 11%

Energy 11%

“ thers” includes Education; Health Insurance; il, Gas & Natural Resources; Pro erty & Construction

Source: SNV & BetterStories Private Sector Interviews 2012

The sample included both private and listed companies as well as local affiliates of multinational corporations as well as social enterprises. The range of industries was selected based on potential growth in these sectors at the BOP. Growth industries were considered the primary focus as these are the industries where companies will require capital infusion. The table below lists the businesses surveyed the size of the company, the estimated growth potential and the BOP business model in terms of employed, suppliers, distributors or consumers. The data from the surveys was used to prepare the table, however in some cases when data was not provided a best estimate was used.

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 Figure 44. Market scoping companies showing sector, size, growth potential & BOP model BOP model Potential Name Products / Sector Size growth E S D C Consumer Products / Retail Aarong Apparels and home accessories L VH     Rahim Afrooz Superstores Ltd.A37 Retail superstore chain L VH  JITA Bangladesh Rural distribution of consumer products S M   Pran Foods Ltd Agro processing L VH  Kazi & Kazi Tea Estate Production, packaging, dist., exports & domestic M VH   Nestle Bangladesh Processed food and beverages L VH  BD Food Agro processing L M     Grameen Danone Foods Ltd Fortified yoghurt for children M M     Pharmaceuticals / Biotechnology Incepta Pharmaceuticals & Biotechnology M VH  Renata Limited Pharma & Biotech; Health & nutrition L H  ACI(Advanced Chemical Industries) Ltd Pharma, consumer brands and agribusiness L H   Manufacturing / Light Manufacturing Otobi Furniture M VH    German Bangla Bicycles Ltd Bicycle exporters L VH  Fortuna Shoes Ltd Footware M VH    Viyellatex Ltd Garments L VH  Bata Shoe Company (Bangladesh) Ltd Shoes, bags, socks, belts etc L M  Monno Ceramic Industries Ltd Tableware (e.g. plates, bowls, mugs etc) L M  Well Group (Sanji Textile) Fabrics L M  Singer Bangladesh Ltd Electronics consumer goods L H  Energypac Power Generation Ltd Green bulbs L H  Apex Adelchi Footwear Ltd Shoes, sandals, exporters L H   DBL Group Manufacturing of textiles and garments M H   TdK (Bangladesh) Ltd Leather goods, jute and recycled products M M   Energy Grameen Shakti Solar systems M VH  Panna Group Batteries M H   Rahimafrooz Renewable Energy Solar systems M H  Dimensions Ltd Diesel gens, hydraulic hose piping, solar panels M L  Beximco Petroleum Petrol S M   Allied Solar Energy Limited Supply solar components and install mini-grids M VH   Banking / Finance BRAC Bank Ltd SME banking, technology adoption L VH  ASA Micro financier with ancillary services L VH   bKash Banking and fin services; focus on low income group M VH  INAFI Network organisation of microfinance lenders S M   LankaBangla Finance Banking and financial services (including microfinance) L M  Agriculture / Agribusiness Multimode Group (Lal Teer) Hybrid seeds, research, biotech, development L VH     World Fish Centre Research M L  iDE Training and capacity building for rural enterprises S M  Neo Inventions Fish fillet export M H   GETCO Limited (agricultural arm) Manufacturing and sale of organic and hybrid seeds L H   Other Bestway Group Real estate, property, const (including low cost housing) L H   Fair Price International Ltd Producer's rights body S M  Jaago Foundation Education provider for disadvantaged children S M  Joyita Livelihoods capacity building for impoverished women S L  NR = No Response; SIZE (refers to annual turnover & no. employees): S = Small, M = Medium, L = Large; GROWTH (refers to forecast potential : L = Low, M = Moderate, H = High, VH = Very High

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Appendix 4. Case studies bKash Limited Background: bKash Ltd, a subsidiary of BRAC Bank, is a joint venture between BRAC Bank Ltd (Bangladesh), and Money in Motion LLC (USA). With a vision of ensuring the people of Bangladesh have access to a road range of financial ser ices, Kash’s focus is on hel ing the low income masses of Bangladesh to achieve broader financial inclusion through the provision of services that are convenient, affordable and reliable. Serving the BOP: According to bKash, approximately seventy percent of people in Bangladesh live in rural areas however only about 15 percent have access to formal financial services. These people need to either receive money from relatives or family members from distant locations to whom they depend, or to access finances in order to purchase essential consumer products and services. Identifying a real consumer need and potentially huge market segment, bKash works in collaboration with telecom networks to provide a secure, fast and affordable money transfer and mobile banking services to the lesser-served remote population of Bangladesh. Growth potential: Formed in 2011, bKash operates its mobile banking system through 3,600 distribution networks serving a customer base of some 70,000 registered users. With almost 75 million people falling within mobile network coverage, the company sees potential for considerable further growth articularly due to a fa oura le regulatory framework and Bangladesh’s continued inadequate anking infrastructure that restricts a large segment of the population from accessing financial services. The company acknowledges however, that illiteracy poses the biggest barrier to its growth due to it being linked to limitations in the uptake of new technology. Financial needs: The company has shown interest to receive a fund of US$ 5 to US$ 10 million preferably in equity however debt would also be considered providing there are SMART terms and conditions, and a viable goal. In the past equity Investment was their main source of funding (49 percent). Case study 2: Aarong Background: Aarong is Bangladesh’s largest retail chain of fashion and lifestyle roducts such as clothing, household items and jewelry. Originally a project of the Ayesha Abed Foundation (established 1978), Aarong is the result of the oundation’s efforts to ro ide a enues for employment and income generation for underprivileged rural women. Today, Aarong has a reputation for selling good quality products to both local Bangladeshis as well as non-residents, a result of comprehensive quality assurance measures. Approximately 70 percent of Aarong-retailed products are apparels, and 30 percent are home accessories. Serving the BOP: Aarong has also institutionalized large-scale female participation in its supplier-base as producers of indigenous handicraft goods in Bangladesh. Initially established to create job opportunities for rural women in just one rural community, today the company estimates that it provides direct Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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employment to some 1,500 low-income earners as staff – of which more than 1,000 are retail associates – in their 11 stores located across the country. It is estimated that a BOP population of some 35,000 mostly women artisans are directly engaged by the company (and a further 30,000 indirectly) through its 13 production centres specifically located in urban and rural areas accessible to the BOP. When multiplier effects are considered, the company estimates that it benefits some 320,000 people across the country, of which the majority fall into the low-income segment of the population. The company also provides a range of additional services for employees and suppliers including vocational training, the supply of raw materials for producers, credit facilities, day care services, free medical check-ups, and financial assistance for the treatment of illnesses. Growth potential: Aarong has significant grounds to grow beyond its existing 11 stores. With Bangladesh’s 150 million eo le shifting towards working age there is significant and realistic expectations for growth resulting from an bourgeoning middle-class and increases in discretionary spending on consumer products. With the development of a strong extension plan the company believes it would be able to engage many more women as artisan suppliers in other parts of the country. Moreover, the company has yet to tap into additional sales opportunities afforded by global boom in internet shopping and e-commerce which may open up new domestic and export markets. Key obstacles for growth according to the company include the absence of fair market competition, along with the lack of equilibrium in international trade exchange [please add a few words to explain what the “lack of equili rium in international trade exchange” actually means – needs to be more specific]. Financial needs: The company has shown interest to receive a fund of US$ 10 to US$ 12 million at an interest rate of between 8 percent to 10 percent for working capital. In the past equity Investment was their main source of funding (49 percent). The company has been borrowing from BRAC at a 12 percent interest rate. Case study 3: Lal Teer (Multimode Group) Background: Identifying a gap in the market, in 1995 Multimode and Simon Groot of the Netherlands set up Lal Teer to develop and sell customized hybrid seeds to local farmers. Despite economic and technological constraints, extensive research and collaboration with local communities from 64 districts has turned the venture into the largest biotechnology and seed production company in Bangladesh. Key products developed by Lal Teer include the development of seeds resistant or tolerant to pests and diseases and adverse climatic conditions, as well as higher yielding livestock in the production of milk and meat. The com any estimates that o er 35 ercent of Multimode’s re enue is now deri ed from this sector. Servicing the BOP: The end benefit of the Lal Teer products to the BOP includes greater food security and increased income through higher-yielding and more resilient crops and livestock, and improved health resulting from the increased nutritional value provided in its products and by- roducts. Lal Teer’s products, pricing and distribution strategies, and its management provisions are specifically designed to access and benefit the BOP segment of the population. The company considers its agricultural business as entirely geared towards the BOP, primarily as consumers (75 percent BOP), and then as suppliers (50 percent BOP), employees (50 percent BOP), and distributors (45 percent BOP). The company estimates Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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that it directly employs approximately 500 people from the low-income segment, and over 250,000 people indirectly from the low-income segment. Lal Teer has hired and trained between 10,000 to 12,000 farmers in how to improve production. These farmers also have the option to sell surplus seeds obtained from crops grown back to Lal Teer; this way, the BOP comprises the consumer base, as well as the supplier and distribution chains. The company is highly engaged in CSR activities (from education and training through to fair employment and working conditions and environmental sustainability). Growth potential: Lal Teer has ositi e growth ex ectations o er the next twenty years. The com any’s brand of around 50 hybrid vegetable, jute, and cereal seeds, are currently marketed to rural farmers through approximately 5,000 stores and mobile vendors, with the company estimating it has approximately 80 percent of the market share, and 100 percent of the export market share to countries in the region lus a handful of Euro ean countries. n account of Lal Teer’s quality seeds, the company expects further growth. With the highest percentage of the Bangladeshi population involved in agriculture [what percent is it?] and also predominantly representing the BOP group, the company considers its farmer consumer base of its vegetable and cereal seeds as the largest emerging consumer market in Bangladesh. Lal Teer is also the only brand that exports hybrid vegetable and cereal seeds from Bangladesh, giving it 100 percent market share of the export hybrid seed market. The company is confident it now has the potential to significantly cut into the Chinese hybrid seed market. Financial needs: Lal Teer (Multimode Group) is interested in further investment in the BOP to increase company growth and profitability as well as gain a first-mover advantage in the market segment. In particular, Multimode is interested in setting up an investment fund to finance research and development (especially in livestock), grants, or long-term equity-based financing. Financial assistance is also needed to build additional infrastructure including the purchase of land, office buildings, labs, and cow sheds. The company requires approximately US$ 3 million for seed projects, expansion and working capital, and a further US$ 10 million for livestock development. The company prefers soft longterm financing in the form of equity and debt at an IRR of about 20 percent over 10 years. Case study 4: Grameen Shakti: Background: ounded y Professor Mohammad Younus, Grameen Shakti is one Bangladesh’s most successful market-based renewable energy social development programmes, reaching millions of rural villagers across the country. Based upon the development of Solar Home Systems and other renewable energy technologies, Grameen Shakti claims to be one of the largest and fastest growing rural-based renewable energy companies in the world. As of December 2009, Grameen Shakti has installed more than 320,000 Solar Home Systems in Bangladesh’s rural areas, equating to almost 9,000 Solar Home Systems installed per month. The company has also introduced Improved Cooking Stoves and Bio-gas to rural households, identifying a need for a fuel efficient and cost effective source of energy for simple purposes such as home cooking. Waste from the Bio-gas process can also be used as fertilizer to assist indirectly in food security. The company attributes its success to its unique approach which blends market and social forces together in order to ring the world’s most u -to-date technology to the impoverished rural people of Bangladesh.

