Inclusive Business Market Study For India and Sri Lanka (Draft Report)

INCLUSIVE BUSINESS MARKET FOR INDIA AND SRI LANKA
DRAFT REPORT
JULY 31, 2012
STUDY
ADB Inclusive Business Market Study for India and Sri Lanka Draft Report
List of abbreviations used

ADB BOP BMGF DFI DFID ESG FDI FMO GDP GDP (PPP) HDI IB IFC IPO IRR JICA KfW LIS LP MPI NORFUND NSDC PE R&D SIDA SIDBI SME Swedfund TA VC Asian Development Bank Base of the pyramid Bill & Melinda Gates Foundation Development finance institution Department for International Development Environmental, Social and Governance (criteria for investment) Foreign direct investment Netherlands Development Finance Company Gross domestic product Gross domestic product at purchasing power parity Human development index Inclusive business International Finance Corporation Initial public offering Internal rate of return Japan International Cooperation Agency Kreditanstalt fr Wiederaufbau, a German government-owned development bank Low-income states Limited partner Multidimensional poverty index Norwegian Governments Investment Fund for Developing Countries National Skill Development Corporation Private equity Research and development Swedish International Development Cooperation Agency Small Industries Development Bank of India Small and medium enterprises Swedish Governments Investment Fund for Developing Countries Technical assistance Venture capital
Table of Contents
1. 2. Context and methodology ............................................................................................................... 4 Recommendations ........................................................................................................................... 5 2.1 2.2 2.3 3. 3.1 3.2 3.3 3.4 4. 4.1. 4.2. 4.3. 4.4. 5. 5.1 5.2 5.3 5.4 6. 6.1 6.2 7. 7.1 7.2 Relevance ............................................................................................................................ 5 Strategy ............................................................................................................................... 7 Fund Operationalisation .................................................................................................... 10 Overview of performance on economic and social indicators .......................................... 11 Key trends shaping the economy ...................................................................................... 15 Size of the market at the base of the pyramid .................................................................. 19 Climate for enterprise and investment ............................................................................. 20 Overview of performance on economic and social indicators .......................................... 22 Key trends shaping the economy ...................................................................................... 25 Size of the market at the base of the pyramid .................................................................. 28 Climate for enterprise and investment ............................................................................. 29 Overview of our methodology .......................................................................................... 30 Analysis of findings ............................................................................................................ 32 Funding needs of Inclusive Businesses .............................................................................. 44 Implications for ADB .......................................................................................................... 48 Overview of our methodology .......................................................................................... 49 Analysis of findings ............................................................................................................ 50 Overview of our methodology .......................................................................................... 59 Analysis of findings ............................................................................................................ 60
Macroeconomic assessment of India ............................................................................................ 11
Macroeconomic assessment of Sri Lanka ...................................................................................... 22
Inclusive business mapping............................................................................................................ 30
PE markets assessment .................................................................................................................. 49
Donor mapping .............................................................................................................................. 59
Bibliography ........................................................................................................................................... 64 Endnotes ................................................................................................................................................ 66
List of Figures
Figure 1: Framework to organize insights collected in the study ........................................................... 4 Figure 2: Total and equity-only FDI inflows into India .......................................................................... 11 Figure 3: Gross domestic product (GDP) at PPP ................................................................................... 11 Figure 4: Historic and planned sector growth rates ............................................................................. 12 Figure 5: Contribution of sectors to GDP and labour force employment ............................................. 12 Figure 6: Percentage of India's population in 9 poorest states ............................................................ 14 Figure 7: Projections for India's working age population ..................................................................... 16 Figure 8: Distribution of urban and rural population ........................................................................... 16 Figure 9: Increase in the number of urban towns ................................................................................ 17 Figure 10: Annual household consumer expenditure in India (1987-2010) ......................................... 18 Figure 11: Market size of India's BOP ................................................................................................... 19 Figure 12: India's credit ratings by various rating agencies .................................................................. 21 Figure 13: Gross domestic product of South and Southeast Asian countries ...................................... 22 Figure 14: Weighted contribution to GDP growth rate by sectors ....................................................... 23 Figure 15: Composition of FDI inflows .................................................................................................. 24 Figure 16: Age profile of Sri Lankas population ................................................................................... 25 Figure 17: Unemployment in Sri Lanka by education level and age group .......................................... 26 Figure 18: Segmentation of market at the base of the pyramid .......................................................... 28 Figure 19: Distribution of survey respondents ..................................................................................... 30 Figure 20: Primary BOP engagement mode of survey respondents..................................................... 32 Figure 21: Additional BOP modes of engagement ................................................................................ 33 Figure 22: Consumer model strategies ................................................................................................. 33 Figure 23: Distributor model strategies ................................................................................................ 34 Figure 24: Supplier model strategies .................................................................................................... 35 Figure 25: Employee model strategies.................................................................................................. 35 Figure 26: Benefits to company of being inclusive ............................................................................... 36 Figure 27: Benefits to the BOP of inclusive businesses ........................................................................ 37 Figure 28: Level of social impact measurement ................................................................................... 38 Figure 29: Geographical spread of IB operations ................................................................................. 39 Figure 30: Perceptions of operating in low-income states ................................................................... 40 Figure 31: Critical growth factors.......................................................................................................... 40 Figure 32: Key risk factors ..................................................................................................................... 41 Figure 33: Equity received to date ........................................................................................................ 44 Figure 34: Debt received to date .......................................................................................................... 44 Figure 35: Credit guarantees raised to date ......................................................................................... 45 Figure 36: Required investment size, by sector .................................................................................... 45 Figure 37: Investment size by geography and mode of engagement................................................... 46 Figure 38: Ideal grant-funded investments .......................................................................................... 46 Figure 39: Composition of Dalberg's sample of 21 fund managers ...................................................... 49 Figure 40: Market capitalization of countries in South and Southeast Asia ......................................... 50 Figure 41: Number and volume of PE (non real estate) investments in India ...................................... 50 Figure 42: Responses to the question: "What is your general outlook for India's economy?" ............ 51 Figure 43: Sector prioritization analysis................................................................................................ 54 Figure 44: Illustrative approaches of major investors deploying equity/debt to IBs in India............... 60 Figure 45: Exposure of major investors deploying equity/debt to priority sectors in South Asia ........ 61
1. CONTEXT AND METHODOLOGY