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Servicing the BOP: Grameen Shakti aims to bring green energy, improved health, income and green jobs to the rural BOP population of Bangladesh [Please explain a little more about how the company is ringing “im ro ed health, income and green jo s”]. Grameen Shakti works directly with the low income segment as consumers of their renewable energy products. The company estimates that they have accessed at least 1,000,000 families with their Solar Home System up to 2012. An integral part of the company sales strategy to the BOP is to offer soft credit and step-by-step instalments of payment to make their products more affordable to their customer base. Product pricing is extensively researched in order to ensure the average family will have the capacity to make the instalment payments without significantly impacting on their household budget. The technology offers villagers a permanent and clean source of energy for their basic power requirements that is cost-effective. Growth potential: Due to the high cost of research and development, Grameen Shakti initially had conservative expectations for growth, selling only 228 Solar House Systems from 1996 to 1997. Since then the volume of Solar House Systems installed has skyrocketed, taking the company three years to reach four digit sales of their product, four years to reach five digit sales, and a subsequent four years to reach six digit sales. By the end of 2012 the company had installed 1,000,000 Solar Home Systems. The company has had similar success with its Bio-gas plants; installing only 30 units in 2005, the company has since installed 24,206 Bio-gas units by 2012. The company is expecting similar growth with its Improved Cooking Stoves. Whilst there is considerable demand for all three of Grameen Shakti’s renewable energy products, the company has expressed that it is experiencing supply chain management setbacks. The company also identified insufficient skilled manpower as an obstacle to serving the level of demand [Is this insufficient staff to install the products? Please can you check? I found the English a little confusing to understand]. Access to finance is also seen as an obstacle to growth due to the inhibitive high interest rates offered by commercial banks. Financial needs: Whilst Grameen Shakti claims to be financially self-sufficient, they would be open to taking US$ 612,670 for use in training field workers and labourers. The company would expect flexible financing arrangements with a low or zero interest rate for a period of five years. Case study 5: JITA Bangladesh Background: JITA Bangladesh is a joint venture Social Business between CARE International and Danone Communities dedicated to empowering women through an extensive network of enterprises, creating employment opportunities and improving access to market. Established in December 2011, JITA is considered to be a leading example in Bangladesh of an NGO project (the CARE Rural Sales Program) that has successfully transformed into an independent Social Business. The Rural Sales Program model involves using local rural women as door-to-door sellers who buy different company products from JITAa ointed local entre reneurs (‘hu managers’). The system is ased on commissions for different participants from private companies. Major multinational companies like Unilever, Bata, and BiC as well as local companies like Square and Lalteer Seeds are current partners in the rural sales activity. JITA is also increasingly focusing on developing consumer knowledge, education and awareness in areas such as nutrition, hygiene, and high yield vegetable seeds by partnering with related companies in order to enable companies to deliver product-related information and knowledge to consumers. Recently JITA Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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has opened a new business arm devoted to gaining market insights, understanding consumer demand, geographical market mixes, and socio-economic patterns and changes over time with the purpose of supporting companies with new ideas, to identify product development opportunities, launch new products, test markets and develop Inclusive Businesses. Serving the BOP: The JITA door-to-door distribution network is generating a sustainable source of income for poor marginalized women who take and directly sell products to other members of the BOP located in Bangladesh’s rural areas. Starting with just 26 sales women in 2005, the number of Aparajitas has since reached 2,600 by the end of 2011. The sales women typically earn an income between US$ 12 to US$ 38 [is this daily, monthly? Unconverted value provided was BDT 1000-3000] which provides the economic means to enjoy a higher standard of living for themselves and their families. JITA distributed products now reaches more than 10 million consumers across Bangladesh, most of whom are from the BOP. JITA has also established more than 100 local entrepreneur / hub managers in scarce local job markets, and created employment opportunities for a further 200 appointed product delivery men (JITA Ser ice Persons). JITA’s ‘Health / Hygiene & Nutrition’ campaigns create rural awareness regarding to different aspects of rural life.

Growth potential: JITA reports that the expansion of the Rural Sales Programme operation with different private partner companies was swift and required only a single initial investment from Danone Communities in order to become the first social enter rise in CARE’s history. The strength of its growth has lead the organisation to believe that it has tapped into a massive market with a bright, prosperous future. Today, JITA aims to empower some 12,000 women as door-to-door sales women and become a create a far more sustainable and successful position in the Social Business arena, which would never have been possible if it had remained as an NGO project. The business also has expectations of being able to create 450 successful local entrepreneurs by covering 450 Bangladeshi Sub-Districts. Financial requirements: JITA is seeking to outsource an equity fund of approximately US$ 550,000 for the year of 2013 with minor shareholding facilities and a profit share of 33 percent for Danone and 67% by CARE Bangladesh [does this actually add up? Please double check figures. I cannot find this information in the survey spread sheet]. Case study 6: Viyellatex Group Background: The business model of Viyellatex Group, a renowned Bangladeshi textile and apparel manufacturing group established in 1996, is comprised of design and product development, sample, knitting, dyeing, washing, cutting, sewing and finishing sections. The Vieyellatex Client list includes prominent brands such as Puma, Marks & Spencer, Esprit, S.Oliver, Hugo Boss, Philip Van Heusen and Decathlon amongst others. A 100 percent export-oriented organization, the Group has successfully etched its brand name worldwide as a reliable manufacturer of textile products. The Viyellatex Group has recently diversified its businesses into tea plantations, logistical management and services, and power generation. Serving the BOP: Viyellatex’s strategy to engage the low income segment is rimarily through the creation of new jobs. With an increase in export volumes the company requires an expanded labor Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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force that will focus on hiring from the BOP segment of the Bangladeshi population. Currently a roximately 90 ercent of Viyellatex’s total la or force of 1,188 em loyees is directly linked with the BOP. A signatory of the UN Global Compact since 2009, the company places CSR as a central edifice of its ethics. Key focus areas of the company have been in health and education. Social development activities undertaken by Viyellatex Group include employing some 60 physically challenged people into its mainstream workforce, establishing seven pre-primary schools for underprivileged children in association with Save The Children (USAID), organizing annual Eye Camps for the local community (benefiting some 5,000 atients to date), and organi ing quarterly clinics for workers’ children, benefiting over 350 children since 2009. Growth potential: Beginning with just six lines in 1996, Viyellatex Group now has grown to more than 135 lines with a current average production capacity of 2.5 million per month and an approximate 2.2 percent to 2.5 percent market share in national exports (worth some US$ 13 billion) during the fiscal year 2010 to 2011. The company estimates its average annual growth rate to date as about 8 percent [please check this figure – I am not sure I have put it within the correct context]. The company has positive expectations for further growth and expansion and intends to not only employ more members of the BOP as employees, but also integrate the BOP into their business model within the textile sector as suppliers in backward and forward linkages [not sure how the forward linkages work for suppliers – can you please provide a small explanation of a few words?]. Financial requirements: In the future Viyellatex Group would potentially be interested in receiving funding of US$ 10 million in the form of debt to enable business expansion. [Please provide further information on financing terms and conditions if available].

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Appendix 5: Current engagement with the BOP Whilst all four modes of engaging the BOP – as consumers, distributors, suppliers, or employees are evident across multiple sectors, the employee and consumer models are most strongly represented.  Figure 45. BOP models according to sector Manufacturing Other Pharma/Biotech Energy Consumer products/retail Banking & Finance Agriculture/Agribusiness 0%

20% Employee

40% Supplier

60%

80%

Distributor

100% Consumer

Source: SNV & BetterStories Private Sector Interviews 2012

The type and range of BOP engagement models vary considerably from sector to sector. In banking and finance for example, the BOP is primarily engaged in just two ways; as consumers of the financial services, or within micro-finance organisations, also as employees. Such microfinance companies are spread throughout the country and may typically employ between 5 to 100 staff often directly from the BOP in district offices, although the salary level of such micro-finance employees may be a matter of contention in consideration of Inclusive Business principles of engagement with BOP employees. Beyond micro-finance, which isn't strictly IB, financial institutions are also expanding their mobile networks, which potentially bring more useful payment solutions and other banking solutions to the rural communities. In comparison to the more limited BOP engagement models seen in banking and finance, within the consumer products and retail sector the full range of BOP models are engaged – as suppliers of goods, deliverers of goods, employees, and as product consumers. An analysis of each of the four observed modes of engaging the BOP – as consumers, distributors, suppliers, or employees is provided below.

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Consumer model For Inclusive Businesses, adopting a consumer BOP model involves providing basic goods or services that are specifically developed to serve the needs of the BOP population, with affordability being the most common key feature.