In May 2012, the ADB commissioned Dalberg Global Development Advisors to undertake a study on the Inclusive Business1 Market in India and Sri Lanka as part of a larger project titled Promoting Inclusive Growth through Business Development at the Base of the Pyramid. The objective of the market study was to assess the feasibility of setting up an inclusive business private equity fund in India and Sri Lanka. Dalbergs analysis focused on answering the following key questions: (1) Relevance. Is PE funding relevant for the growth of IBs in India and Sri Lanka? (2) Strategy. What should ADBs investment strategy be? (3) Operationalisation. How should ADBs fund be operationalised? These key areas of analysis - relevance, strategy and operationalisation were then broken down into sub-questions as described in the table below: METHODOLOGY
Our analysis is presented along 3 topics:
Figure 1: Framework to organize insights collected in the and (1) Relevance of ADBs potential IB fund, (2) investment strategystudy(3) fund operationalisation
Key questions addressed in our study
a. Are macroeconomic conditions conducive for IB growth?
Relevance
b. Are macroeconomic and business conditions favorable for VC/PE investment? c. Is there demand from inclusive businesses to seek out VC/PE investment? a. What size of enterprise and investment should the fund target? b. Which sectors should the fund prioritize?
Strategy
c. Should geography be a factor, and if so, where should the fund focus? d. Which financial instruments should the fund deploy? e. Should mode of engagement be an investment criterion? f. Which company-specific parameters should influence investment decisions? a. How should ADB engage existing PE funds investing in IBs?
Operationalisation
b. Who should ADB target to raise funds from? c. What are some other key considerations to set the IB fund up for success?
The approach Dalberg used to answer the above questions had four distinct parts: A. Assessment of macroeconomic and microeconomic conditions in India and Sri Lanka B. Mapping of inclusive businesses operating in India and Sri Lanka through an online survey of 7 130 businesses, and interviews with 20 potential investees for ADB C. Assessment of strength of capital markets in both countries through interviews with 21 fund managers with exposure to inclusive businesses D. Mapping of potential co-investors (donors) in ADBs fund through interviews with 11 agencies including family foundations, banks, DFI-funded investors and bilateral aid agencies The detailed methodology adopted within each of these work streams is described in the relevant sections of the report.
2. RECOMMENDATIONS
Based on findings across multiple work streams, we believe that ADB should adopt a three-pronged strategy to supporting the development of IBs in India and Sri Lanka 1. Invest in an existing PE fund to provide equity support in the $1-$10 million range to early and early growth stage, small and medium-sized inclusive businesses (IBs) The fund should adopt a sector-agnostic approach with a light preference for education, health, water and tourism sectors The fund should adopt a geography agnostic approach but may consider investing part of its funds in existing low-income state focused funds Mode of engagement with BOP should not be a major criterion for investment; focus should be on innovative high-growth models that are not capital-intensive and more service-oriented The fund management team should have experience in sourcing, managing and exiting investments of under $5 million, the likely size of majority of deals The funds allocation for Sri Lanka should be limited with the expectations of securing not more than 1-2 deals per year Set up a credit guarantee scheme (separate from the PE fund) to support IBs in gaining access to debt, a major area of need in both India and Sri Lanka Set up a technical assistance (TA) facility to provide grant support to investees of the fund for activities that are non-revenue generating and support the creation of public goods In Sri Lanka, the TA facility should also focus on promoting inclusive business practices among the wider business community
2.
3.
The following sections of this chapter present our findings and recommendations in detail, organized by the 3 broad questions outlined in Chapter 1 Relevance, Strategy, and Operationalisation.
2.1 RELEVANCE
PE funding is relevant for growth of small and medium IBs in both India and Sri Lanka; diverse conditions warrant a differentiated approach to investment in both countries. In order to answer this question, Dalbergs team looked at both demand and supply factors. On the demand-side, we examined whether macroeconomic conditions support the growth of IBs and whether IBs look to PE firms to support their growth. On the supply-side, we looked at whether macroeconomic conditions and capital markets support PE investment. In India, the growth of private business is supported by the countrys positive long-term economic prospects driven by favourable demographics and consumption growth. The segment of the private sector expected to grow the fastest is the collection of approximately 12 million small and medium enterprises (SMEs) that employ over 30 million people. Within this large set, there are thousands of inclusive businesses that engage members of Indias vast BOP population (>1 billion) and need growth financing in the range of $1-10 million. Impact investors are particularly optimistic about the growth of enterprises that provide access to basic services like energy, water, education and health as Indias massive BOP population suffers deprivation across multiple development parameters2. For the VC/PE community (supply-side), Indias most attractive features are the size of its stock market, IPO issuing activity and expected economic growth. PE market statistics show that the number of deals is increasing, indicative of more opportunities for PE investment. While an unclear
regulatory environment and inadequate infrastructure do pose challenges to doing business in the country, we feel that these will dissipate over a 10 year period. In Sri Lanka, conditions warrant a different, more measured approach. Sri Lankas economy has grown at over 8% since 2009, when its 26-year long civil war ended. The government has initiated a number of measures to stimulate the growth of businesses in sectors like tourism where the target is to attract 1.5 million tourists by 2016 from 850,000 in 2011. The results of these efforts are beginning to show from 2011 to 2012 the country jumped 9 places in the Doing Business Rankings and is ranked 89th of 183 countries which is second best, behind Maldives, in the South Asia region. Fund managers (there are 2 active fund managers at present) expect investment opportunities to emerge in the SME sector, especially in services and manufacturing companies catering to the needs of larger firms in inherently inclusive sectors like tourism, agri-business and renewable energy. These businesses are expected to engage hundreds of BOP members as employees and suppliers addressing Sri Lankas problems of a high youth unemployment rate (20%). Consumer-oriented IBs are less relevant in Sri Lanka due to the relatively small BOP population (<2% of Indias at 12 million people) and the high level of access to basic services contributing to Sri Lankas low multidimensional poverty score of 0.021 compared to India 0.283. It must also be kept in mind that PE is a relatively new asset class in Sri Lanka. The total number of investible opportunities ready to absorb PE funds is said to be in the range of 100-150. This number is hard to verify as accessing opportunities in Sri Lanka is entirely dependent on proprietary networks, unlike in India where the PE market is highly intermediated. Many IBs we spoke with expressed a preference for concessionary debt over equity given the prevailing high interest rates. A lot of groundwork will need to be done to convince business owners to sell their stake. Exit options must also be thoroughly explored before investment. The corpus of money raised by IPOs on the Colombo Stock Exchange increased nearly fivefold from 2010 to 2011, but the LKR 19.2 billion ($165 million) raised by the 13 listings in 2011, is small in absolute terms. Overall market capitalization as a percentage of GDP continues to remain very low at 40.2% of GDP, compared to other nations like India (93.6%), Philippines (78.8%) and Indonesia (51%). While the small size of the Sri Lankan PE market and relatively weak stock market must not be ignored, we believe that risks can be effectively managed by taking a measured approach to investment. ADB should set aside a limited amount to invest through an experienced fund manager with the expectation of making a maximum of 1-2 IB investments a year.
2.2 STRATEGY
Our findings in response to this question are divided into five parts: a) b) c) d) e) Target size of investment and investee Sector focus Geography focus Mode of engagement and other criteria for investment Instruments to deploy and expected returns
a) Target size of investment and investee ADB should target inclusive SMEs seeking equity infusions in the $1-10 million range with the expectation that most deals will be below $5 million; financing needs of large IBs are being adequately met by the market. Stakeholders across various categories IBs, fund managers and donors have echoed the view that ADBs fund should focus on supporting the growth of small and medium-scale IBs that roughly correspond to the Indian governments small and medium industry classification, i.e. firms with less than $2 million invested in plant and machinery. These firms have limited access to external sources of finance as banks practice collateral-based lending and very few equity investors provide support in the $1-$10 million range, required for early growth financing. Larger firms, on the other hand, have several alternate financing options, including commercial PE (there are over 300 PE funds in India, majority of whom invest upwards of $10 million per deal); commercial bank loans, corporate debt and the stock market. While USD $1-10 million is seen as a relevant range for ADBs fund, investors expect a higher proportion of deals to be below $5 million given the nascent stage of development of most IBs in India and Sri Lanka today. This has several implications for the way ADBs fund must be managed. Smaller deals are often sourced through a proprietary route by experienced, well-networked fund managers. The leadership of these smaller companies (often lead by a single entrepreneur) tends to demand greater involvement from the fund managers team and require more assistance across multiple areas including but not limited to finance, human resources, marketing and corporate governance. ADB should factor these realities into the fund design and any future due diligence of fund managers. b) Sector focus ADB should adopt a sector agnostic approach, but prioritize 4-5 sectors that deliver strong social and financial returns; preferred sectors should be education, healthcare, water and tourism. Though the overall market for PE deals in India is substantial (460 deals in 2011), very few sectors, barring large infrastructure, real estate, finance and telecom, see sufficient annual deal flow to warrant exclusive focus. Highly inclusive sectors like agriculture saw fewer than 4 deals per year between 2005 and 20103. The relative lack of depth in any specific sector has resulted in very few sector-specific PE funds - over 80% of the 300+ PE funds active in India today are sector-agnostic. Given the newness of the asset class in Sri Lanka, adopting a sector-agnostic approach is perceived by many as the only feasible approach. Acknowledging the constraints imposed by the stage of PE market development, we recommend that ADB adopt sector-agnostic approach with a light focus on 4-5 sectors that deliver high financial and social returns, in addition to being relatively asset-light and free of risks such as over-regulation
and ESG concerns. Based on Dalbergs analysis of these factors and risks, inclusive businesses in education, healthcare, water and tourism appear to be the most attractive. c) Geography focus ADB should adopt a geography-agnostic approach and may consider investing part of its fund in existing low-income states (LIS) focused funds. Low deal flow is a key reason cited by many impact-oriented investors as the key reason for maintaining a pan-India investment approach instead of focusing exclusively on Indias low-income states in the north and east. Indias high and growing incidence of urban poverty (298 million BOP live in urban areas that typically fall in high-income states) and the pan-India growth plans of majority (over 75%) of IBs that responded to our survey, are additional arguments in favour of a geography-agnostic approach. There are, at present, only two funds in India which invest exclusively in low-income states. Both were launched in 2012 with support from DFIs and DFI-funded investors like DFID, CDC and IFC and their performance is yet to be assessed. In Sri Lanka too, investors are wary of exclusively focusing on post-conflict provinces in the north & north-east and under-developed eastern and southern provinces. The higher operational costs (personnel and time) of sourcing deals from these regions were also cited as a disincentive. While uncertainty concerning deal quality and deal flow can be mitigated with an agnostic approach, the argument still remains that under-developed regions deserve special attention. Several donors and fund managers believe this can be achieved through appropriately designed monetary incentives for fund managers e.g. increase in fees and carry for deals executed in low-income states/post-conflict regions. Another, more straightforward approach to achieving focus and one that we endorse, is for the ADB to consider investing a part of its fund with existing low-income states-focused SME funds to complement and leverage the efforts of other DFIs. d) Mode of engagement with the BOP and other criteria Mode of engagement with BOP should not be a major criterion for investment; focus should be on innovative high-growth models that are not capital-intensive and more service-oriented. The ADB should invest in innovative businesses that engage the BOP in a variety of ways. We find that successful IBs tend to utilize more than one mode of engagement, sometimes even three or four. In the Indian context, all modes of engagement are relevant and have high potential for social impact and financial returns. The relatively small size of the BOP in Sri Lanka and high level of human development, reduce the relevance of pursuing consumer-oriented models in Sri Lanka. Across the board, stakeholders have mentioned that mode of engagement should not be used as a criterion for investment. The more important questions to ask are whether the business model is a capital-intensive one, as is the case with most real estate and microfinance firms; whether the model is service-oriented; and, how, if at all, technology is leveraged by the model. These factors are seen to play a greater role in determining the scalability and long-term impact of an IB business model than the mode by which they engage with BOP. e) Instrument and returns expectations ADB should observe financial discipline across all instruments that it deploys; reasonable net financial return expectations provide an opportunity to service the large need for non-equity instruments. In our assessment, ADBs expectation of net financial returns in the range of 10-12% can be met by observing discipline across the instruments deployed by the fund. This implies that expected returns
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on equity and debt should be no less than market rate (typically in excess of 20% for equity and 14% for debt, gross). A strategy that is focused solely on equity will not address the large underserved need for debt for working capital, which is currently a critical barrier to growth of inclusive businesses, largely for want of collateral/security. ADBs reasonable overall returns expectations and impact-orientation provide an important opportunity to address this issue by allocating a portion of funds to stimulate greater lending to IBs. This could be achieved through a credit guarantee scheme, targeted at IBs/existing investees that are keen to access debt from the commercial banking sector. Such an intervention would also be very timely. A number of PE funds are currently contemplating launching Non-Banking Finance Companies to provide debt to businesses A technical assistance (TA) or grant facility, comprising roughly 5% of the total fund, is another important mechanism to supporting the growth of high potential IBs. TA is seen as most relevant for non-revenue generating activities such as R&D, ESG4 improvement and the creation of public goods such as training and awareness generation.
2.3 FUND OPERATIONALISATION

ADB should partner with a few select existing IB-focused funds managed by experienced fund managers and aim to secure preferential rights. India has several funds targeting IBs, many of which have fund managers with deep experience in investing for both impact and financial returns. Feedback from fund managers suggests that obligations with existing funds and challenges in raising capital for a new fund in the current environment (albeit with ADBs sponsor capital) may prevent experienced managers from responding to an invitation to set up a new fund. This feedback was corroborated by feedback from other donors and investors, majority of whom have taken a fund-of-funds approach. CDC and IFC, two of the largest DFI-supported PE investors, have only recently invested in impact-oriented SME funds5 where managers are still in the process of fund raising, a clear opportunity for ADB to collaborate. These funds are an attractive investment option for ADB as their managers have completed the due diligence process, have local networks and experience, critical elements for an IB-focused fund. We recommend, therefore, that ADB invest into IBs in India through one or two established funds managed by experienced teams. This approach, coupled with preferential rights such as coinvestment rights, right to offer debt, position on the funds advisory board, lower management fees, etc., could help ADB achieve the same outcomes as setting up a new fund without the risks associated with engaging less experienced fund managers. This approach is even more relevant for Sri Lanka where deal sourcing is largely non-intermediated and most under-the-radar opportunities can be accessed only by experienced fund managers.
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3. MACROECONOMIC ASSESSMENT OF INDIA

A number of secondary data sources were used to conduct an assessment of macroeconomic conditions in India. These sources include government census reports, economic publications and surveys, data published by international organizations such as the ADB, UN, World Bank and CIA, and other key BOP-focused reports including The Next 4 Billion.
3.1 OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

Post-liberalization in 1991, Indias growth has been led by strong FDI inflows across sectors pointing to multiple areas of opportunity; gross fixed capital formation remains high at 35% of GDP, indicating strong prospects for future growth. The impact of the economic reforms of 1991 and the resulting attractiveness of the Indian economy as an investment destination can be gauged by the level of Figure 2: Total and equity-only FDI inflows foreign direct investment (FDI) that India has attracted. In into India Foreign Direct Investment (FDI) growthFDI inflowssectors to $73.5 million and by 2010; 1991, and top amounted this figure had increased to equity inflows in after reaching a peak $ billions Sectors attracting highest $24.1 billion 2011-12 Figures in USD in 2008 of $43.4 billion (billions) 6. India currently ranks 4th in the 40 Computer software number of FDI18 projects, behind US, China and UK, and 3rd in 4% 30 & hardware terms of FDI value, behind China and Brazil7. Total 9%
20 10
Metallugical industry Foreign has been directed across various sectors, indicating multiple areas of growth and opportunity. The 11% Telecommunication 0 services sector, including both financial services and non2000 2004 2008 2012 12% Others financial services like business process outsourcing, has SOURCE: Department of Industrial policy and promotion received the highest FDI inflow, of $31.97 billion over the last 12% Construction activities 12 years. Capital-intensive services like telecommunications, housing & real estate and construction continue to receive significant amounts of 17%FDI, 3. Gross Domestic Product at PPP Drugs & pharmaceutical underscoring the high growth prospects of these Figure 3: Gross domestic product (GDP) at PPP industries.
Equity
Power
9% investment
Overall investment, largely gross fixed capital formation, has grown exponentially in India since 2001, when it represented 23% of GDP. In 2011, this figure stood2011-2012 at 34%. A good indicator of a countrys future growth prospects, Indias gross fixed capital formation is expected to continue to be around 35% of GDP in the near future8. A booming services sector has led Indias growth story over the last decade, but a languishing agriculture sector has limited the inclusiveness of this growth.
26%
Service sector
$ trillions 60
China India US
40
20
2
Brazil Japan
2000F 2010F 2020E 2030E 2040E 2050E

SOURCE: World Bank data
Over the last decade, Indias GDP has been growing at an average of around 8% per annum, making it one of the fastest growing major economies in the world. At a total size of $1.45 trillion, the Indian economy is the 11th largest by nominal GDP and at a total size of $4.82 trillion (PPP), the 3rd largest by Purchasing Power Parity (PPP) behind the US and China. Multiple forecasts predict this trend continuing to accelerate, and by 2020 Indias GDP in PPP terms is expected to rise to $8.01 trillion9. While Indias economy as a whole has been growingly rapidly, the key economic sectors of agriculture, industry and services have been growing unevenly. Data from past five-year plans, 9th Plan (1997-2002), 10th Plan (2002-2007) and 11th Plan (2007-2012) point to the fact that the
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agriculture and allied services sector, which employs over 50% of the countrys population, has grown significantly slower (less than 3.5% annually) than the services sector (approx. 7.5% annually). 3. has significantly limited the inclusiveness of rates This Historic and planned sector growthIndias growth.
Figure 4: Historic and planned sector growth rates
% growth rates
9th plan (97-02) Agriculture, Forestry and Fishing Industry Mining & quarrying Manufacturing Elect., gas & water Construction Services Trade, hotels & restaurants Transport, storage, and communication Banking and financial services 2.5 4.3 4.0 3.3 4.8 7.1 7.9 7.5 8.9 8.0 10th plan (02-07) 2.3 9.4 6.0 9.3 6.8 11.8 9.3 9.6 13.8 9.9 11th plan (07-12) 3.2 7.4 4.7 7.7 6.4 7.8 10.0 7.0 12.5 10.7 12th plan (12-17) Low Growth Estimate * 4.0 9.6 8.0 9.8 8.5 10.0 10.0 11.0 11.0 10.0 High Growth Estimate* 4.2 10.9 8.5 11.5 9.0 11.0 10.0 11.2 11.2 10.5
Community, social & personal services

GDP
7.7
5.5
5.3
7.8
9.4
8.2
8.0
9.0
8.0
9.5
* Low growth target - 9% target ; high growth target -9.5% Note: Classification of sub-sectors into industry & services is done according to planning commission of Indias method SOURCE: Faster, Sustainable and More Inclusive Growth An Approach to the Twelfth Five Year Plan 2012-2017; Planning Commission-2011, Government of India
The sections below describe the trends and issues across these key sectors:
AGRICULTURE AND ALLIED SERVICES
3. Contribution of sectors to GDP and labor force em

Figure 5: Contribution of sectors to GDP and labour force employment
The agricultural sector, comprising of activities such as crop farming, horticulture, animal husbandry and fisheries, provides livelihood to roughly half of Indias population, and is a high-impact sector in the context of inclusive growth. Its contribution to Indias GDP, however, has reduced from 29.3% in 1990-91 to 18% in 2011201210. In the most recent 11th plan period (2007-12), agriculture grew by only 3.2%, as compared to the target of 4%. Furthermore, within that period, the sector stagnated at 0.1% growth for two consecutive years between 2008 and 2010.
: asdasd
Industry
$ 1.8 trillion 18%
488 million
Agriculture
26%
52%
14%
Services 56% 34% Sectoral contribution to GDP (2011) Labour force by sector (2009)
Under-investment in critical infrastructure, inefficient land-use patterns and seasonal uncertainties are to be SOURCE: CIA Factbook blamed for the sectors poor performance. In the 12th 5-year plan (2012-2017), the government plans to achieve growth rates over 4% by focusing on non-farm activities, such as post-harvest operations, rural supply chain management, and warehousing, which can all contribute significantly towards the expansion of employment and income opportunities.
INDUSTRY
Though industry has grown faster than agriculture (a 7.4% growth rate11 during the recent plan period), growth has still been below expectations (10-11%). Within that period, the growth of the
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sector, which includes mining and quarrying, manufacturing and energy, dropped from 12.2% in 2006-2007 to 3.9% in 2011-2012. Furthermore, its contribution to Indias GDP decreased from 28.7% to 26%12. In addition to contributing heavily to overall GDP growth, a growing industrial sector is essential for absorbing surplus labour from the agricultural sector. Growth in industry has been impeded by challenges in land acquisition and poor energy and water infrastructure. In more recent times (2011-12), the high interest rates imposed by the central bank to combat inflation have been blamed for the slow growth of industrial output, as measured by Indias Index of Industrial Production.
SERVICES
The services sector in India has grown sharply over the past decade and continues to do so. Services comprise of financial services, information technology and information technology-enabled services (IT and ITES), tourism and hospitality, health, education and construction. Combined contribution of all service-oriented industries to Indias GDP has grown from 54% in 2006-07 to 59% in 2011-12. The services sector is currently growing at a healthy 10% annually. This growth in the service sector has been led primarily by private enterprises, aided by Indias large pool of workers, both skilled and unskilled. The sectors activities have resulted in massive job creation, and it has become a catalyst of urbanization and urban migration. The construction industry alone provides direct/ indirect employment to 35 million people and is expected to employ 92 million people by 2022. Indias limited inclusiveness of growth is reflected in its significant economic inequality and poor performance on human development indicators. Despite emerging as one of the worlds largest economies, Indias per capita income still places it in the low-middle income bracket, as per World Banks definition of country lending groups. At $3,694 (PPP), Indias per-capita income places it at the 129th place in the world; just below Iraq13. In 2004-05, the average per capita income of Indias bottom quintile by income was $176 (INR 9,305) but $1,997 (INR 105,845) for the top quintile, an eleven-fold difference in income levels. As per the India Human Development Survey 2010, consumption-based inequality measured by the Gini coefficient stood at 0.38, which is considered to be moderately unequal by world standards and is slightly below most low-middle income developing countries, where the consumption-based Gini coefficient ranges from 0.40 to 0.50. At 0.52, Indias income-based Gini coefficient is much higher than that commonly observed in emerging economies, reflecting its significant levels of inequality14. On a per person basis, therefore, India may be considered a lower-middle income economy with huge disparities in levels of income. Indias progress with regard to human and social development has not been as robust as its economic growth. High GDP growth rates have not translated to a proportional reduction in poverty, improvement in health outcomes, access to education and skill development, and an overall improvement in quality of life. While India has the 3rd highest GDP (PPP) in the world, it was ranked 134th out of 187 countries on the UNDP Human Development Index in 2011. Though there is no commonly accepted measure of poverty in India, the Tendulkar Committee, the most recent official endeavour to estimate poverty, placed the percentage of people living below the poverty line at 29.8% of the population (355 million people) in 2009-2010, down from 37.2% in 2004-2005. The same committee placed the urban poverty line at $0.54 (INR 28.65) per day and the rural poverty line at $0.42 (INR 22.42) per day. However, the committees methodology has come under criticism for placing the poverty line too low, and is currently under review.
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3. Multi-dimensional poverty index (MPI) mapping of Indian

Figure 6: Percentage of India's population in 9 poorest states
States
% share of total population
In addition to income-based poverty, most Indian citizens lack access to basic services of a reasonable quality. There is less than 1 hospital bed per 1000 people in India while the world average is 3 beds per 1000 people. There are over 40 children per classroom in India while the world average is just under 2415. Taking access parameters into consideration, the Oxford Poverty and Human Development Initiativedevelopers of the Multi-Dimensional Poverty Index estimated that in 2011, 53.7% of the population was living below the poverty line. There are more poor (as per MPI) in eight Indian states than in the 26 poorest African countries combined. 421 million people in the Indian States of Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal live in multi-dimensional poverty.
AS (3%)
RA (6%)
UP (16%) MP (6%)
BI (8)%
WB (8%) JH (3%) OR (8%) CH (2%) 0.001 0.100 0.101 0.200 0.201 0.300 0.301 0.400 0.401 0.500
NOTE: UP - Uttar Pradesh; RA Rajasthan; MP Madhya Pradesh; CH Chhattisgarh; OR Orissa; JH Jharkhand; BI Bihar; AS Assam; WB West Bengal SOURCE: Oxford Multidimensional Poverty Index 2011 ; India Census Data 2011
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3.2 KEY TRENDS SHAPING THE ECONOMY

India could take advantage of its favourable age demographics and develop a competitive advantage in possessing 25% of the worlds workforce; demographics in low-income states are particularly well positioned to drive growth. OECD estimates that in 2020, India will have a population of 1.3 billion people16, surpassing China to become the most populous nation in the world. Against the backdrop of new economic opportunities, Indias teeming millions, once seen as a major burden, are being seen as assets to propel the country onto a higher growth trajectory. According to the IMF, a substantial proportion of growth that India experienced since the 1980s can be attributed to the countrys age structure and age demographics17. Currently 54% of Indias 1.2 billion people are under the age of 25 and 63.5% of Indias population, roughly around 760 million people, falls in the working-age bracket of 15 to 59 years18. Further, 300 million people will enter the labour market by 2025, providing 25% of the worlds workers19. The continuing demographic dividend is estimated to add roughly 2 percentage points to Indias per capita GDP growth every year. There are multiple implications of millions of young people entering the workforce. According to David Bloom - the demographer who first coined the term demographic dividend - young, unencumbered workers are seen to spur entrepreneurship and innovation, enabling significant gains in productivity, savings, and capital inflows. Additionally, India will be experiencing an increase in the number of working age people just when other large countries see the average age of their populations decline, opening up opportunities for the export of workers from India to the rest of the world. In 2020, the average age in India will be only 29 years, compared with 37 in China and the United States, 45 in Western Europe, and 48 in Japan20. Demographics are also believed to have played a role in influencing the growth rates of Indian states. Authors of the IMF working paper feel that some of Indias economically strong states have already reaped a demographic dividend over the last couple of decades. Per their analysis, the states of Karnataka, Tamil Nadu and Gujarat can attribute between 2.4 and 3 percent of their annual per capital GDP growth rate in the 1980s to a favourable age distribution. According to the authors, the 9 economically weaker states21 in the country, home to more than half the population, may have just entered the sweet spot in terms of the age structure of their populations to start experiencing a demographic dividend. Bihar, a traditionally low-growth state, has been the fastest growing state for the last two years with its GDP expanding by 14.8% and 13.1% in 2010-11 and 2011-12 respectively. A percentage of this growth could be attributed to favourable demographics. The value of Indias demographic dividend will depend in great measure on whether the public and private sector have the political will and foresight not only to create jobs but also to train the new workforce, encourage global trade, improve a failing education system, provide better housing, lure capital to support innovation, and implement policies that engender confidence in the economy.
15
3. Figure 7: Projections for India's working age population

Population in billions by age group 1.1 1.2 1.4 1.5 23% 1.7 20%
Demographic projection for India