IB organisations that are strongly focused on serving the BOP will often undertake market research to understand the needs of the BOP market as well as their specific limitations in being able to access particular products or services. The International Network of Alternative Financial Institutions (INAFI) provides micro-insurance and remittance services to some 115,000 members of the BOP. Through a demand and affordability survey of some 3,000 respondents, INAFI identified that rural poor are vulnerable and prone to a different set of risks compared to other segments of the population. They also found that the low-income group needed social protection including outpatient, inpatient and compensation at an affordable rate and with a streamlined service that could enable claims to be settled quickly. However, start-up and operational costs to service the geographically spread BOP population was estimated to be prohibitively high. One way INAFI overcame this was to partner with 14 NGOs which enabled them to operate their micro-insurance scheme through the NG ’s 140 ranches across Bangladesh. For renewable energy Inclusive Businesses engaging the BOP as consumers of their products is about providing energy to those off the grid or by providing cheaper, less polluting energy. For those who are off the grid (and unlikely to be connected for some time to come), renewable energy offers a life changing experience that poses little to no negative effects on health, unlike firewood for example, that can cause a range of health impacts. Panna Group for example, is a manufacturer of various types of batteries (e,g, pasengaka, IPS, Solar and PBC) that almost exclusively serves the domestic market. With a focus on the BOP as the consumers of its products, Panna Group set up the Panna Rural Development Foundation (PRDF), a social enterprise to provide sustainable energy solutions and services to the rural households and businesses of Bangladesh. In order to ena le the B P to take u PRD ’s renewa le energy roducts, customers are Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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provided with a complete package of product, service and consumer financing through a micro-credit and cash purchase system. The micro-credit facility operates from PRDFs own invested money. Another strategy to engage the BOP as consumers is to run awareness raising, capacity building and training programmes for target communities of Inclusive Business products or services. GETCO Agro Vision produces high quality F1 Hybrid, OP and organic vegetable seeds primarily for domestic consumption. GETCO sells its agro-products to BOP farmers by providing minimal prices and developing roducts that fill an identified need, such as the farmer’s need to e a le to increase the roduction of otatoes in order to fill the country’s shortfall of su ly. In order to introduce new hy rid arieties of different types of vegetables farmers are educated in routine training sessions in the field.  Case study: bKash Limited Background: bKash Ltd, a subsidiary of BRAC Bank, is a joint venture between BRAC Bank Ltd (Bangladesh), and Money in Motion LLC (USA). With a vision of ensuring the people of Bangladesh have access to a broad range of financial ser ices, Kash’s focus is on hel ing the low income masses of Bangladesh to achie e roader financial inclusion through the provision of services that are convenient, affordable and reliable. Serving the BOP: According to bKash, approximately 70 percent of people in Bangladesh live in rural areas however only about 15 percent have access to formal financial services. These people need to either receive money from relatives or family members from distant locations to whom they depend, or to access finances in order to purchase essential consumer products and services. Identifying a real consumer need and potentially huge market segment, bKash works in collaboration with telecom networks to provide a secure, fast and affordable money transfer and mobile banking services to the lesser-served remote population of Bangladesh. Growth potential: Formed in 2011, bKash operates its mobile banking system through 3,600 distribution networks serving a customer base of some 70,000 registered users. With almost 95 million mobile phones in the country, the company sees potential for considerable further growth particularly due to a favourable regulatory framework and Bangladesh’s continued inadequate anking infrastructure that restricts a large segment of the population from accessing financial services. Currently, only around 10% of the population have bank accounts, and most don't have access to physical bank branches. The company acknowledges however, that illiteracy poses the biggest barrier to its growth due to it being linked to limitations in the uptake of new technology. Financial needs: The company has shown interest to receive a fund of US$ 5 to US$ 10 million preferably in equity however debt would also be considered providing there are SMART terms and conditions, and a viable goal. In the past equity Investment was their main source of funding (49 percent).

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Distributor model Distributor BOP models used by Inclusive Businesses do not feature strongly in any one sector but instead are commonplace across a range of sectors, most notably within the consumer products and retail sector, manufacturing, and agriculture / agribusiness.

The use of door-to-door sales is a common distribution method employed by Inclusive Businesses as it allows the BOP to become involved without the need of additional resources. Grameen Danone Foods engages some 600 people from the low-income group as distributors of its dairy food products and has found that local distributers are also more trusted by the local community. Similarly, footwear manufacturer, Bata Shoe Company (Bangladesh) Ltd, uses the BOP as a part of its distri ution strategy. In Bangladesh’s many isolated laces, working through the connections of the JITA / CARE joint venture social business (see Case Study following), rural women are engaged to sell Bata shoes door-to-door as a part of a Rural Sales Programme. This not only creates a source of income for the women but also increases their entrepreneurial skills and is a source of empowerment. Due to the success of the programme Bata is considering to make the programme a part of its core distribution model and help it meet its Corporate Social Responsibility requirements. Some Inclusive Businesses on the other hand, implement capacity building of distributors to increase efficiency and sales. GETCO Agrio Technologies Ltd manufactures high quality and high yielding seeds that are priced to be accessible to BOP farmer producers. The seeds are distributed through a highly developed network of distributors and retailers who are provided with training and technical advice which not only helps to improve efficiencies for the company but ultimately also increases sales. Instead of using a distributorship, Lal Teer from the Multimode Group, an agri-business research and development organisation, introduced a retail marketing model that involves reaching grassroots level farmers through the deployment of mobile seed vendors in villages. To promote new varieties of seeds or other agricultural products Field Days are run and farmer information booths operated in village haats (a local weekly bazaar). Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Case study: JITA Bangladesh Background: JITA Bangladesh is a joint venture Social Business between CARE International and Danone Communities dedicated to empowering women through an extensive network of enterprises, creating employment opportunities and improving access to market. Established in December 2011, JITA is considered to be a leading example in Bangladesh of an NGO project (the CARE Rural Sales Program) that has successfully transformed into an independent Social Business. The Rural Sales Program model involves using local rural women as door-to-door sellers who buy different company products from JITA-a ointed local entre reneurs (‘hu managers’). The system is ased on commissions for different artici ants from ri ate com anies. Major multinational companies like Unilever, Bata, and BiC as well as local companies like Square and Lalteer Seeds are current partners in the rural sales activity. JITA is also increasingly focusing on developing consumer knowledge, education and awareness in areas such as nutrition, hygiene, and high yield vegetable seeds by partnering with related companies in order to enable companies to deliver product-related information and knowledge to consumers. Recently JITA has opened a new business arm devoted to gaining market insights, understanding consumer demand, geographical market mixes, and socio-economic patterns and changes over time with the purpose of supporting companies with new ideas, to identify product development opportunities, launch new products, test markets and develop Inclusive Businesses. Serving the BOP: The JITA door-to-door distribution network is generating a sustainable source of income for poor marginali ed women who take and directly sell roducts to other mem ers of the B P located in Bangladesh’s rural areas. Starting with just 26 sales women in 2005, the number of Aparajitas has since reached 2,600 by the end of 2011. The sales women typically earn a monthly income of between US$ 12 to US$ 38 which provides the economic means to enjoy a higher standard of living for themselves and their families. JITA distributed products now reaches more than 10 million consumers across Bangladesh, most of whom are from the BOP. JITA has also established more than 100 local entrepreneur / hub managers in scarce local job markets, and created employment opportunities for a further 200 appointed product deli ery men (JITA Ser ice Persons). JITA’s ‘Health / Hygiene & Nutrition’ cam aigns create rural awareness regarding to different as ects of rural life. Growth potential: JITA reports that the expansion of the Rural Sales Programme operation with different private partner companies was swift and required only a single initial investment from Danone Communities in order to ecome the first social enter rise in CARE’s history. The strength of its growth has lead the organisation to elie e that it has tapped into a massive market with a bright, prosperous future. Today, JITA aims to empower some 12,000 women as door-to-door sales women and become a create a far more sustainable and successful position in the Social Business arena, which would never have been possible if it had remained as an NGO project. The business also has expectations of being able to create 450 successful local entrepreneurs by covering 450 Bangladeshi Sub-Districts. Financial requirements: JITA is seeking US$ 550,000 to then provide loans to its network or entrepreneurs.

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Supplier model Those in the retail sector most heavily engage the BOP as suppliers of key inputs, with agriculture and manufacturing also a natural fit.

Rahim Afrooz Su erstores, one of Bangladesh’s largest chain of retail stores, engages the low income group primarily as suppliers of fresh agricultural-based products. After a recent merger with another leading superstore in the country, PQS, Rahim Afooz Superstores has enhanced its previously low margins by overcoming an identified supply chain setback, whilst at the same time expanded its number of retail chain outlets. To achieve this the company undertook a joint initiative with a business innovation facility that assisted it to build the capacity of small and medium fresh produce suppliers through the provision of technical assistance, know-how, and vocational training, thereby developing a range of robust supply chains. This has benefited the company by better ensuring stability in the supply of critical inputs and ultimately increased sales. Moreover, with the BOP engaged not only as suppliers but also as customers, Rahim Afrooz Superstores can better ensure that the products it sells are compatible with customer needs. Whilst Pran Foods, another retailer, engages some 30,000 people as employees (of which 18,000 are from the BOP), an even more impressive 70,000 people from the BOP are associated with the company as farmers. One of the key Pran Foods supplier model engagement strategies was to introduce mango plants to new parts of Bangladesh that previously had not grown the fruit. People were encouraged to get involved in mango production through the provision of free mango plants and the incentive of a buyback guarantee. With the suppliers not having to worry about marketing and the non-binding promise: “if you roduce it, we will uy it”, mango roduction has astly increased. This move from traditional subsistence crops such as rice to cash crops enables the poor to put money in their pockets as well as food on the table -- a first step up in the rise out of poverty.  Case study: Lal Teer (Multimode Group) Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Background: Identifying a gap in the market, in 1995 Multimode and Simon Groot of the Netherlands set up Lal Teer to develop and sell customized hybrid seeds to local farmers. Despite economic and technological constraints, extensive research and collaboration with local communities from 64 districts has turned the venture into the largest biotechnology and seed production company in Bangladesh. Key products developed by Lal Teer include the development of seeds resistant or tolerant to pests and diseases and adverse climatic conditions, as well as higher yielding livestock in the production of milk and meat. The company estimates that over 35 percent of Multimode’s re enue is now deri ed from this sector. Serving the BOP: The end benefit of the Lal Teer products to the BOP includes greater food security and increased income through higher-yielding and more resilient crops and livestock, and improved health resulting from the increased nutritional value provided in its products and by- roducts. Lal Teer’s roducts, ricing and distri ution strategies, and its management provisions are specifically designed to access and benefit the BOP segment of the population. The company considers its agricultural business as entirely geared towards the BOP, primarily as consumers (75 percent BOP), and then as suppliers (50 percent BOP), employees (50 percent BOP), and distributors (45 percent BOP). The company estimates that it directly employs approximately 500 people from the low-income segment, and over 250,000 people indirectly from the low-income segment. Lal Teer has hired and trained between 10,000 to 12,000 farmers in how to improve production. These farmers also have the option to sell surplus seeds obtained from crops grown back to Lal Teer; this way, the BOP comprises the consumer base, as well as the supplier and distribution chains. The company is highly engaged in CSR activities (from education and training through to fair employment and working conditions and environmental sustainability). Growth potential: Lal Teer has ositi e growth ex ectations o er the next twenty years. The com any’s rand of around 50 hybrid vegetable, jute, and cereal seeds, are currently marketed to rural farmers through approximately 5,000 stores and mobile vendors, with the company estimating it has approximately 80 percent of the market share, and 100 percent of the export market share to countries in the region plus a handful of European countries. n account of Lal Teer’s quality seeds, the com any ex ects further growth. With the highest ercentage of the Bangladeshi population involved in agriculture and also predominantly representing the BOP group, the company considers its farmer consumer base of its vegetable and cereal seeds as the largest emerging consumer market in Bangladesh. Lal Teer is also the only brand that exports hybrid vegetable and cereal seeds from Bangladesh, giving it 100 percent market share of the export hybrid seed market. The company is confident it now has the potential to significantly cut into the Chinese hybrid seed market. Financial needs: Lal Teer (Multimode Group) is interested in further investment in the BOP to increase company growth and profitability as well as gain a first-mover advantage in the market segment. In particular, Multimode is interested in setting up an investment fund to finance research and development (especially in livestock), grants, or long-term equity-based financing. Financial assistance is also needed to build additional infrastructure including the purchase of land, office buildings, labs, and cow sheds. The company requires approximately US$ 3 million for seed projects, expansion and working capital, and a further US$ 10 million for livestock development. The company prefers soft long-term financing in the form of equity and debt at an IRR of about 20 percent over 10 years.