1.7 18% 0-14 years 15-59 60+
35%
31%
27%
58%
62%
64%
65%
65%
62%
7% 2001
8% 2010
10% 2020
12% 2030
16% 2040
20% 2050
SOURCE: United Nations Population Divisions
An increasing proportion of Indias labour force comprises casual labour, driven by the large shift in employment patterns from farm-based to non-farm based temporary or contractual jobs. In 2010-11, 36% of Indias population was either employed or available for employment. With 790 million people in the working age population, Indias labour force is roughly 430 million strong. 40 million people, 9.4% of the labour force, are unemployed. 7 The National Sample Survey Offices statistics released in 2011 indicate that there has been a shift in employment pattern across the country with the number of casual workers increasing by 21.9 million and the number of regular workers reducing by half from 2004-05 to 2009-10. Based on other macro-economic data it appears that there is a structural shift taking place with people from the rural sector taking up temporary and contract jobs in labour-intensive industries like construction, manufacturing and the rapidly growing services industry that can absorb low-skilled labour quickly.
Despite the shift, the agriculture & allied services industry continues to be the largest employer in the country employing 46% of total employment. Over 50% of all people employed in rural areas work in agriculture or allied industries. The other significant employment industries in rural areas are construction, manufacturing and wholesale and retail trade. Together with agriculture, these industries employ over 77% of the rural labour making them high-impact sectors with respect to employment. 3. Rapid urbanization has been fueled by a shar
Figure which lack municipal rural In urban areas, manufacturing, wholesale & retail and towns,8: Distribution of urban and facilities community services stand out as industries employing the population highest percentage of the labour force. Billions
1.4
In terms of size of the enterprises, 66% of the employed people work in enterprises that have less than 10 employees. A further 3% work in enterprises with between 10 and 19 employees and only 7%22 in firms with over 20 employees23. Rapid migration away from rural areas has led to widespread, unplanned urbanization; there is a large opportunity to tackle the resulting urban poverty. Urbanization in India is fuelled by migration of the rural
1.2
1.0 0.8 Urban Rural 26% 74% 72% 70% 28% 30%
35%
65%
1991
2001
2011
2021
SOURCE: Census of India, Dalberg research and analysis
16
population to existing urban areas and by growth of new urban areas. In 2001, 285 million people lived in designated urban areas. This increased to 380 million in 2011 and as per the Government of Indias projections; over 600 million people will live in urban areas by 2030. Between 2001 and 2011, India witnessed a 54% increase in the number of urban towns from 5,161 in 2001 to 7,935 in 2011. Most of this increase, 2,532 towns, is on account of growth of census towns, rather than statutory towns, which saw an addition of only 242 between 2011 and 201124. Statutory towns are towns that have statutory governing structures like municipalities or town corporations. Census town do not have urban governing structures and are largely rural or semiurban areas that turn urban on account of densification of their population. Census towns have poor civic urban infrastructure like roads, water, sanitation, etc.
towns
000s +54% 7.9 +10% 4.7 Statutory Town 3.0 5.2 4.0
fueled by a sharp increase in number of census ilities Figure 9: Increase in the number of urban With the share of urban population increasing at a rapid pace,
instances of urban poverty have also increased. As per the available data on urban poverty, roughly 80 million in urban India live below the national poverty line25. As urbanization increases across the country, more and more migrants settle in unauthorized tenements often categorized as slums given the lack of legally available affordable housing. Per the 2011 census, 93 million people currently live in slums, a figure that is expected to grow 105 million by 201726.
As per Planning Commission recommendations, the government will need to attract private investment in all 3.9 Census areas of urban infrastructure like drinking water supply, 1.7 1.4 Town sewage treatment, urban roads, urban transport, power, as well as large infrastructure projects. The committee on Indian 1991 2001 2011 Urban Infrastructure and Services, appointed by the Ministry SOURCE: Census of India, Dalberg research and analysis of Urban Development, estimates that $0.7 trillion (INR 39.2 trillion) will be required over the next 20 years to meet the requirements of the projected urban population. With increase in per capita income, consumption expenditure across the country has also increased. As per the National Sample Survey Offices (NSSO) 2011 report on household consumer expenditure in India, the Monthly Per Capita Consumption Expenditure (MPCE) (Mixed Reference Period) has 8 increased substantially in both rural and urban areas. The average MPCE was estimated to be $18 (INR 953) in rural India and $35 (INR 1,856) in urban India in 2009-10, up from $11 (INR 579) and $21 (INR 1,104) in 2004-05, an increase of 65% and 68% respectively. With rising incomes, the composition of consumption expenditure is also changing. As per the NSSO report27, in 1999-2000 food constituted 59.4% of total expenditure in rural areas and 48.1% in urban areas. In the decade since, expenditure on food as a percentage of total spending in rural areas had declined to 53.6% in rural areas and 40.7% in urban areas. This shift in spending on necessities like food and clothing to discretionary items that improve the overall quality of life like healthcare, education, personal products and entertainment, will continue to grow. The McKinsey Global Institute estimates that discretionary spending will rise from 52% of household expenditure in 2005 to 70% in 202528.
3.8
17
3. Annual household consumer expenditure for select years from 1987ADB Inclusive Business Market Study for India and Sri Lanka 2010 Draft Report
Figure 10: Annual household consumer expenditure in India (1987-2010)
Percentage of total expenditure 21% 23% 25% Other discretionary goods and services Clothing, Bedding & footwear Fuel & light Food
29% 5% 10%
31%
8% 7%
6% 7%
8% 7%
6% 9%
64%
64%
60%
56%
54%
1987-88
1993-94
1999-00
2004-05
2009-10
SOURCE: Key Indicator of household consumer expenditure in India 2009 -2010, NSSO; October 2011
18
3.3 SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

87% of Indias population qualify as Base-of-Pyramid living under $4 a day; this segment spends $667 billion (PPP) on goods and services every year. The Next 4 Billion report29 defines the BOP population as those earning $3,000 (2002 PPP terms) or less annually. Collectively, this represented 4 billion people globally at the time with 924 million living in India (95% of Indias population). ADB classifies the BOP as those earning $3-4 PPP or less per day30. As per Dalbergs estimates based on NSSO data, 1.04 billion people, or 87% of Indias population, would form the BOP population. Approximately 90% of the rural population, or 743 million people and 80% of the urban population, or 299 million people can be classified as BOP population. In other words, 71% of Indias BOP population lives in rural areas. Dalberg estimates the total market for BOP as consumers is estimated to be $667 billion in PPP terms, approximately 62% of which would constitute the rural BOP market. As per this data, 61% of consumption expenditure for rural BOPs is towards food while urban BOPs spend 53% towards food.
Figure 11: Market size of India's BOP
$ billions (2005 PPP)
3. Annual BoP household expenditure by category
692
509
84
18 12 10 7 5 2 ICT
45
Other
Total market size
Food
Energy Healthcare Houshold Transpgoods ortation
Housing Education
NOTE: BOP taken as a sum of BOP500, BOP1000 and BOP1500 segments that spend less than USD 4 PPP per day (2005) SOURCE: World Resources Institute, Next 4 Billion Report
As per the World Resource Institutes The Next 4 Billion report, the BOP market in India was 10 estimated to be USD $1.2 trillion in 2005. Of this, the BOP500, BOP1000 and BOP1500 segments, collectively classified as those earning less than USD $4 PPP per day in 2005, presented a USD $692 billion (PPP) consumer market opportunity. On an average, these three segments spent approximately 73.5% of their household expenditure on food and 12.1% on energy, the two highest expenditure heads in terms of percentage of household expenditure.
19
3.4 CLIMATE FOR ENTERPRISE AND INVESTMENT

Poor enabling institutions and weak law enforcement make starting and running a business in India a struggle; investor protection and strength of the financial markets are strong positives. In the Doing Business report (2011) published by the IFC and World Bank, Indias rank was 132 of 183 countries in terms of overall ease of doing business. In terms of ease of starting a new business, India ranked 166th. In terms of the ease of getting a construction permit India was 179 th, or the fourth last in the world and in terms of enforcement of contracts, India stood 182nd of 183 countries. These challenges are being cited as some the reasons for Indias GDP slowing down to 6.5% in 20112012. Indias rank in the Global Competitiveness Index 31(GCI) has fallen from 43 in 2006-2007 to 56 in 2011-2012 among 142 countries covered in the index. Further, India ranks a poor 91st in basic requirements that include institutions (69th), infrastructure (89th), macro-economic environment (105th) and health & primary education (101st). Corruption and complicated regulatory framework, in which India ranked 99th and 96th respectively, remain high areas of concern in Indias ability to provide a conducive business environment. High inflation, high fiscal and current account deficits add to the poor macro-economic rank of 105. For businesses and investors, the large market size, where India ranks 3rd of 142 countries, seems to be the biggest draw. Its rank of 36 in the strength of investor protection is also encouraging for investors. Also, its fairly sophisticated financial market (21st rank) and innovative businesses (38th) have the ability to deploy and utilize finances well and add to its strengths in overall competitiveness. Despite a negative short-term outlook indicated by Indias poor current credit rating, long term outlook for economic growth and attractiveness for investment look positive. The economic reforms triggered the opening-up of the economy and the consequent high-growth rates, and Indias economy has several underlying factors that make it an attractive investment destination in the long-term. A large working-age population, projected to remain at over 62% of the population32, joining the workforce has the potential to deliver demographic dividends for the next few decades. Strong private final consumption expenditure (PFCE) at 56% of the GDP33 and high domestic savings of 33% of the GDP34 further underscore the long-term growth prospects of the country. While long-term trends look positive, the short-term economic outlook looks tepid at best. A low quarterly growth rate of 5.3% in the last quarter of the financial year 2011-201235 pulled annual GDP growth rate down to 6.5% as opposed to the earlier projection of 6.9%. The GDP growth rate between January and March 2012 was the worst last quarter growth rate in nine years. To add to this, the fiscal deficit is at 5.9% and inflation is close to 10%, which restricts the options available to the government to correct the situation by way of a fiscal stimulus and monetary measures. Policy paralyses, lack of reforms, administrative obstacles and instances of large-scale corruption in the government have been largely responsible in slowing down the economy. Recommendations by the government like implementing retrospective tax laws are likely to dampen the short-term investment climate further. These factors have raised concerns about Indias ability sustain the high growth rates it has experienced in recent years. The silver lining is the recognition by businesses, as cited in various reports and interviews, that the slowdown is largely the result of inaction on the governments part rather than any serious structural issues with the economy36. In terms of credit ratings, while there are strong reasons for the bearish sentiment in the short-term, the long-term view is bullish. In near term, while the economy as a whole is expected to experience
20
3. Short-term outlook by rating agencies was negative in mid-2012
slow growth some sectors are expected to perform well, explaining the investment grade rating given by most credit rating agencies.
Figure 12: India's credit ratings by various rating agencies
Rating Agency Standard & Poor Fitch Moodys Dagong Rating BBBBBBBaa3 BBB Outlook Negative Negative Stable Stable Date 25-Apr-12 18-Jun-12 05-Aug-11 11-Jul-11
NOTE: (1) For S&P, Fitch & Dagong, a bond is considered investment grade if its credit ratings is BBB- or higher. Bond rated BB+ Sometimes also refereed to as junk bonds. (2) For Moodys a bond is considered investment grade if its credit rating is Baa3 or higher. Bonds rated Ba1 and below are considered to be speculative grade, sometimes also referred to as junk "bonds. SOURCE: Websites of Standard & Poor, Fitch, Moodys & Dagong
11
21
4. MACROECONOMIC ASSESSMENT OF SRI LANKA

To develop a holistic perspective on the macroeconomic assessment of Sri Lanka, we used a number of sources of data. These sources include Central Bank of Sri Lanka reports and publications, data published by international organizations such as the IMF, UN, World Bank and CIA, and other key reports including The Next 4 Billion.
4.1. OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