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Employee model Employing people from the BOP is the most common model of engagement, with more than one third of all the Inclusive Businesses surveyed identifying this as one of their key BOP engagement strategies. or exam le, AAR NG, Bangladesh’s largest retail outlet for fashion and lifestyle products, provides direct employment to 1,500 low-income earners as staff, of which 1,100 become retail associates. Textiles manufacturer, Viyellatex Limited, estimates that approximately 90 percent of its labour force are from the BOP. A signatory to the United Nations Global Compact, Viyellatex takes great pride in paying its workers more than what is required by the Bangladeshi government. There are a broad range of other benefits to staff including health care, meals and training that goes beyond the immediate needs of the company. The continued employment of the BOP is a key strategy for the company to reach its export volume targets over the next 5 years.

However, with the Bangladeshi BOP incorporating a sizable segment of the total population for a company to truly demonstrate Inclusive Business, it must include BOP engagement as a core business strategy and undertake specific activities that help lift the BOP out of impoverishment. In order to help retain BOP employees and ensure productivity, many Inclusive Businesses will also provide additional services that specifically fulfill the needs of the BOP such as free healthcare and daycare facilities for parents. Well Group (Sanji Textile), an industrial sewing thread business that grew from a family business into one of the largest sewing companies in the country within three decades, directly employs some 1,800 people from the low-income group, and expects to employ many more as it continues to grow. For the BOP, in addition to gaining employment and income, free education, training and health services are also received. Providing such additional services not only keeps staff healthy, but helps to secure productivity. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Case study: Aarong Background: Aarong is Bangladesh’s largest retail chain of fashion and lifestyle products such as clothing, household items and jewellery. Originally a project of the Ayesha Abed Foundation (established 1978), Aarong is the result of the oundation’s efforts to ro ide a enues for em loyment and income generation for underprivileged rural women. Today, Aarong has a reputation for selling good quality products to both local Bangladeshis as well as non-residents, a result of comprehensive quality assurance measures. Approximately 70 percent of Aarong-retailed products are apparels, and 30 percent are home accessories. Serving the BOP: Aarong has also institutionalized large-scale female participation in its supplier-base as producers of indigenous handicraft goods in Bangladesh. Initially established to create job opportunities for rural women in just one rural community, today the company estimates that it provides direct employment to some 1,500 lowincome earners as staff – of which more than 1,000 are retail associates – in their 11 stores located across the country. It is estimated that a BOP population of some 35,000 mostly women artisans are directly engaged by the company (and a further 30,000 indirectly) through its 13 production centres specifically located in urban and rural areas accessible to the BOP. When multiplier effects are considered, the company estimates that it benefits some 320,000 people across the country, of which the majority fall into the low-income segment of the population. The company also provides a range of additional services for employees and suppliers including vocational training, the supply of raw materials for producers, credit facilities, day care services, free medical check-ups, and financial assistance for the treatment of illnesses. Growth potential: Aarong has significant grounds to grow eyond its existing 11 stores. With Bangladesh’s 150 million people shifting towards working age there is significant and realistic expectations for growth resulting from an bourgeoning middle-class and increases in discretionary spending on consumer products. With the development of a strong extension plan the company believes it would be able to engage many more women as artisan suppliers in other parts of the country. Moreover, the company has yet to tap into additional sales opportunities afforded by global boom in internet shopping and e-commerce which may open up new domestic and export markets. Financial needs: The company has shown interest to receive a fund of US$ 10 to US$ 12 million at an interest rate of between 8 percent and 10 percent for working capital. In the past equity Investment was their main source of funding (49 percent). The company has been borrowing from BRAC at a 12 percent interest rate.

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Appendix 6: Fund managers Brummer & Partners This globally-oriented Scandinavian hedge fund manager with total assets under management of US$ 15 billion globally, was the first firm to start a private equity business in Bangladesh in 2008. Target asset classes include hedge funds, private equity and listed equities. In Bangladesh, Brummer & Partners is operating the Frontier Fund (Bermuda) Limited, a fund focused on the privately-held companies of Bangladesh with assets under management of the fund worth US$ 100 million (invested by organisations such as the International Finance Corporation, CDC, and FMO). The Frontier Fund has already made investments in Rahim Afrooz Superstores Limited, the first retail chain in Bangladesh, and RahimAfroozGlobatt Limited, which produces low maintenance batteries. Both these companies have significant engagements with the BOP through Inclusive Business oriented strategies. For Brummer & Partners a typical deal size is about US$ 5 million to US$ 20 million, with a target return of about 18 to 25 percent with no specific sector focus. Small Enterprise Assistance Fund The second Private equity fund manager to start business in Bangladesh, the Small Enterprise Assistance Fund (SEAF) provides growth capital and business assistance to small and medium enterprises (SMEs) in emerging and transition markets underserved by traditional sources of capital. SEAF has a presence in 22 countries across Asia, Europe and Latin America where 338 investments have already been made. In Bangladesh, SEAF operates through its finance company SEAF Bangladesh Ventures (SEAF BV) which focuses on key growth sectors that lack access to traditional sources of finance. Thus far, SEAF has made two investments in Solaric, a renewable energy technology company, and SSD TECH, an information technology company. A more in-depth profile of SEAF BV can be found in the following section. BD Venture Limited Bangladesh’s first enture ca ital com any was launched with a mandate to in est in and incu ate new and existing business ideas in emerging and high-growth sectors to assist in the development of the country. A art from financial returns, BD Venture’s mission is to encourage inno ation and ins ire the entrepreneurial spirit in the country. Besides financing, BD Venture helps manage investee companies by shaping their business strategy, as well as providing assistance to companies to create new product categories. Some of the leading banks, non-bank financial institutions, insurance companies and renowned business leaders of Bangladesh are involved in BD Venture. Whilst BD Venture is yet to make any investments it feels that equity, an equity-debt blend, and debt are the financial instruments preferred by investees. The company sees Education, Hospitality & Leisure / Tourism, Food & Beverage Products, Manufacturing, Agriculture, Information Technology, and Energy as the most attractive sectors within which to invest. The most viable sectors for including low income groups are considered to be Education, Hospitality & Leisure / Tourism, Food & Beverage Products, Manufacturing, Agriculture, Information Technology, Energy, Water & Sanitation. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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 Figure 46. Estimated deal sizes according to the different types of financial institutions in Bangladesh Type Examples Estimated starting deal size Private equity / Venture capital SEAF, Brummer & Partners, BD Venture US$ 50,000+ SME banking BRAC Bank, Eastern Bank Limited, Prime Bank US$ 1,000+ Non-private equity Grameen Fund, VIPB, Midas Financing, IDCOL US$ 650+ Micro-financiers ASA, BRAC, Grameen Bank US$ 125+ Source: Estimation of Authors

The Government of Bangladesh The Go ernment of Bangladesh’s (GoB) Equity and Entre reneurshi und (EE ) was esta lished in the fiscal year 2000-2001 with a fund size of BDT 1 billion (USD12.8 million) and later increased. The objective of the EEF is to increase investments in the software industry and food processing and agrobased industries, and to encourage entrepreneurs to launch projects within these sectors to create employment opportunities for the young educated and skilled people of the country. Though Bangladesh Bank managed this fund since inception, the Investment Corporation of Bangladesh has been authorized to run the fund from 2009. The fund mostly focuses on agro-based industries and the IT sector, with typical deal sizes of less than US$ 1 million. SEAF Bangladesh Ventures SEAF BV provides long-term growth capital and the necessary support to medium-sized businesses in Bangladesh that are underserved by traditional sources of finance. Currently, half of the portfolio of this private equity fund manager is invested in the Information Technology sector with the rest going into the Energy sector. SEAF BV has invested in companies that serve the low income segment. SEAF BV believes that targeting businesses with low-income segment employees can generate the best mix of social and financial return (creating employment and leveraging low labour cost). Sectors such as Education and Energy where the low income segments are consumers are also considered of interest as they can generate high social and financial returns. SEAF BV believes investee companies mostly like blended financing of both equity and debt. For Bangladesh, an average deal size per investment of US$ 500,000 could expect to generate an average return in the range of between 18 to 24 percent. Since its inception SEAF BV has invested US$ 1 million out of its US$ 40 million committed capital. As the fund is new, many more investments are planned in the coming years. Profile of SEAF BV investee preferences: Finance instrument Equity-debt mix Credit guarantee