Sri Lankas 26 year old civil war and recently the global recession have stunted growth, but post-conflict regions are now being developed amidst strong prospects for economic growth. Since the beginning of reforms in 1977, the Sri Lankan economy has diversified from its dependence on commodities like tea and rubber, to services like banking and telecom. Sri Lankas potential for growth was not fully realized because of a civil war between the original inhabitants, the Sinhalese, and the immigrants from colonial times, the Tamils, that lasted for 26 years from 1983 to 2009.
Poor economic growth persisted in the country even after the end of the war in 2009 because of the global recession, which resulted in low exports. The resulting balance of payments crisis prompted the IMF to step in with a Stand-By-Arrangement (2009-12) to stabilize the situation. In June 2012, the IMF, at the conclusion of their staff mission to Sri Lanka, stated that Sri Lankas macroeconomic health had improved. The current account deficit had been curbed, credit growth had been moderated and reserves had been restored to stable levels.37 The Sri Lankan economy is expected to 4. Gross domestic product (GDP) based on purchasing-pow benefit from increased exports as the global economy recovers. The peaceful environment has also brought Figure 13: Gross domestic product of South and Southeast about other favourable changes that have the Asian countries potential to spur growth. Military expenditure $ billions (PPP) is expected to reduce, giving the government Vietnam 500 more flexibility in managing the budget.38 The Bangladesh lifting of unfavourable travel advisories and 400 insurance, issued due to risk of war, will 300 facilitate growth of tourism and trade.39 In the two years since the war ended, the government has spent large sums of money to resettle Internally Displaced People (IDP) and to de-mine prior conflict areas. The government is also focusing on providing sustainable livelihood opportunities to IDPs, which could result in the inclusion of IDPs in the labour force.
200 100 0 1992 1998 2004 2010 2016E Sri Lanka Myanmar Afghanistan
valuation of country
Data is not available for Afghanistan before 2002 and for Myanmar before 1998 SOURCE: International Monetary Fund, World Economic Outlook Database, September 2011
Additionally, multiple infrastructure projects in conflict affected provinces and across the country are likely to be completed by 2013. Between 2009 and 2011, $1.2 billion was spent on infrastructure projects in northern areas alone. Sri Lankas GDP is forecast to double to $189.4 billion (PPP), in the 8 years following the end of the war in 2009.40 The economy grew 8% in 2010 and 8.3% in 2011.41 As of 2011, GDP stood at $116.3 billion (PPP) which is small in absolute terms relative to the size of other countries in developing Asia such as Vietnam, Bangladesh and Pakistan (see figure below). However, it is one of the highest in the region on a per capita basis. GDP per capita reached $5,600 (PPP), after showing strong growth in
22
the post-war years, rising 8.4% in 2010 and 9.7% in 2011. This figure is expected to continue with an increase to $9,000 (PPP) in 2017. The short-term outlook for GDP growth is moderate, given the uncertainties of the global economy. Strong growth of 8% was expected at the start of this year, but the IMF has revised its forecast to 6.75% GDP growth for 2012. 42 The lower forecast is partly due to the impact of the recession and Euro Zone crisis on Sri Lankas trading partners, which will impact the countrys exports. The consequent widening of the trade deficit is expected to put further strain on Sri Lankas balance of payments situation. To avoid this, Sri Lanka might have to go in for a tighter fiscal and monetary policy, which may further slow down output and GDP growth. Sri Lankas services sector is the engine of the countrys growth; construction and hospitality industries have grown significantly in the recent past. The contribution of agriculture, industry and services to Sri Lankas GDP stood at 11%, 60% and 29% respectively in 201143. Agriculture has seen the slowest growth of all three sectors, with a compounded annual growth rate of around 3.5% over the past decade. Tea, rubber, coconut and paddy are the main crops of Sri Lanka. Along with fishing, they form the bulk (approximately 45%) of agricultural output. Fishing has 4.seen strong growth of 12.2% in 2010 and 15.5% in 2012. Output for other crops in 2011 was Sector-wise contribution to GDP growth rate Figure 14: Weighted contribution to GDP growth rate by adversely affected on account of heavy flooding. 44 Currently, about a third of the sectors population is dependent on agriculture and 8.3% 8.0% allied industries. 2% Industry (i.e., manufacturing, mining, etc.) has been the fastest growing sector since 2004, 32% with a compounded annual growth rate of 28% 3.5% 7.5%. The growth of the industrial sector has 11% been broad- based, with construction (14.2%), 34% 61% 60% 62% mining (18.5%) and textiles (10.8%) achieving 56% 56% double-digit growth in 2011.45 46 With reforms and liberalisation after the war, building 2007 2008 2009 2010 2011 capacity is the prime focus of the sector as a SOURCE: Central Bank of Sri Lanka Annual Report -2011 whole. Much of the multilateral grants and loans that Sri Lanka has received have gone towards building infrastructure that is expected to help industries.
6.0% 15% 30% 36% 6.8% 6% 10% Agriculture Industry Services
The services sector has had the largest contribution to growth in GDP over the past 5 years, making it the engine of the economy (see figure above). In 2011, Sri Lanka experienced strong double-digit growth in multiple service sectors including wholesale and retail trade (10.3%), transportation and communication (11.9%), and hotels and restaurants (26.4%).
3
The global recession has affected Sri Lankas economy deeply, indicated by low FDI inflows; recent increase in net inflows has raised hopes. Sri Lanka has been facing a balance of payments crisis which is the chief threat to its economic stability and ties in with other aspects of the economy such as the fiscal deficit and exchange rate depreciation. The crisis became unmanageable in 2009, when the IMF had to step in with a $2.6 billion Stand-By-Arrangement in order to stabilize the situation. The IMF attributed the crisis to the reliance on short term financing of high budget deficits from international markets which were badly hit due to the economic slowdown that year.
23
ADB have Business since the war ended Lanka 4. FDI inflows Inclusiveshot upMarket Study for India and Sriin 2009, but equity flows have Draft Report been contracting for the past 5 years Figure 15: Composition of FDI inflows
$ millions 1,200 Loans and advances Intra-company borrowing Foreign loans Reinvestment of retained earnings by existing companies Equity
800
400
In June 2012, a press release issued by an IMF mission stated that macroeconomic indicators such as the current account deficit, credit growth and level of reserves had shown improvements. The areas that were still under pressure were identified to be government revenue collections and interest expenditures.
Net foreign direct investments have been increasing steadily since the 2007 2008 2009 2010 2011 end of the war in 2009 but total SOURCE: Central Bank of Sri Lanka Annual Report s-2006 to 2011 inflows have been erratic. For instance, total inflows declined in 2009 and 2010 but recovered in 2011 to reach $1.06 billion.47 The poor performance in 2009 and 2010 must be referenced against global FDI flows, which declined sharply in 2008 and 2009.48 Reflective of the recovery in global FDI flows, inflows into Sri Lanka in the first quarter of 2012 exceeded inflows in 2011 in the same period.49
0
In last 2 years the sectors that attracted the most FDI were infrastructure and tourism. Infrastructure 4 projects were the main recipients of FDI in 2010, attracting nearly 60% of total inflows. 50 Tourism accounted for 20% of total inflows in 2011. Although total inflows seem to have recovered from a downturn in 2009 and 2010, the equity component of inflows has decreased significantly from around 30% of total inflows in 2007 to single digit levels between 2009 and 2011. However, based on strong prospects for economic growth in the future, Sri Lanka will likely attract increasing amounts of foreign investment. Sri Lanka has performed strongly on human development indices for its income levels; standards in education and water and sanitation are high, while malnutrition is a major concern. The country has made progress in poverty reduction, while education and sanitation parameters are also above world averages. Nutrition remains an area of concern, especially given the high food expenditure ratio. Sri Lanka has also nearly completed the process of resettling people displaced due to the war.51 Sri Lanka boasts of an unusually high Human Development Index of 0.691. 52 For instance, Turkey has a similar HDI (.699) despite having more than double the GNI per capita (PPP) of Sri Lanka. Sri Lankas Inequality-Adjusted HDI was .57- a discount of 16.2%.The reduced value incorporates the effects of inequality on various sub-dimensions such as education and health. Sri Lankas Multi dimensional Poverty Index score is 0.021, which is not only much lower than most countries in South Asia, but also lower than countries like Turkey, China and Philippines.53 The proportion of poor to total population by the MPI methodology is 5.3%, which is significantly lower than the proportion of poor estimated by other poverty measures such as the National Poverty Line (22.7%) and the World Banks $1.25 Poverty Line (14%).54
HEALTH AND NUTRITION

Sri Lanka has been able to achieve relatively good healthcare standards for its population. The number of hospital beds per 1000 people was 3.1 in 2004, in line with the world average of 3. Almost all births (99%) were attended to by skilled health staff. 55
24
Malnutrition figures however, have not progressed at the same pace, and are a cause of concern. At 21.6% the prevalence of malnutrition, measured as weight for age for children under the age of 5, is roughly the same as the average for developing Sub Saharan Africa56 and much larger compared to Turkeys 3.5%.
EDUCATION
Educational standards in Sri Lanka are also relatively good. The student teacher ratio of 19 compares favourably with a world average of 23.57 More than 95% of the teachers are either trained or graduates themselves. There is gender parity in the number of children in schools. World Bank data shows that in 2006, 99% of all children who join school reach the final primary grade, indicating a low drop-out rate in primary education.
WATER AND SANITATION

91% of Sri Lankans had access to improved drinking water sources in 2010 compared to 80% in 2000. There has been an impressive jump, from 77% to 90%, in rural areas. The figure in urban areas is a near universal, 99%. The figures are now above the world average of 88%.58 In the same period, access to improved sanitation facilities increased from 82% to 92%, keeping Sri Lanka miles ahead of the world average of 62%. Interestingly, at 93%, rural areas have now surpassed urban areas in access to improved sanitation facilities. Open defecation was eliminated in rural areas and reduced to 2% in urban areas, a small figure compared to the world average of 23%.
4.2. KEY TRENDS SHAPING THE ECONOMY

Increasing proportion of the aged within Sri Lankas age demographics may put a strain on resources, especially public healthcare, indicating an opportunity for the private sector. Demographic and labour participation trends provide certain opportunities and risks for Sri Lankas competitiveness on the world stage. The percentage of population of working age has begun decreasing although the absolute number of people will increase to around 15 million in 2035, an increase of approximately 8% from the 2010 figure.59 60
Figure 16: Age profile of Sri Lankas population
Total population in millions
17.5 18.9 21.2 22.8 23.8 24.5 24.6
4. Population distribution by age
41%
36%
32%
30%
26%
24%
22%
0-19 20-59 60+
49% 9%
54%
54%
52%
51%
49%
46%
The percentage of people aged 60 years and above is forecast to nearly double from 9.3% in 2000 to 18% in 2025.61 The parent support ratio, has also increased from 2.1 in 2000 to 4.1 in 2025. The decrease in the labour participation rate, from 50.3% in 2000 to 48.1% in 2010, will also add to the strain if the downward trend continues.
To ease the pressures created by an increasing dependency ratio, Sri Lanka 1990 2000 2010 2020 2030 2040 2050 has already begun taking measures like increasing the retirement age of public SOURCE: UN Department of Economic & Social Affairs, World Population prospects, 2010 Revision sector workers. 62 These demographics shifts may be a burden for the government which currently provides free healthcare in its facilities. 63 This may also be viewed an opportunity for private healthcare services.
11% 14% 18% 23% 27%
32%
Although overall unemployment is decreasing, there is a large need for skilled jobs among the educated youth.
5
25
Sri Lankas overall unemployment rate has reduced significantly from 8.1% in 2003 to 4.9% in 2010.64 However, when unemployment rates across age-brackets are examined, they reveal that the unemployment rate of youth aged between 15 24 years is very high compared to older age-groups. 1 in every 5 youths is unemployed compared to 1 in every 20 for the entire population. The youth unemployment rate for Sri Lanka is considerably higher than other developing countries in South Asia. The youth unemployment figures for Pakistan and Bangladesh have been below 10%, while the overall unemployment rates were similar to that of Sri Lanka. 65 In terms of unemployment rate across different educational levels, rates are shown to be higher for people with higher educational levels suggesting either a skill mismatch or insufficient employment opportunities for educated people. These are challenges that Sri Lanka will have to address in order to extract the most from the remainder of the demographic dividend.
Figure 17: Unemployment in Srirates by education level level group 4. Unemployment Lanka by education and age
Unemployment rates by education level 18% 16 Unemployment rates by age group 50%
14
12 10 8 6 4 G.C.E (O/L) G.C.E (A/L)+
40
30 15 - 19 20 - 24 25 - 29 30 - 39 40+ 2002 2004 2006 2008 2010
20
Grade 5-9
Below Gr.5 2002 2004 2006 2008 2010
10
2
0 2000 0 2000
Note: (1) Data prior to 2004 for below Gr. 5 is N/A; approximated to that of 2004 (2) G.C.E (O/L): General Certificate of Education Ordinary level (3) G.C.E (A/L): General Certificate of Education Advanced Level SOURCE: Sri Lanka Labor Force Surveys 2000 to 2010
Note: Age groups 15-19 & 20-24 are clubbed into age group 15-24 in the reports of 2008,09 & 10 SOURCE: Sri Lanka Labor Force Surveys 2000 to 2010
Sri Lanka is attracting an increasing number of tourists post war; the tourism industry will 6be an attractive opportunity for investment. The end of the civil war has resulted in the increased attractiveness of Sri Lanka as a tourist destination. The number of tourist arrivals grew from 0.45 million in 2009 to 0.85 million in 2011 and the number of tourist nights increased from 4 million to 8.5 million in the same period.66 In that period, the receipts per tourist per day also increased from $82 to $98. Growth has continued into 2012, as earnings from tourism in the first quarter, grew 25.7% over the same period last year, amounting to LKR 38.7 billion ($340 million).67 Further, luxury hotel chains like Shangri-La, Hyatt and Sheraton are expected to enter the Sri Lankan market in the next few years. Hotels and restaurants gained an edge over telecommunications, as a major recipient of FDI in 2011. This was, however, mostly influenced by the construction of 2 luxury hotels accounting for $130 million in-flows. To capitalize on the increased number of arrivals, 11 new airlines registered to fly into Sri Lanka in 2010 and 2011. The national carrier also expanded operations to tap the traffic from emerging economies.
26
The government also launched the National Tourism Strategy in 2011 to make Sri Lanka a sought after tourist destination. As part of this program, the government created the Sri Lanka Tourism Development Authority (SLTDA), to facilitate investments in tourism. The SLTDA received more than 210 investment applications in 2011. The government is keen on increasing the nations capacity to cater to 2.5 million tourists by 2016, and has reduced the taxes on items required by the industry to expand, refurbish or upgrade their services.68
27
4.3. SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