Ranking 1 2

Average deal size US$ 500,000 US$ 500,000

IRR 18-24 percent 18 percent

SEAF BV sees Oil, Gas and Natural Resources, Information Technology, Energy, Water & Sanitation, and Life Insurance as the most attractive sectors for investment. Education, Food and Beverage Products, Manufacturing, Agriculture, Energy, Textiles & Garments, and Water & Sanitation are considered the most viable for including low income groups. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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ASA The Inclusive Business finance model of ASA, one of the most reputed micro-finance institutions of Bangladesh, is involved in establishing and investing in high-performing micro-finance institutions throughout Asia and Africa. With this aim, ASA has created the CMI fund, a private equity fund of US$ 125 million. Investors of the CMI fund include the Dutch pension fund, ABP, the US Investor Financial Services Organization, TIAA-CREF, the Bangladesh GoF, and CDC Group. The company has also established micro-finance funds including Gray Ghost Microfinance. The CMI fund has invested in micro-finance institutions in Pakistan, the Philippines, Nigeria, Ghana and Cambodia. Through the provision of small loans, the low income people can then get involved in a range of small businesses and agricultural activities (amongst others). Whilst micro-finance is not necessarily by nature an Inclusive Business, ASA’s acti ities are strongly connected to the etterment of the low income eo le of the Asia and Africa region, whilst at the same time meeting its business objectives. Whilst ASA was not able to disclose the specific nature of its investments, an equity-debt blend and credit-guarantee are identified as the most attractive financial instruments used by its investees. The company believes an IRR of between 8-10 percent can be expected with a investment fund for the low income segment. ASA sees Banking & Financial Services, Pharmaceuticals & Biotechnology, Retail, and Transportation & Logistics as the most attractive sectors within which to invest. The most viable sectors for including low income groups are considered to be Banking & Financial Services, Pharmaceuticals & Biotechnology, and Life Insurance. Ventures Investment Partners Bangladesh Limited The target group of VIPB is SMEs who lack sufficient collateral to get conventional financing from banks and leasing companies. Whilst VIPB acknowledges the inherent level of risk in financing these types of companies, unique advantages are seen to make it more worthwhile such as high growth potential (due to their size), and the expertise and self-in ol ement of the entre reneur in the com any’s growth. VIPB expects these factors to generate meaningful return to both investors and entrepreneurs -typically a risk-weighted return of 15-25%. For investing in these ventures, VIPB uses two investment instruments – equity and quasi-equity (a mixture between debt and equity). VIPB financing starts from as low as US$ 3,750 to various SME ventures throughout the country. Apart from financing, VIPB also has an advisory wing that offers technical and business assistance to help the companies they have invested in. Currently VIPB invests in Manufacturing, Agriculture, Information Technology and Textiles & Garments. Profile of VIPB investee preferences: Finance instrument Equity-debt mix Debt Equity

Ranking 1 3 2

Average deal size US$ 10,000 US$ 8,000 US$ 20,000

IRR 20 percent 20 percent 10 percent

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VIPB sees Education, Pharmaceuticals & Biotechnology, Retail, Food & Beverage Products, Agriculture, and Energy as the most attractive sectors within which to invest. The most viable sectors for including low income groups are considered to be Pharmaceuticals & Biotechnology, Retail, Food & Beverage Products, Transportation & Logistics, Manufacturing, Agriculture, Forestry & Forest Products, Textiles & Garments, and Water & Sanitation. Midas Financing Limited Specifically focused in the Micro and SME sector, Midas Financing Limited invests its funds into the economy’s roductive sectors that are directly engaged in employment creation including Agro-based sectors and Renewable Energy, as their backward and forward linkages are considered to have the most promise for changing the life of low income people. In addition they have financed some NGOs who are engaged in development work at the grass-roots level including the landless, poor people of the villages, in semi-urban and urban slums. Whilst Midas was not able to disclose the specific nature of its investments, debt and credit-guarantee are identified as the most attractive financial instruments used by its investees. Midas sees Banking & Financial Services, Retail, Hospitality & Leisure/Tourism, Manufacturing, Agriculture, Information Technology, and Energy as the most attractive sectors within which to invest. The most viable sectors for including low income groups are considered to be Food & Beverage Products, Manufacturing, Agriculture, Energy, and Textiles and Garments. Infrastructure Development Company Limited (IDCOL) IDCOL is funds private sector infrastructure and power. Projects in rural areas have a direct or indirect positive impact on the BOP. The primary objective of IDCOL is to promote significant participation of the private sector in investment and operation, ownership and maintenance of new infrastructure facilities. IDCOL has access to resources provided by the World Bank, Asian Development Bank, GIZ, Kfw, Islami Development Bank and the GOB to place in projects across a range of infrastructure sectors and has been mandated to provide long-term senior and subordinated debt financing to viable infrastructure projects in the private sector for power generation, gas and gas related infrastructure, toll roads and bridges, water supply, urban environmental services, ports, telecommunications, renewable energy and other similar projects for the development of infrastructure of the country. IDCOL also channels grants and provides soft loans for the development of rural infrastructure, i.e. renewable energy. At the end of 2012, IDCOL had a total of 18.18 billion taka (USD 233 million) extended in loans and purchased bonds, an increase of 49% over the previous year. IDCOL currently invests in Energy and Information Technology amongst some other lesser sectors. IDCOL sees the Energy sector as a standout for both its general investment attractiveness as well as its viability for including low income groups. Other companies

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Non-private equity fund managers include Grameen Fund, Venture Investment Partners Bangladesh Limited (VIPB), Midas Financing Limited, and Infrastructure Development Company Limited (IDCOL). These companies invest from their own funds or from borrowed funds. Well-known BRAC Enterprises not only invests in ventures but also manages them, whilst ASA, one of the largest NGOs in the country and manager of the Catalyst Microfinance Investors (CMI) fund, only invests in NGOs. Banking institutions Recently banks are heavily investing in the agro-based and SME sector due to incentives given by the Bank of Bangladesh. Banks will typically provide debt financing and sometimes seed money for an infrastructure mutual fund. BRAC Bank Limited, the country’s largest SME financier, has hel ed to create many jobs. Prime Bank Limited and National Bank Limited on the other hand, focus on infrastructure mutual funds.

Appendix 7: Co-investors 

Industrial and Infrastructure Development Finance Company Limited – The Industrial and Infrastructure Development Finance Company (IIDFC) Limited is a development finance institution sponsored by ten commercial banks, three insurance companies and the Investment Corporation of Bangladesh. This non-bank financial institution offers various types of financial services including term financing, lease financing, syndicated financing, SME financing, and acquisition of public sector enterprises amongst others. The company has also started capital market services through its two subsidiary companies – IIDFC Securities Limited, a stock broking company, and IIDFC Capital Limited, a full-fledged merchant bank. Though IIDFC is interested to invest in this fund, they are now facing a severe liquidity crisis with the com any’s in estment in its two su sidiaries, IID C Securities Limited and IID C Ca ital Limited. Their investment of BDT 2 billion (USD25.6 million) is not providing any return to the parent though IIDFC has to expend interest expense to the depositors. For this reason, IIDFC is not in a position to invest in equity although they may consider investing in this fund if the situation changes for the better. Investment of IIDFC in this fund may be in the range of US$5 to 6 million. For providing this fund, the investor would expect at least a 1 percent spread over their cost of funds. Although IIDFC normally earns an interest spread of 3 to 3.5 percent in their loans, it would agree to less due to their interest in making a social contribution. This would put their hurdle rate of return at around 12-15%. Though the fund manager may invest in any viable sector, IIDFC believe investment in the Health Care and Education sectors are the best placed to create significant social returns to society as a whole.



Prime Prudential Fund Limited – Prime Prudential Fund (PPF) is a public limited company whose main objective is to manage funds of the company and its investors and provide other financial

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services such as corporate advisory, merger & acquisition, equity investment, joint venture sourcing and socio economic consultancy. Prime Finance & Investment Limited, one of the country’s largest non-bank financial institutions, owns 40 percent of the shares in the company. PPF is not interested in being a co-investor in the ADB fund at a 10-15 percent fund return. PPF considers this to be too low -- they can earn that interest rate almost risk-free in a bank account. If the fund can provide IRR of 30 percent (local currency), the company may consider investing around US$3 million. Among the other terms, the company would require a 15 percent hurdle rate and high water mark provision in the fund structure. Furthermore, PPF would expect ADB to select a fund manager with adequate experience in managing private equity funds. Whilst PPF is sector-agnostic, they would expect the fund to invest in companies which may be brought to IPO within 3 to 5 years post-investment with the investment being floated in a bull market – a challenge for early start-ups. While choosing companies, the company would like to see the fund give importance to the integrity of the entrepreneur due to transparency and corporate governance being a serious issue in Bangladesh. Prime Prudential would only be interested in a full equity fund. Employment generation and goods and services creation for low income segments are considered as social return objectives. 

Caravel Management, LLC – Caravel Management, LLC, founded in 2004, is a New York-based investment manager dedicated to investing in the beyond-BRICs Emerging and Frontier Markets. Caravel Management seeks high returns through value investment around the world. They are actively making investments in countries of Asia, Latin America and Africa. Caravel Management, LLC is already operating its first hedge fund, Caravel Fund which is providing 18 percent return on average since inception. Current assets under management of this fund are US$ 200 million. This particular fund cannot invest directly in private equity, However, Caravel Management is interested in Inclusive Business private equity funds and would be interested in investing if they launch a second fund which allows investments in private equity. Though Caravel Management, LLC is interested in contributing to society, the company considers that the target IRR of the investment should be at least 25 percent if it is a full equity fund. Of all of the exit options, Caravel Management believes IPO would provide the best financial return.



Professor Mahbub Ahmed – Prof. Mahbub Ahmed is a renowned academic, businessman and social worker who currently teaches at the Department of Accounting, University of Dhaka. Prof. Mahbub has business stakes in many financial institutions including banks and brokerage houses, and has served for the last seven years as the Vice Chairman of Alhaj Abu JorGhifari Donor Trust, a social welfare organization with an asset size of BDT 500 million (USD6.4 million). Though Professor Mahbub does not currently have an interest in investing in this fund, he would consider investing US$2-3 million in the future based upon a number of specific terms and

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conditions, including social impact and the inclusion of religious students as beneficiaries of the fund. Whilst social return is a key criterion, an IRR of 15 to 20 percent would be required to meet normal commercial expectations -- normal bank deposit rates in local currency. With regard to measuring social return, Prof. Mahbub would like 10,000 low income people set as a target as beneficiaries of the Investment in the Education and Agriculture sectors are considered the most viable for this fund in order to create both financial and social returns. The low level of education of Bangladeshi eo le and the ossi ility of a large num er of eo le’s engagement in agriculture are reasons given for the sector selection. IPO is considered the most viable exit option for a private equity investment.

Appendix 8: Overview of relevant donor partners An overview of the current programmes and initiatives of donors including both bilateral aid agencies and Development Finance Institutions that are relevant to the development of Inclusive Business in Bangladesh follows. These donors may be involved in:    

Funding activities – Such as grants, loans, and guarantees Advice & brokerage – Providing guidance on Inclusive Business models, value chain development, linking / networks Implementation support – Leveraging local offices, skilled local staff, technical experts and networks Policy dialogue & development of business friendly environments – Help with advocacy to develop or revise legislation to attract investment and support PSD and Inclusive Business)

 Figure 47. Current activities of key bilateral aid agencies and DFIs in private sector development Funding Policy dialogue, development Grants, Implement of business loans, Advice & -ation friendly guarantees Investment brokerage support environments

Inclusive Business relevance

Bilateral aid agencies DANIDA DFID EC JICA Netherlands Embassy SIDA

     

*

%

    



  

Medium High Low Low Medium Medium

DFI funded investors Frontier PE Fund

1



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2

Q

ICD-IDB 3 Katalyst 4 SEDF (IFC) 5 World Bank



 

 

  

 

Medium High Medium Medium

 

 

 

Low Low

Other providers of support for IB

BGCCI Solidaridad 

 B  

1

CDC, IFC, FMO, Norfund; 2 51 IDB member countries & 5 public financial institutions; 3CIDA, Gov UK, Netherlands Embassy, GiZ, SDC; 4 IFC, DFID, NORAD; 5 IDA, DFID; *See SEDF; % See Frontier F; Q = Quasi; B = Broker

Bilateral aid agencies As part of their Overseas Development Assistance (ODA) programs, a number of countries provide funding and or support for Inclusive Business initiatives or run Inclusive Business related programmes themselves. 

DANIDA - The Business Partnerships Bangladesh programme supports sustainable development and contributes to the economic and social development of Bangladesh by attracting Danish technology and investment to the country's private sector. The programme establishes profitable, long-term and mutually binding business-to-business co-operations between Bangladeshi and Danish companies.



Department for Internal Development (DFID) - Four key programmes have relevance to the potential ADB Inclusive Business Fund: i)

The Economic Empowerment of the Extreme Poor Programme aids the government of Bangladesh to achieve Millennium Development Goal Target 1 and Target 2 on income, poverty and hunger by improving the livelihoods of the extreme poor to scale, testing innovative approaches to improve the livelihoods of the extreme poor, and through local and national policy advocacy.

ii)

The Urban Partnerships for Poverty Reduction Programme reduce urban poverty in Bangladesh through empowering and supporting the urban poor to acquire the resources, knowledge and skills they need to increase their income and assets.

iii) The Business Innovation Facility (BIF) helps the development and uptake of Inclusive Business models by companies in developing countries by supporting companies that are developing Inclusive Business projects (e.g. by brokering partnerships, signposting to other sources of support, and / or sharing the cost of consultancy support). The BIF also provides a gateway to the latest information, insights from peers, good practice, useful resources, and lessons learnt about developing and implementing Inclusive Business. iv) An Inclusive Business in Bangladesh Programme is currently in the feasibility design stage that will scope, assess and design programming options for strengthening or facilitating the Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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establishment of Inclusive Business models that address the needs of the poor as consumers, producers, suppliers and distributors in Bangladesh. 

European Commission (EC) Delegation to Bangladesh – The EC’s SME Competitiveness Grant Scheme reduces poverty in Bangladesh by supporting the development of SMEs in cluster and value chain development projects that clearly seek the increase in SME competitiveness in priority sectors, as well as skills development and capacity building of business intermediary organizations.



JICA – The Private Sector Development Project empowers developing countries to build industrial bases, advance industry, increase job opportunities and create a society that can reap the rewards of economic de elo ment through their own efforts. JICA’s strategy for achie ing this is by promoting trade and investment, SMEs, and local industry and economies.



The Netherlands Embassy – The Private Sector Development Programme works to improve the enabling environment for doing business in Bangladesh to reduce poverty via sustainable and pro-poor economic growth through enhancing its business enabling environment in areas such as policy development. A second programme, Private Sector Investment (PSI), stimulates financial growth, creates employment opportunities and generates income in developing countries by providing Dutch companies with an opportunity to make an innovative investment together with a Bangladeshi partner.



SIDA – The Innovations Against Poverty Programme supports sustainable business ventures to impact on poverty reduction by providing a risk sharing mechanism for sustainable business ventures.

Investors funded by Development Finance Institutions (FDI funded investors) The following investors differ from commercial investors in that their funds come from bilateral and multilateral agencies. Due to multi-lateral agencies often not permitted to invest directly in businesses in host countries, equity investments are made through Development Finance Institutions (FDI) such as the IFC, CDC (funded by DFID), FMO (funded by the Government of the Netherlands), and Norfund (funded by NORAD). In most cases, these entities invest in private equity funds with a footprint in the country in question (i.e. through a fund of funds approach). Others may also make equity investments directly in businesses. 

CDC, IFC, FMO, Norfund – Invests in the development of capital markets and institution building, infrastructure, general manufacturing and services, and innovative projects in health and education. Investment may be in listed securities as well as the securities of privately-held companies in Bangladesh.



ICD-IDB – The Global Line of Finance Programme aims to provide lines of financing to qualified local financial institutions to support SMEs in Bangladesh by extending lines of financing to commercial banks and national DFI.

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

IFC, DFID, Norad – The South Asia Enterprise Development Facility assists sustained growth and development of SMEs in order to reduce poverty in South Asia. Key strategies include the provision of access to finance, increasing the competitiveness of SMEs in selected sectors by addressing the overriding market failures within the value chain, and facilitating the easing of constraints to business operation, formation and expansion.



SDC, CIDA, Gov UK, Netherlands Embassy7 – The Katalyst Programme (Phase 2) benefits the poor as producers, entrepreneurs, employees or consumers through market development on an economic sector-wide basis, targeting growth opportunities and removing constraints.



World Bank – The Private Sector Development Project8 aims to increase transformative investments and enhance the business environment by supporting Economic Zones (Private Sector Development), providing long-term finance (including housing and capital market), and by strengthening the micro-finance sector.

Appendix 9. Private sector mapping survey About the company 1. From the list below, please select the industry sector that best describes the core business of your company. Please also note the estimated % market share your company has within the industry sector selected. Sector Education

% Market Share

Banking and Financial Services (including microfinance) Real Estate/Property/Construction (including low cost housing) Pharmaceuticals and Biotechnology Retail Hospitality and Leisure/Tourism Food and Beverage Products Transportation and Logistics Oil, Gas and Natural Resources Manufacturing Agriculture Forestry and Forest Products Information Technology

7

Phase 1 was funded by DFID, SDC, SIDA and implemented by Swisscontact, GiZ (GTZ at the time) and the Ministry of Commerce of Bangladesh 8 Funded by IDA and DFID Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Energy (including renewables) Textiles and Garments Water and Sanitation Health Insurance (including micro-insurance)

2. What is the legal status of your company? Select one of the two types in each pair below. SOE

Private

Proprietorship

Partnership

Listed Company

Unlisted Company

3. Please provide a brief overview of your main product/service lines and their relative contribution to your company´s annual turnover. Product and/or Service 1. 2. 3. 4. 5.

Annual Sales

% Contribution

4a. Which of these products/services are the most profitable? Why? 4. Please provide a brief overview of the relative market share of each of these products/services visà-vis your competitors nationally and where relevant internationally over the past 5 years. Product and/or Service 1. 2. 3. 4. 5.

Domestic Market Share ´07 ´08 ´09 ´10 % % % % % % % % % % % % % % % % % % % %

´11 % % % % %

International Market Share ´07 ´08 ´09 ´10 ´11 % % % % % % % % % % % % % % % % % % % % % % % % %

5. Please describe any significant changes in strategy, customer base, supplier base, distribution channels or other changes that contributed to the improvements in your market position (if any) 6. Please describe what percentage of your business is domestic and what percentage is for exports? How has that changed over the past 5 years? What has driven these changes? 7. Do you think your company´s prospects for growth are good? What new business opportunities do you see? What do you expect your rate of growth will be over the coming 3 years? What will drive your company´s growth? 8. What do you see as the 3 main barriers to the growth of your company? Please rank the top 3 with 1 being the most significant barrier. Opportunity Favourable business climate

Select 3 Opps ONLY

Rank (1-3) 1= Highest

Growing consumer confidence Increasing export opportunities Rise in domestic consumption Company Innovation Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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New customer segments in the BoP Government incentives/reduced taxes M&A Opportunities for company to expand Increased access to capital Increased access to technology Lower input costs

9. What do you see as the 3 main opportunities to accelerate the growth of your company? Please rank the top 3 from highest to lowest. Obstacle

Select 3 Obstacles ONLY

Rank (1-3) 1= Highest

Poor business climate and regulatory environment Lack of Access to Capital Poor Infrastructure High cost of inputs High labour costs Saturated customer base Competition from international companies Competition from domestic companies Lack of government incentives Lack of access to competitive technology Poor corporate governance

10. What are the most significant risks facing your company in the following areas? Please provide examples where relevant in 3 of the most significant risks: a) b) c) d) e) f) g) h)

Regulatory? Financial? Supply Chain? Labour? Competitive? Environmental? Social? Political?

About working with the low-income segment 11. What is your definition of the low-income segment? Someone who earns:  $1/day  $2/day $3/day $4/day $10/day Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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12. Has or does your company work with the Low-Income Segment? If so, please characterize the manner through which your company actively engaged this segment of the population (as consumers, suppliers, distributors, employees?) 13. Does your company have a specific business strategy and/or goal to engage the low-income segment? If so, please describe the strategy and/or the goal. 14. Is the low-income segment important to your company´s current business model? Do you have plans to consider making it a priority over the next 5 years? If so, why? If not, why not? 15. What would be the main reason for you to more actively incorporate the low-income segment within your company´s business strategy? Please select and rank the top 3. Reason

Select 3 Reasons ONLY

Rank (1-3) 1= Highest

Increase company growth and profitability Strengthen company reputation/brand Comply with Corporate Social Responsibility Strategy/internal requirements Comply with government regulations To gain first mover advantage in this market segment To localize my company´s supply chain and reduce associated costs To secure a long-term license to operate To appeal to company shareholders To mitigate local stakeholder risks To attract additional capital to the company Improve product quality Contribute to a charitable cause Comply with management directive Innovation/Research and Development

16. Does your company currently have a commitment to corporate social responsibility (CSR)? If so, please describe it in more detail. How do you report on your CSR performance? What percentage of your overall budget in percentage terms would you say your company invests in CSR each year? 17. What has been your company´s commitment to environmental sustainability? Please describe it in more detail 18. Does your company have a Corporate Foundation through which you finance charitable initiatives? If so, please describe it in more detail.