59% of Sri Lankas population forms its economic base of the pyramid, and spends $23 billion annually. 58.5% of Sri Lankas population can be categorised as base of the pyramid, if we define the upper cut off of the segment as individuals earning $4 (PPP) per capita per day.69 This figure varies across the geographies. 79.5% (0.8 million) of the estate households, 60% (9.8 million) of the rural households and 43.5% (1.3 million) of urban households can be considered as Base of the Pyramid. The market size at the base of the pyramid is of particular relevance to inclusive businesses engaging the poor as consumers. Dalberg estimates, the total market at the base of the pyramid to be $45 billion (PPP) in 2011. In 2011, BOP expenditure on food was $26 billion (PPP). Housing, which accounts for expenditure totalling $4.8 billion (PPP), was the second largest market after food. The other large markets were energy ($2.1 billion PPP), transportation ($2 billion PPP) and personal care and health ($1.9 billion PPP).
4.
Figure 18: Segmentation of market at the base of the pyramid

Food vs. non-food market size $ billions 23 Break up of non food market size 10
38%
Other Education Personal Care & Health Transport Energy
Food
13
5% 10%
11% 11% Non-food 10
25%
Housing
SOURCE: Dalberg Estimates using Household Income Expenditure Survey 2009-10, Department of Census and Statistics
Expenditure data reveals that richer deciles spent a larger percentage of their incomes on transport, 27 communication and education. Notably, the spending on education varied from 1.8% for the poorest deciles non food expenditure to 5.9% for that of the richest decile.
28
4.4. CLIMATE FOR ENTERPRISE AND INVESTMENT

Sri Lanka is continuously improving its investment climate in order to achieve its $2 billion FDI inflow target in 2012. Sri Lanka jumped 9 places from 2011 and is ranked second best, behind Maldives, in the South Asia region with a Doing Business Rank of 89 (of 183 countries) in 2012. Sri Lankas rank in the Global Competitiveness Report follows closely, when it moved Sri Lanka to rank 52 (of 142 countries) in 2011-12 from 62nd position in 2010-11. Both reports, however, stated that Sri Lankas tax policy was a road block to competitiveness. Sri Lanka ranked 173 out of 183 countries in terms of the ease of paying taxes in the Doing Business Report. The Global Competitiveness Report also identified tax rates and regulations as the most problematic factor for doing business. An additional area of concern identified by the Global Competitiveness Report was macroeconomic stability. The high government budget deficit and inflation rate caused concerns about the macroeconomic environment in Sri Lanka, leaving it with a rank of 116 out of 142 countries. In response to these concerns the government has looked to rationalize tax policy and improve investor protection laws. Tax reforms have included reducing certain tax rates, replacing multiple rates with a single tax rate and setting up a Tax Appeals Commission to expedite the appeal process.70 Sri Lanka has also introduced tax reforms, which simplify and refocus tax incentives by restricting them to only strategically important projects. 71 These incentives were set up to attract investors during the civil war period and were previously a drain on revenues. The government is also considering revamping the Board of Investments (BOI) to ensure that the BOI does not withdraw concessions or change the terms of approval once they have been granted, thereby protecting investors from ad-hoc policy changes.72 The post conflict economy is expected to see strong growth in the long-term despite the current concerns. The short term risks have been mitigated by government policy measures, which have curbed the current account deficit to safeguard reserves.73 Even the double-digit inflation figures in the pre-war years have stabilized to single digit levels for the last three years. Sri Lankas government has implemented focused policy measures to attract investments. Total investments, which are already at a healthy 27% of GDP since 2005, will also facilitate growth over the long term. Investor confidence has been reflected in the increasing flows of FDI into the country since 2010.
29
5. INCLUSIVE BUSINESS MAPPING

5.1 OVERVIEW OF OUR METHODOLOGY
The following inclusive business market assessment for India and Sri Lanka adopts a two pronged methodology for data collection: 1) Firstly, primary data was collected and analyzed from a comprehensive online survey completed by senior executives of over 70 inclusive businesses (IBs). These survey respondents represent a wide range of sectors, size (measured by annual turnover), BOP engagement mode, and geographical presence across India.74 2) Secondly, in-person interviews were conducted with the senior management of a set of 21 companies in India and Sri Lanka, shortlisted from the survey responses. From these interviews, 15 businesses were ultimately chosen to be featured as case studies for this report. In addition to being proven, successful and impactful models with strong growth potential, these case studies also represent a diverse range of inclusive businesses. A profile of our survey respondents is depicted in Our 68 survey the figure below: respondents from India comprised a diverse set of companies
Figure 19: Distribution of survey respondents
68
LIS only 16% 67 3% 10% 24%
Distributor Employee Supplier
53
> 100 10-100 1-Oct 19% 9% 28%
68 Domestic PPP 1% Public sector 7% Foreign-owned 18% private sector
Including LIS
54%
Consumer Non LIS 29%
63% <1 43%
Domestic private sector
74%
Geographical presence1
1.
Engagement model2
Turnover ($ millions)
Legal entity
LIS: inclusive businesses (IBs) with operations exclusively in Indias 7 lowest income states (Bihar, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Assam, West Bengal, Rajasthan, Odhisha, North Eastern States). ; Including LIS: IBs with some operations in Indias lowest income states; Non-LIS: IBs with no operations in Indias lowest income states. 2. Companies which mentioned multiple modes of engagement were reclassified into their primary mode of engagement SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
29
In total, more than 70 responses were collected from the online survey, which represented wide geographic distribution across India. 70% of respondents were businesses with inclusive operations in one or more of Indias lowest income states, of which one third have inclusive operations exclusively in these states.75 The wide geographic distribution was present within sectors as well. Within 8 of the 11 sectors represented, more than 50% of the respondents have operations in lowincome states. Only one third of the respondents had no operations in low income states. Regarding their primary mode of engaging the BOP, 63% of respondents employed a consumer model, while 24% primarily engaged the BOP as suppliers, 10% as employees and 3% as distributors. As explained in more detail below, this distribution is only reflective of companies primary mode of engaging the BOP; several respondents utilized more than one way.
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In terms of annual turnover, 43% of survey respondents currently have a turnover of less than $1 million, and approximately one third have a turnover of between $1-10 million. An additional one third are quite well established, with turnovers of more than $10 million, while approximately one fifth are very big corporations, with over $100 million in annual turnover. A majority of survey respondents were domestic private sector entities; almost one fifth were foreign private companies. Few companies were publicly owned or were public-private partnerships.
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5.2 ANALYSIS OF FINDINGS

All four modes of engaging the BOP occur across multiple sectors, and at times multiple modes are employed in a single business model; the consumer-oriented model is most prevalent. As depicted in Figures 20 and 21 below, inclusive businesses within sectors adopt a variety of modes of engaging the BOP. Within agriculture, for example, though the largest component of survey respondents engage the BOP as suppliers of agricultural produce, some also employ the BOP (to work as company farmers), and consumer-focused agribusinesses sell inputs and/or advisory services to smallholder famers. For sectors that provide critical goods and services, such as healthcare, water and sanitation, education and financial services, the majority engage the BOP as consumers. This is seemingly because the primary reason of being inclusive is precisely to increase access of basic service to these populations.
Within sectors, inclusive businesses engage the BoP through various models
Figure 20: Primary BOP engagement mode of survey respondents Engagement model by sector N = 120
Agri-business Energy Healthcare Telecom,BPO and IT Retail
23% 38%
33% 19% 69% 46% 15% 25% 50% 60% 50% 75%
17% 25%
27% 19% 31%
30 16 13 13 12 12 10 6 4 3 1
Consumer Supplier Distributor Employee
15%
23% 25% 33% 20%
25%
25% 17%
Water and sanitation

Education Real estate and construction Textiles, garments and handicrafts BFSI Hospitality and tourism
10% 10%
17%
33% 25%
SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
30
Furthermore, individual inclusive businesses often simultaneously engage the BOP in more than one way. As depicted in Figure 3 below, businesses that sell critical goods and services to BOP populations often also employ individuals from similar backgrounds. Using local distributors, for example, is a very effective method of reaching last mile customers.
32
ADB Inclusive Business Market Study for India and Sri Lanka the most Draft Report common secondary mode of engagement Figure 21: Additional BOP modes engagement within each primary Presence of additional modes of of engagement modes of engagement N = 67
42 7% 14% 16 7 14% 50% 29% 2 Consumer Supplier Distributor Employee No additonal modes
40% of IBs are engaging the BoP in more than one way; the Employee model is
13%
13%
75% 50%
86% 50%
Consumer
Supplier
Employee
Distributor
Inclusive businesses often begin serving the BOP in one way, and eventually form additional engagement approaches to meet their other needs. Engaging in complementary inclusive initiatives 31 not only brings additional benefits to the target population, but is often also advantageous to the business. Star Agri, an agricultural production and supply chain company, buys agricultural produce from farmers while also providing them with storage facilities (for a fee) and advice on producing high quality crops.
Below, we outline our views on each of the four observed modes of engaging invested in awareness generat 44% of consumer oriented models the BOP as consumers, distributors, suppliers, or employees. of distributor oriented companies appointed franchisees at the lo
CONSUMER MODEL
For the purposes of this study, consumer-based inclusive businesses are defined as those providing a critical good or service to BOP populations. The key feature of companies adopting this model is ensuring affordability for BOP consumers. Waterhealth International, for example, sells purified drinking water in rural India and East Africa for a very low price to encourage the consumption of purified drinking water and thereby reduce the incidence of water-borne disease. Apollo Hospitals, one of Indias largest healthcare companies, is building its Reach hospitals in Tier II and Tier III cities, to bring tertiary healthcare services to underserved communities.
Figure 22: Consumer model strategies Engagement strategies of consumer models N = 43

Invest in awarenessgeneration/education 44% 26% 24%
E N
Provide Pay-peruse option