POTENTIAL, CURRENT OR NO ENGAGEMENT WITH THE LOW INCOME SEGMENT Please complete questions 20 – 29 if your company is currently engaged with the BoP. Please complete questions 30– 36 if your company has plans to engage with the BoP in the near future (next 18 months) Please complete question 37 – 39 if your company has no plans to engage with the BoP. Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Current engagement with the low income segment only 19. Does your company currently engage with the low-income segment in the following ways? Please check all that apply. Inclusive Business Model BoP as employees

Currently Engage

BoP as suppliers of raw materials BoP as distributors of goods and/or services BoP as consumers of your company´s products and/or services

20. If your company is engaging with the BOP in the aforementioned business models, how many people are currently being impacted by your company using this approach? Please estimate impact numbers per applicable business model. Inclusive Business Model BoP as employees

Currently Engage

Number of Beneficiaries

BoP as suppliers of raw materials BoP as distributors of goods and/or services BoP as consumers of your company´s products and/or services

21. In your company´s engagement with the BOP, what have been the benefits to the BOP? Please rank the top 3 benefits. Reason

Select 3 Reasons ONLY

Rank (1-3) 1=greatest benefit

Increased income for suppliers or distributors Access to new products and services tailor made to their needs that contribute to their livelihoods Access to credit Access to technical assistance, know-how, vocational training Access to basic services like water, sanitation, health and education Access to new markets Secure and long-term buyer of goods and services Access to technology Employment opportunities Improved nutrition Access to financial services Access to housing Other: Please specify:

22. In your company´s is engagement with the BOP, what have been the benefits to the Company? Please rank the top 3 benefits. Reason

Select 3 Benefits ONLY

Rank (1-3) 1= greatest benefit

Cheap labour supply Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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New, highly profitable (high volume, low margin) consumer market Stable supply of critical inputs in supply chain Lower transaction costs in supply and/or distribution Improved reputation/brand equity in local and international market To create shared value To contribute to sustainable development Improved results for CSR Report Favourable engagement with national government Improved sales Improved profits Innovation Other: Please specify:

23. What Percentage of your overall business is related to the BOP? 24. Please provide the percentages through which you involve the BOP in any of the following ways: As suppliers

As Consumers %%

As Employees %

As distributors %

%

25. Considering the importance of job creation to long term growth, how many people does your company employ directly? How many would you say are employed indirectly (indirectly refers to people who are not on your company´s payroll but still compensated by your company)? What percentage of direct and indirect employees are from the low-income segment? 26. Please describe two initiatives (the most successful or with the best potential) through which you are actively engaging in a BOP-focused business venture/project? How did you identify and develop the opportunity? What was the business need you identified? Why did you engage the BOP? What has been the impact to your company and to the low-income participants involved? What have been the lessons learned? Did you partner with any organizations to achieve your objectives? Did you require additional capital to develop the initiative? 27. What obstacles have you encountered when developing an inclusive business iniative with the BOP? Obstacle

Select all that Apply

Rank them (1= greatest obstacle)

Lack of information about the BoP (i.e. consumer behaviour, needs, productive capacity, etc) Lack of access to relevant technology critical to the inclusive business initiative Lack of appropriate distribution channels Lack of skilled and qualified participants from the BoP to make project a success Start-up costs for the inclusive business initiative were too high Lack of management buy-in and company support Lack of organizational capacity and organization among supplier (if applicable) Insufficient volume with sufficient margins to make business viable Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Lack of finance to kick-start the project Lack of trust between the company and the BoP Lack of company capacity to effectively develop the inclusive business project Negative perceptions about the value of the opportunity with the BoP

28. Considering the risks involved, would there be a need for a technical assistance facility that could provide patient capital (grants) to mitigate pre-investment and/or post-investment risks of working with the BOP? If so, how would you see it helping your inclusive business initiative succeed?

Potential engagement with the low income segment 29. Does your company plan to engage with the low-income segment in the following ways? Please check all that apply. Inclusive Business Model BoP as employees

Plan to Engage

BoP as suppliers of raw materials BoP as distributors of goods and/or services BoP as consumers of your company´s products and/or services

30. If your company WERE planning to engage with the BOP in the near future through the aforementioned business models, how many people would you say might be impacted by your company using this approach? Please estimate impact numbers per applicable business model. Inclusive Business Model BoP as employees

Potentially Engage

Number of Beneficiaries

BoP as suppliers of raw materials BoP as distributors of goods and/or services BoP as consumers of your company´s products and/or services

31. If your company is plans to engage with the BOP, what benefits to the BOP do you aim to achieve? Please rank the top 3 benefits. Reason

Select 3 Reasons ONLY

Rank (1-3) 1=greatest benefit

Increased income for suppliers or distributors Access to new products and services tailor made to their needs that contribute to their livelihoods Access to credit Access to technical assistance, know-how, vocational training Access to basic services like water, sanitation, health and education Access to new markets Secure and long-term buyer of goods and services Access to technology Employment opportunities Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Improved nutrition Access to financial services Access to housing

32. If your company is planning to engage with the BOP, what are the benefits to the company? Please rank the top 3 benefits. Reason

Select 3 Benefits ONLY

Rank (1-3) 1= greatest benefit

Cheap labour supply New, highly profitable (high volume, low margin) consumer market Stable supply of critical inputs in supply chain Lower transaction costs in supply and/or distribution Improved reputation/brand equity in local and international market To create shared value To contribute to sustainable development Improved results for CSR Report Favourable engagement with national government Improved sales Improved profits Innovation

33. What Percentage of your overall business would you expect to be related to the BOP? Specifically, what percentage of your sales would you expect to be generated as a result of goods and services provided to the low income segment? What percentage of your company´s suppliers would you estimate comes from the BOP? What percentage of your labour force (both direct and indirect) comes from the BOP? 34. Please describe two initiatives (the most successful or with the best potential)you are contemplating through which you plan to actively engage in a BOP-focused business venture/project? How would you identify and develop the opportunity? What would you consider to be the business need to be identified? Why would you engage the BOP? What could be the impact to your company and to the low-income participants involved? Would you partner with other organizations to achieve your objectives? Would you require additional capital to develop the initiative? 35. Considering the risks involved, would there be a need for a technical assistance facility that could provide patient capital (grants) to mitigate pre-investment and/or post-investment risks of working with the BOP? If so, how would you see it helping your potential inclusive business initiative succeed?

No engagement with the low income segment 36. What are the main reasons for which your company is not interested in engaging in business models that could integrate the BOP within your company´s value chain? What evidence or argumentation would make you reconsider? 37. Are there any market OPPORTUNITIES THAT could yield additional benefits to your company? Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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38. If you were provided with patient capital provided through a technical assistance facility to develop an inclusive business pilot to demonstrate proof of concept, would you reconsider?

About financing and financing Inclusive Business 39. What sources of financing have you used in the past? What amounts and under what conditions? Please check all that apply. Financing Equity Investment

in use or used

Terms(Rate/currency/period)

Amount

Debt Guarantee Grant Other:

40. Have the investor(s) made the anticipated return? If not, why not? 41. What are the current Financing (both debt and equity) options in Bangladesh? Explain under what terms each of these options operate (i.e. In terms of interest rates, collateral or guarantee requirements, etc) 42. What role did the investors take in the management of the company (i.e. General Partner, Limited Partner, etc) 43. Is your company interested in receiving financing designed to support the development of inclusive business initiatives within your company? 44. If so how much financing would your company require (in USD) for this initiative? What would the funds be used for primarily (i.e. Working capital, marketing, capital investments, etc) 45. What type of financing would you consider? Debt? Equity? Guarantees? 46. Under what terms would you consider financing? Within what time frame? 47. What would you consider to be the IRR for the investment made and over what period? What would you anticipate would be the potential benefits to the BOP (number of people impacted by increased income, employment opportunities, standard of living, etc)? 48. Does your company currently have a source of financing that supports your BOP activities? If so, please describe the type of financing, terms, amounts and returns provided where possible.

Follow-up 49. Would you like to receive further information about financing opportunities from the ADB and/or SNV to support inclusive business development in your company? 50. Would you like to receive additional information about inclusive business and be added to our newsletter through which you can receive regular updates as to inclusive business activities worldwide?

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Appendix 10. Fund manager & co-investor survey General information for the fund and interviewee 1. a. b. c. 2. a. b. c. d. e. 3. a. b. c. d.

Fund Information Name of Fund Management Company: Geographic Focus: Website: Fund Manager (Company) Name of Fund: Address: Province: District: Specific Fund website (if any): Interviewee Contact Information Name: Position: Telephone: Email:

1. Please describe your fund´s investment strategy. What are the kinds of investments you are looking for? What has gone well so Far? What challenges have you faced so far? Can you give one of your success stories so far? 2. Have you considered investing in companies who might have focus on or might want to engage with the low income segment for business reasons? would you consider this as important criteria now or in the future and why? Investment climate and economic outlook 3. What is your general outlook for the economy of Bangladesh over the next 12 months? Why? Positive

Neutral

Negative

4. What is your general outlook for the economy of Bangladesh over the next 5 Years? Why? Positive

Neutral

Negative

5. Of the following issues, please rate the degree to which the following are Obstacles to investment in Bangladesh. Please rate them as A) Major Obstacle; B) Obstacle; or C) Not an Obstacle: Issue

Major Obstacle

Obstacle

Not an Obstacle

Government Bureaucracy Rule of Law Regulatory Environment Corruption Currency Controls Lack of Access to Finance (debt and/or equity) including Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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commercial lending Government Subsidies Political Instability Social Conflict/Instability Competition with State-owned Enterprises Real Estate Ownership Laws Private Equity Regulation or Lack Thereof Physical Infrastructure Other (please specify):

6. What are the Main reasons for Investors to Invest in Bangladesh? Please rate the Degree to which the Reasons are Important. Issue

Very Important

Important

Not Important

Positive Investment Climate Diverse and Attractive Investment Opportunities Medium Term Real GDP Growth Potential for High Returns Tax Incentives and Administrative Burdens Effective Corporate Governance Attractive Regulatory Environment Quality of Legal Enforcement Political Stability Security of Property Rights Entrepreneurial Culture and Innovation Labor Market Rigidities Low Unemployment Rate Potential local market Other (please specify):

7. How attractive do you think Bangladesh would be for Private Equity Investments vis-à-vis other countries in South Asia? Why? Extremely Attractive

Very Attractive

Neutral

Less Attractive

Not Attractive

8. How attractive do you think Bangladesh would be for Social Investments vis-à-vis other countries in South Asia? Why? Extremely Attractive

Very Attractive

Neutral

Less Attractive

Not Attractive

Industry/ sector investment /company attractiveness Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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9. Please provide your Investment attractiveness rating for the following Industry Sectors in Bangladesh. Please rate them as a) Very Attractive; B) Attractive; C) Neutral; or D) Negative. Sector

Very Attractive

Attractive

Neutral

Negative

Education Banking and Financial Services (including microfinance) Real Estate/Property/Construction Pharmaceuticals and Biotechnology Retail Hospitality and Leisure/Tourism Food and Beverage Products Transportation and Logistics Oil, Gas and Natural Resources Manufacturing Agriculture Forestry and Forest Products Information Technology Energy (including renewables) Textiles and Garments Water and Sanitation Life Insurance (including micro-insurance)

9a. Why have you rated some of these industries as Very Attractive? 9b. Why have you rated others as Negative? 10. Of these sectors, which ones do you invest in actively and what is the distribution (in percentage of assets under management) within these sectors in your investment portfolio? Please mark the sector(s) and the estimated percentage (note: total percentage cannot exceed 100%)? Sector

In Portfolio

Percentage

Education

%

Banking and Financial Services (including microfinance)

%

Real Estate/Property/Construction

%

Pharmaceuticals and Biotechnology

%

Retail

%

Hospitality and Leisure/Tourism

%

Food and Beverage Products

%

Transportation and Logistics

%

Oil, Gas and Natural Resources

%

Manufacturing

%

Agriculture

%

Forestry and Forest Products

%

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Information Technology

%

Energy (including renewables)

%

Textiles and Garments

%

Water and Sanitation

%

Life Insurance (including micro-insurance)

%

11. Of the following industries, please rate which ones may present the best and most viable opportunities for businesses to integrate the low income segment as consumers, suppliers, distributors and/or employees within their business model. Sector

Most Viable

Viable

Neutral

Unviable

Education Banking and Financial Services (including microfinance) Real Estate/Property/Construction Pharmaceuticals and Biotechnology Retail Hospitality and Leisure/Tourism Food and Beverage Products Transportation and Logistics Oil, Gas and Natural Resources Manufacturing Agriculture Forestry and Forest Products Information Technology Energy (including renewables) Textiles and Garments Water and Sanitation Life Insurance (including micro-insurance)

11a.Why are the industries you selected most viable for investment in business models with the lowincome segment? Please explain. 11b.Considering these sectors, which of the following inclusive business approaches -- including the low-income segment as a) suppliers, b) distributors, c) consumers and/or d) employees-- would generate the best mix of social and financial returns? Why? 12. From your Investment experience, please select and rate (1-6 with 1 being Most Preferred) the financial instruments preferred by your investees, indicate what percentage of your investment portfolio is currently allocated per instrument and the average deal size and returns obtained? Financial Instrument

Check if part of portfolio

Rank (1-6) 1 = most preferred

Equity

% of Portfolio %

Average Deal Size $

Average Returns %

Debt

%

$

%

Credit Guarantee

%

$

%

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Blended (Debt+Equity)

%

$

%

Grant

%

$

%

Other: Please specify:

%

$

%

13. If you were to consider developing a social investment fund to finance business models that target the low-income segment, please indicate the financial instruments that are likely to be preferred by investees, their ranked preference, potential % of the funds portfolio, and the average deal size and returns you would expect per financial instrument. Financial Instrument in a SOCIAL INVESTMENT FUND Equity

Check if part of portfolio

Rank (1-6) 1 = most preferred

% of Portfolio Expected

Avg Deal Size Expected

Avg Returns Expected

%

$

%

Debt

%

$

%

Credit Guarantee Blended (Debt+Equity) Grant

%

$

%

%

$

%

%

$

%

Other: Please specify:

%

$

%

Currency

Term In years

13a.Please explain why you would expect the aforementioned portfolio structure and expected returns in a Social Investment Fund?

Key factors in investment strategy 14. When considering the following most important factors in making a private equity or related investment in Bangladesh, please select and rank the top three below (1 being the most important): Factor

Select 3 Factors ONLY

Rank (1-3) 1= Highest

Transparency in Business Activities Growth history and projections Quality of the Management Team Company Track Record/Performance Cash flow Speed at which value can be created Operational/Cultural Fit with Fund´s Goals Brands/Products Strategic Fit with Fund´s Strategy Corporate Responsibility/Ethical Reputation Other Reputable Investors Anticipated Return Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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15. Why are these the most important factors? 16. Conversely, what would make you not invest? and Why? 17. Conversely, what would be the most important concerns/risks when making investments in Bangladesh? Please select up to 3 of the following concerns/risks and rate them in terms of their degree of importance (1 being the most important) degree of importance: Factor

Select 3 Factors ONLY

Rank (1-3) 1= most important

Lack of Transparency Poor Corporate Governance Lack of Skills/Experience in Current Management Limited or No Company Track Record Poor business strategy/business plan Lack of other investors/finance streams Significant reputational issues No CSR/Stakeholder management strategy Unclear/opaque financial reporting Issues with current shareholders Conflict of Interest Difficulty to exit

17a. Why have you selected these three concerns as the most important? 18. What are the greatest challenges to starting a private equity fund in Bangladesh and why? 19. What are the current opportunities for private equity fund development in Bangladesh? Why are these opportunities most promising? 20. What are the best performing private equity funds in Bangladesh and why do you think these funds are the best performing?

Key factors when considering the low-income segment (please answer these questions even if you have not made prior investments in business models serving the low income segment) 21. When considering (or if you were to consider) the most important factors in making a private equity investment in an Inclusive Business venture in Bangladesh, please select and rank the top 3 most important factors. Factor

Select 3 Factors ONLY

Rank (1-3) 1= most important

Viability of Business Model Company Track Record with the BoP Potential for Social Returns (>5,000 people impacted) Potential for Financial Returns (>15%) Innovation Potential Strategic Alignment with Investment Strategy Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Prospects for Growth % contribution of inclusive business to overall company growth/bottom line Quality of product/service being proposed Presence of other reputable investors Overall company reputation/brand Clear pathway to exit

21a.Please explain why these 3 factors are the most important. 22. Conversely, which of the following issues would you consider the top 3 greatest concerns when making inclusive business investments in Bangladesh? Concern

Select 3 ONLY

Rank (1-3) 1= greatest concern

Lack of Skills/Experience in Current Management especially with the BoP Lack of Grant Funds/Technical Assistance to mitigate BoP associated risks Weak prospects for social returns/impacts on the BoP Limited or No Company Track Record with the BoP Poor business strategy/business plan to create value for the BoP Lack of other investors/finance streams Significant reputational issues No CSR/Stakeholder management strategy Unclear/opaque financial reporting Weak prospects for significant financial returns Risks associated with proposed BoP suppliers, distributors and/or employees Difficulty to exit

22a. Please explain why you selected the aforementioned concerns?

Obstacles to starting an Inclusive Business private equity fund in Bangladesh 23. What would be the greatest challenges, obstacles or barriers to starting a private equity fund focused on inclusive business in Bangladesh and why? Do you think there is a real opportunity? Why or why not? 24. If you were to create an Inclusive Business-Focused Private Equity Fund in Bangladesh, what would be the greatest obstacles to effectively capitalizing and managing a successful fund (please select and rate the top 3 obstacles)? Obstacle

Select 3 Obstacles ONLY

Rank (1-3) 1= greatest obstacle

Lack of a viable pipeline of inclusive business opportunities Lack of investor interest to capitalize an Inclusive Business Private Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Equity Fund Lack of Technical Assistance support to Mitigate Inclusive Businessrelated risks Negative perception regarding possible returns of a private equity fund targeting the BoP Lack of fund managers with required expertise and/or motivation to manage such a fund Perceived Risks far outweigh returns Lack of Government Incentives to support BoP-related investments Lack of standard metrics by which to assess social/financial returns Lack of bi-lateral/multi-lateral funder interest to complement fund managers Ethical Reasons

24a.Please explain why you selected these top 3 obstacles? 25. Can all of these obstacles be overcome? If yes, how would you overcome these obstacles? 26. Considering the risks involved, would there be a need for a technical assistance facility that could provide patient capital (grants) to mitigate pre-investment and/or post-investment risks of working with the BoP? If so, how would you structure the ta facility? 27. If the ADB Investment is capped at US$10 - 20 million for this Fund in Bangladesh, do you think you would have difficulty raising the remaining US$80 - 90 million? Why or Why not? what challenges you think you could face when trying to raise the remaining US$80 – 90 million? 28. Would you be interested in managing such a fund? Why or why not? 29. Please describe the kind of investors you would target for this fund (i.e. other fund managers, donors, multilateral financial institutions, etc.) What is their risk profile and what kind of financial and/or returns do you think they might expect?

Factors to measure success in private equity investments 30. Other than the IRR, How would you define success for a private equity fund? What are the current metrics you use? 31. 30a. Are you aware of and/or do you use any established metrics systems to assess the financial and social impact of your fund like GIIRS? 32. If you are currently managing or were to manage a portfolio of private equity investments focused on creating value for the BoP, what would be the kinds of metrics you would use to measure the success of the fund? 33. What would you consider the most important factor when measuring the success of an Inclusive Business Private Equity fund in Bangladesh? Please provide an example of a quantifiable metric (i.e. 25% IRR, 10,000 served, etc.) that would qualify as success. Factor

Select 1 Factor ONLY

Metric

Social Return Financial Return Developing the Business Case for Investing in Inclusive Business in Bangladesh: A Market Scoping Study

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Greater Social Return than Financial Return Greater Financial Return than Social Return Equal Social and Financial Return (provided it can be measured)

34. What do you consider the most attractive exit strategy for your investments? IPO

Trade Sale

Secondary Sale

Refinancing

33a.Please explain why.

Social investment strategies and considerations 35. Do you currently make investments based on their potential for social impact? If so, what are the kinds of investments you have made of this type? 36. What would be the average deal size were you to manage a social investment fund? And what would be the returns you would want to have? 37. What is your preferred term for the investments you could make in the social investment marketplace? 38. If the investment were to be debt rather than equity, what would you consider to be competitive terms in the current market in Bangladesh? 39. If the investment were to be equity, what position would you normally take (Stake and Role)? Please provide an example. 40. What incentives would you integrate into the design of the Inclusive Business Private Equity Fund to attract investors/Fund Managers? What would be the critical success factors in your opinion? 41. What kind of real and/or perceived benefits, if any, does the anchor investment by the ADB in this type of fund provide?

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