Provide consumer financing options
Sell smaller units

Provide no frills service option Provide subscriptionbased service Distribute service via mobile platforms Provide rental/ lease options
22%
22% 18% 13% 13%
A common challenge facing consumer-oriented inclusive businesses is not whether the NOTE: Some companies used strategies which were listed under different engagement models product/service is affordable in the absolute SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka sense, but the limited cash flow of BOP customers. To address this, businesses consider various financing options, such as monthly
33
Other
13%
installment plans, or the possibility of partnering with a microfinance institution (MFI). Edubridge, for example, a skills training organisation for rural youth in India, allows its students to pay class fees in installments. One of the ways in which consumer-oriented inclusive businesses are maximising their reach is through the use of the hub and spoke model. G.V. Meditech, for example, a hospital chain based in Varanasi, India, serves its rural patients through spoke micro-clinics. Patients needing more advanced treatment are referred to its larger, multi-specialty hub, located in the city. As opposed to a larger facility, multiple micro-clinics located in rural areas bring crucial healthcare services closer to rural populations, and their no-frills model reduces operational costs.
DISTRIBUTOR MODEL
Partly due to the high costs associated with using existing distribution channels, some inclusive businesses engage the BOP to reach underserved populations. For example, Greenlight Planet, a company that sells affordable solar-powered lighting products to the BOP, has created an innovative, 1,000-member strong distribution network. Village-level entrepreneurs, called Sun King Saathis, are recruited and trained to sell its solar lighting products in rural villages. These distributors are also responsible for educating consumers on the benefits of using solar lights. Greenlight Planet has found that successful distributors are not involved in any other entrepreneurial activities, which ensures that they are motivated by the sales commission to maximize sales. Further, they should be local, trusted individuals with rd 44% of consumer oriented models invested in awareness generation, while almost 1/3credibility within the local community. of distributor oriented companies appointed franchisees at the local level
Figure 23: Distributor model strategies Engagement strategies of distributor models N = 18
44%
Appoint franchisees at the village level
28%
%
Identify & train micro-entrepreneurs 24%
Partner with NGOs/MFIs to sell through their networks
21%
Decentralize production to be close to distributors
13%
Similarly, Global Easy Water Products (GEWP) engages farmers to distribute its affordable drip irrigation products to small-scale farmers. Whereas GEWPs distributors are not exclusively from BOP backgrounds, they are still local farmers, and therefore very effective. Given the sensitive nature of convincing a farmer to adopt a new technology which could potentially affect his livelihood, GEWP finds that local farmers are the most compelling salesmen. The company therefore invests heavily in training these front-line salesmen with basic marketing skills. Given the logistical challenges involved in reaching rural areas with critical goods and services, distribution is an area with significant potential for partnerships. ITC Ltd, for example, an Indian multi-business conglomerate, shares its distribution platform with other companies for a fee. This reduces the costs of distribution 37 for every stakeholder.
Provide financing to meet costs of up-front investment
12%
Other
10%
NOTE: Some companies used strategies which were listed under different engagement models SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
SUPPLIER MODEL
Several inclusive businesses, especially those in the agriculture sector, engage BOP populations as suppliers of key inputs.
34
ADB Inclusive Business Market Study for India and Sri Lanka The key strategy of Draft Report
IBs that engage the BoP either as employees or suppliers is to invest in training and skill development
CIC Agri, one of Sri Lankas largest seed to Figure 24: Supplier model supplier models Engagement strategies of strategies shelf agriculture companies, engages over N = 22 20,000 farmers as suppliers of agricultural Invest in training/ produce. Contributing to 6% of Sri Lankas education overall agricultural produce, CIC Agris impact on farmer livelihoods is very significant. It Invest in supply chain provides its vast network of farmers with its infrastructure own seeds and other inputs (such as fertilizer), Engage through and later buys the produce back from these intermediaries farmers at fair prices. To further support its farmers, CIC Agri has also set up a loan scheme Organize suppliers into for them, and provides several forms of cooperatives/associations consultancy services to educate its farmers on farm and soil content management, and Provide financing/credit effective farming and storage techniques.
29%
26%
24%
19%
19%
Other 16% Supplier models are also commonly found in the handicrafts and retail industries. Industree Crafts, a lifestyle retail chain and supplier of NOTE: Some companies used strategies which were listed under different engagement models home dcor products in India, engages 360 SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka suppliers (mostly women) through a network of 18 Self-Help Groups (SHGs). Recognising that networks of rural women are an ideal supplier base for Industree, it proactively organized women into SHGs, and assisted in them in securing loans for working capital against credit notes provided by the company. Furthermore, it provided support with sourcing materials (in this case, natural fibre for weaving) and with training on creating high-quality The keyproducts. of IBs that engage the BoP either as emp finished strategy
EMPLOYEE MODEL
to invest in training and skill development
Employing large numbers of BOP individuals is Figure 25: Employee model strategies Engagement strategies of employee models another way through which inclusive N = 31 businesses are directly increasing BOP incomes. MAS Intimates, a Sri Lankan lingerie manufacturing company, employs over 50,000 employees to produce apparel for global brands such as Victorias Secret, Calvin Klein, Ann Taylor, Speedo and Nike. 80% of these employees are women. Though MAS Intimates costs of production are not as low as that of other developing countries that specialize in apparel production, such as China, the company was insistent from inception on providing its workers with fair wages and creating a working atmosphere that significantly surpassed safety and environmental standards. As a result of its strong social values, it is one of Victoria Secrets preferred suppliers, and has won widespread recognition for its model.
Invest in in-house training and skill-upgradation Simplify & standardize work processes Provide benefits above minimum required by regulations Partner with local schools and institutes Partner with NGOs that provide training 16% 40% 54%
Engagement N = 22
Inve
Invest in in
En in
13%
10%
Organize s cooperatives
Offer financing support for training/education in extern

Other
9%
Provide fin
4%
MAS Intimates has built manufacturing plants in semi-rural areas, bringing crucial jobs to thousands of Sri Lankan youth. In addition to the technical skills required for their jobs, MAS employees are trained in general life skills and are encouraged to think about career advancement.
35
Companies adopt inclusive business models to serve profitable gaps in the market sustainably. Whether companies decide from inception to adopt an inclusive model, or alter their operations to be more inclusive, they experience several benefits of engaging the BOP. Whereas the top reasons cited by our survey respondents of engaging the BOP included lower labour costs, improved relations with the government, and lower transaction costs, the key reasons cited by our interviewees were more nuanced. While some inclusive businesses may have been conceived for Whereas the the benefits to companies of adopting an one reason in particular, others were started due to a combination of top following reasons:
financial, the BoP experience increased access to critica
GOOD FOR BUSINESS / CUSTOMER RETENTION

Aitken Spence, a hotel chain with properties in Sri Lanka and India, engages the BOP in several ways. It sources raw agricultural produce and biofuel from local farmers, and employs villagers as tour guides and hotel staff within its premises. Aitken Spence had more than one reason for deciding to actively engage the BOP, though they were all related to creating productive and mutually beneficial relationships with the local community. For companies located in rural areas, especially large ones, it is imperative for the local community to be supportive. This happens when the community also experiences undeniable benefits from the business.
Figure 26: Benefits to company of being inclusive

% of respondents, N = 68
1 Not important 2 3 4 Very important
Access to
Lower transaction costs
23
15
45
18
Low labour costs Improved relationship with the government Increase in profits
17
23
25
35
Improved
27
16
33
24
Reduced
15
30
36
19 Improved
Stable supply of inputs
37
26
21
16
Access Improved brand/reputation
30
45
19
As hotel guests often want to experience local Access to new customers 42 37 13 8 ingredients and materials, Aitken Spences hotels depend on locals to lead recreational To contribute 75 16 5 excursions and tours.76 For this reason, the hotel to social change maintains a strong, and mutually beneficial and 4 respectful relationship with the local SOURCE: Results from Dalberg-administered survey of inclusive businesses in India communities surrounding its resport. To further ensure this, Aitken Spence hires local high school graduates, guaranteeing them a job close to home. Furthermore, Aitken Spence chooses to engage local BOP farmers as key suppliers of raw agricultural produce, even though it may be easier to source its food from one large supplier. In order to meet the hotels quality standards, therefore, it trains local farmers and provides them with the necessary equipment, such as crates. Another example, CIC Agri depends on tens of thousands of small holder farmers to supply the company with agricultural produce. In order to guarantee them the best price possible, it trains its farmers on how to maximise the quality of their produce. The company offers complementary extension services (technical assistance trainings), not only because its mission is to improve rural livelihoods, but also because it needs to gain the trust of its farmers to ensure a sustained working partnership. As farmers observe their own productivity and profitability increasing due to support from CIC Agri, they are less likely to see the company as exploitative, and therefore likely to remain loyal suppliers. Though several companies employ large numbers of low-income individuals out of need rather than a social initiative (such as those in mining, agriculture, textiles, etc), they are not inherently inclusive businesses. Those that are inclusive, such as those featured in this study, have gone above and beyond simply employing the BOP. They are either heavily investing in skills training, offering a higher-than-minimum salary, or providing them with significant benefits.
Stab
36
FILLING A PROFITABLE GAP IN THE MARKET

Though some businesses may have been inherently inclusive from inception, they may have primarily started in order to fill a gap in the market. Star Agri, for example, an agricultural production and supply chain company, was started when its co-founders recognized the glaring need to address Indias vast, disorganized agricultural sector. As a result of its operations, Star Agri benefits thousands of farmers as well as the companies that procure its produce. Additionally, Vortex Engineering develops ATMs for rugged, rural areas. As traditional ATMs need to be maintained within a certain temperature range, they are inappropriate for rural areas, where there are often no reliable sources of energy to power an air conditioner. Vortexs ATMs have been designed specifically with this environment in mind, and for use by BOP populations. There are now thousands of Vortex ATMs across India, bringing access to financial services to tens of thousands of rural populations. These BOP individuals are thus able to save and develop financial literacy, and government banks are now able to more effectively reach rural populations. Vortex is now poised to export its model to other countries in Asia and Africa. The mode of engagement affects the benefits of IBs to the BOP; key benefits include improved access to criticaltop benefits to companies of adopting an inclusive model are Whereas the goods and services and improved livelihoods.
financial, the BoP experience businesses Figure 27: Benefits to the BOP of inclusiveincreased
% respondents, N = 68 1 Not important 2 3 4 Very important
access depicted ingoods and services several key As to critical Figure 27, there are
benefits to BOP populations of companies adopting inclusive models, the most important of which is increased access to basic services.
Access to basic services
40
20
27
13
IMPROVED ACCESS TO CRITICAL GOODS AND SERVICES

A key benefit to BOP populations of inclusive businesses is increased access to basic goods and services. In many cases these are services that the national government has failed to deliver adequately. Sarvajal, for example, a Gujaratbased company that builds reverse osmosis plants in rural areas, sells purified water to underserved communities. Due to its very low cost, consumers are able to afford clean water, and the companys for-profit model keeps it sustainable. Vortex is increasing access to financial services for rural populations with its appropriate technology ATMs, designed for energy-poor locations.
35
Access to credit
37
29
20
15
Improved health/hygiene
43
29
20 8
Reduced discrimination
40
36
16 9
Improved education/skills
33
51
12 4
Access to information Stable or increased income
67
18 9 5
72
21
2
SOURCE: Results from Dalberg-administered survey of inclusive businesses in India
SKILLS DEVELOPMENT
By engaging them as employees, distributors or suppliers, inclusive businesses are developing the skills of BOP populations. In addition to a steady source of income that is often the result of this engagement model, these skills empower the BOP and fundamentally alter their economic trajectory. MAS Holdings, an apparel manufacturing company based in Colombo, and one of Victoria Secrets preferred manufacturers, employs thousands of youth from BOP backgrounds. Though their wages are not significantly higher than other employment opportunities available to educated youth in Sri Lanka (due to a shortage of labour), the professional and life skills taught to MAS team
37
members such as critical thinking and problem solving skills are significant non-financial benefits experienced by the employees. 77
INCREASED INCOMES
Inclusive businesses that engage the BOP as suppliers, distributors and employees directly increase the incomes of these individuals. In most cases, these individuals are earning a higher income than they otherwise would without the presence of the inclusive business.
The agriculture companies included in our survey, such as Star Agri, CIC Agri and Nestle, all guarantee the highest possible price to the farmers that supply them with agricultural produce. Star Measuring plague the Indian Agri is able to do this by removing the multiple middle men whosocial impact agricultural sector, impeding farmers from getting higher prices for their crop. CIC Agri and Nestle both train Indirect their farmers on how to improve the quality of their crop, to ensure that their produce is bought at a Direct Number treated Increase in salary fair price. As a result, famers are earning higher incomes, benefitting from trainings that -are very of patients trained Number of persons Increase in cultivated land Number of users, drink water use relevant to their livelihood generation, and are protected from exploitative middlemen. Increase in productivity/yields
Access to energy Number of farmers engaged No. of cities reached, number of Milk collection per farmer a result of purchasing its Inclusive businesses may also indirectly contribute increased incomes. As No of camps conducted Awareness about commodity prices Number solar lanterns, for example, Greenlight Planets customers are able to continue working during the of jobs created Consumption patterns Reduction in kerosene usage, exp Amount saved by water consumers on events and nights, allowing them to be productive for longer hours each day. Aspirational goods purchased health Co2 reduction 75% of inclusive businesses in India are either Figure 28: Level of social impact measurement - Rise in students trained
directly or indirectly measuring their social impact. Almost half of the IBs in our survey measure their social impact indirectly. This is mostly done by measuring output indicators, such as number of individuals trained, treated, employed, or with improved access to a critical good or service. IBs that are improving livelihoods tend to measure changes in income, number of jobs created, or changes in the expenditure of aspirational goods.
% of respondents, N = 64 Directly measure 30%
Indirectly measure
45%
Do not measure
25%
Direct measures of social impact, would include metrics such as an increase in awareness about commodity prices and differences in expenditure on healthcare services (to treat water-borne disease). Inclusive businesses choose geographies similar to other businesses presence of a strong market and local availability of human and material resources. Across sectors, inclusive businesses have operations throughout India. This holds true for the Sri Lankan respondents as well. The majority of inclusive businesses have operations in at least one of Indias lowest income states. For some sectors, such as textiles and handicrafts, it is more advantageous for production to take place in the lower-income states, given the large availability of labour. A few companies, however, lament the fact that logistical challenges and poor infrastructure make it very difficult to operate in these states. Some consumer-oriented IBs are fearful of the populations poor credit record and subsequent reluctance of financial institutions to serve this region. This would hamper on their ability to partner with a financial institution to facilitate sales. Furthermore, some companies view local experience as a key criterion for operating in this region.
38
ADB Inclusive Business Market Study for India and Sri Lanka Respondents covered a variety of sectors, Draft Report
with nearly every sector having a
pan-India presence
N=68
Figure 29: Geographical spread of IB operations
LIS only Agri-business 8%
Including LIS 62% 70% 44% 57% 57% 33% 14% 7 29% 57% 20% 5 7 7 20% 9
Non LIS 31% 10 13
Telecom,BPO and IT 10% Healthcare Education Energy Water and sanitation Retail 22% 29% 14% 43% 80%
Real estate / construction 33%

Textiles, garments and handicrafts Hospitality and tourism 67%
67%
33% 3 67% 3
BFSI 33%
1
37
STRONG MARKET
When choosing where to operate, consumer-oriented inclusive businesses first determine whether or not there is a market for its good/service in a prospective region. Attractive geographies would be ones in which there is a lack of access to this good/service. Some consumer-oriented companies also need to ensure that the BOP population has a minimum level of purchasing power. Other IBs focus more on where the need for their service is the strongest, and which areas have the largest BOP populations. One way that geographic expansion is achieved at a low-cost is franchising. AISECT, for example, has expanded to 27 states and 3 union territories because of its franchise network. In addition to being a low-cost model (the company does not have to bear the cost of building new facilities), local entrepreneurs who start each new AISECT centre have crucial local knowledge to leverage.
AVAILABILITY OF KEY INPUTS

Many inclusive businesses choose their geographic location based on key inputs. Desicrew, for example, which runs rural Business Process Outsourcing (BPO) centers in Karnataka, chooses the location of its centers based on the availability of infrastructure, universities, and proximity to a major railway stop. This would ensure a steady supply of young, educated graduates to employ. Further, some IBs choose to locate where there is a strong presence of a complementary sector. SELCO, for example, a company that sells solar lighting products to off-grid and underserved rural populations, chooses to operate in areas with a strong and mature banking sector. Financing partners are needed to provide its consumers with financing options. Waterhealth International, which sells purified drinking water to rural populations, chooses areas with a good supply of groundwater when identifying where to expand its centres. Edubridge, a training centre for rural youth, chooses to locate its activities where there is a presence of on-the-ground partners. Star Agri, an agricultural production company, assesses for the total
39
population of farmers, the presence of potential substitutes to Star Agris services, and the relative ease of doing business in particular states.
PERCEPTIONS OF OPERATING IN INDIAS LOWEST INCOME STATES

Interestingly, perceptions of operating in Indias low-income states is more or less similar between those IBs that already have operations in these geographies compared to those that do not. The Concerns with operating in low income states are related to poor biggest concern is the lack of infrastructure in these states. Other risks are perceived to be the difficulty of finding skilled manpower, security concerns are higher among IBs goods or infrastructure and manpower; and a low willingness of consumers to pay for services. presence in LIS with no
Figure 30: Perceptions of operating in low-income states
% of companies operating in that geography, N=59 Poor infrastructure Lack of skilled manpower Regulatory risk Low willingness to pay Security concerns or poor law enforcement Lack of relevant physical conditions
63 69 19 41 38 41 31 32 29 31 6 10 13
LIS presence No LIS presence
49
50
Cultural barriers
No challenges experienced/perceived
22
Scarcity of talent and company innovation are critical to the growth of IBs, though specific success factors vary across sectors SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
Of note is the observationWhich of the following have a potential that 50% of our respondents that do not have operations inthelow incomeIB ? to hamper growth of your states % of companies which markedstates to be perceive the security concerns in low income the factor, N=60 a significant challenge, whereas only about a third of IBs working in this area agree with this view.
Scarcity of quality talent 72%
Which of the following have a potential to 43 Figure 31: Criticalthe growth of your IB? enable growth factors
% of companies which marked the factor, N=59

Company innovation Access to technology Rise in domestic consumption Government incentives Increasing export opportunities Lower cost of physical inputs Lower cost of human resources M&A opportunities 32% 27% 22% 19% 14% 51% 51% 71%
Another interesting observation is companies without Finance income states operations in lowfor capital investments do not perceive60% lack the of talent to be as acute a challenge as it apparently is, Regulatory complexity 57% according to those that have experienced this. Furthermore, IBs unfamiliarcapital low income states do Access to working with 48% not think cultural barriers would be an issue, whereas Poor infrastructure 45% one fifth of IBs in low income states believe this to be an issue. Consumer reluctance
to change behaviour High cost of non-labour inputs High labour costs 38% 28% 25%
48
40
Technology and cost management will remain the critical success factors for inclusive businesses.
TECHNOLOGY HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE IMPACT OF INCLUSIVE BUSINESSES
The majority of inclusive businesses, not unlike any business, would benefit greatly with access to technological products. Across all sectors, technology was identified as a key factor to the success of IBs. Greenlight Planet, for example, is currently piloting the use of mobile technology to track the sales of its 1,000 distributors. This would result in real-time data that would allow optimal inventory management and sales trends. They are also experimenting with remote product monitoring technology that will help them develop new, affordable leasing models. Technology is also seen as the key to keeping a large network of decentralized stakeholders engaged. AISECT, which has set up thousands of centers throughout India that offer educational and skills training services to rural youth, sees technology as the way to improve processes and its management information systems. Star Agri, an agricultural production company, would use technology to keep its network of thousands of farmers quickly and effectively informed of the services available to them, which many farmers are not even aware of. Companies like Shree Kamdhenu Electronics are allowing dairy farmer collectives to gain from the growing demand for dairy products by supplying them with technology with which to improve the quality of their milk. Electronic measurement and quality testing products allow these collectives to assess for themselves the quality of their milk, making the milk collection process transparent and efficient. The role of technology will be particularly important for businesses in the agricultural sector. As agricultural companies strive to capture more value, they will focus on producing more value-added products, such as and company innovation are critical to the growth this will Scarcity of talentcheese and yoghurt. Unlike traditional farming practices, of IBs, require more machinery. In the Sri Lankan market, this development though specific success factors vary across sectors will happen with a growth in its GDP per Which of the following have potential capita, which is expected to increase from its current level of $2,800 to $4,000 aby 2016. Demand for to dairy and processed food products will increase as incomes and tourism rises.
Which of the following have a potential Figure 32: Key riskto hamper the growth of your IB ? factors enable the growth of your IB?
% of companies which marked the factor, N=59 Furthermore, whereas more than half of

Scarcity of quality talent Finance for capital investments Regulatory complexity 72% 60% 57%
Access to working capital

Poor infrastructure Consumer reluctance to change behaviour High cost of non-labour inputs High labour costs
48%
45% 38% 28% 25%
Indias BOP population is rural and subsistent on agriculture, Sri Company innovation 71% Lankas labour market is tight, and as incomes rise, labourAccessexpected to move out51% agriculture. As is to technology of machinery will be needed to replace farmers, Rise in domestic technology consumption a greater 51% in the future will play role growth of agricultural companies. The use of Government incentives 32% technology would not only increase productivity, a key priority for Sri Lankas agriculture sector, but it would Increasing export 27% opportunities contribute to improved farmer livelihoods. CIC Agri, a Lower cost company, believes its farmers big agribusiness of 22% physical inputs incomes could be doubled with technology.
COST MANAGEMENT
Lower cost of human resources
19%
M&A opportunities 14% Another key success factor for inclusive businesses is the ability to keep costs as low as possible. Apollos Reach Hospitals, for example, need to keep operating costs at a minimum to ensure its services stay affordable for its target rural patients. It 48 not only is
41
consumer-oriented IBs that feel the pressure to maintain costs, however. Desicrew, which builds rural BPOs in India, has targets for its centres to have standardized costs, so that the company can remain competitive. Lack of access to affordable working capital, complexity in the regulatory environment, and shortage in qualified manpower are key challenges to the growth of inclusive businesses.
LACK OF ACCESS TO AFFORDABLE WORKING CAPITAL

In both India and Sri Lanka, inclusive businesses are facing a significant challenge of not having access to affordable working capital. Ideally, working capital could be raised in the form of debt from a local bank. However, in India, banks traditionally do not give debt to young companies, especially those without assets/collateral. Banks regard businesses that have been operational for several years to be safe investees. However, consumer-focused inclusive businesses often adopt an assetlight model, to keep costs down and thereby stay affordable for BOP consumers, reducing their ability to provide collateral. As local banks tend to regard young companies as too risky, working capital needs are often most pressing during the early stages in a business growth trajectory. Greenlight Planet, for example, has stated that its only major bottleneck to growth is a lack of working capital. They are able to fund all their operations with existing capital reserves, but the unavailability of affordable working capital is the only reason why it is not already operating in more states across India. As expressed by several companies, access to debt would help ease the pressure on working capital, and would enable them to grow faster. Global Easy Water Products (GEWP), that sells affordable drip irrigation technology to small-holder farmers in India, finds it challenging to keep inventory in time for its busiest season due to its tight cash flow. Water Health International, which sells purified drinking water to rural populations, and Apollo, a leading hospital in India that is launching tertiary healthcare centres in Tier II and III cities, have both received debt funding from the IFC at cheaper rates than those offered by Indian banks such as ICICI. In Sri Lanka, debt is similarly expensive; however this problem has not disproportionately affected inclusive businesses, as in India. Whereas in India, interest rates on debt for early-stage inclusive businesses are a reflection of their perceived risk level, in Sri Lanka government policy has dictated much higher interest rates, aimed at correcting the countrys severe balance of payments situation. Since January 2012, Sri Lanka has hiked interest rates by 75 basis points, or approx 11%. Sri Lankan companies are therefore not growing as fast as they could be with additional funding. Kelani Valley Plantations, for example, a company that produces high quality tea and rubber in its estates, has found that the return on an investment to replant ageing tea bushes would not be high enough to cover current interest rates. As a result, the only investments made are funded by a small percentage of its annual profits. The Sri Lankan inclusive businesses included in this study, however, are quite big. For them, a lack of financing is impeding fast expansion of an already large and established business. Smaller inclusive businesses in India that are either approaching profitability or recently achieved profitability do not have the options that some Sri Lankan companies have. CIC Agri and MAS Intimates, for example, has grown using its own capital and MAS Holdings has grown through joint ventures with other companies.
COMPLEXITY IN REGULATORY ENVIRONMENT

Though some inclusive businesses were started to provide an alternative, market-based approach to the traditional government-provided basic services, others are large corporations with a large impact on the local economy and their operations could be significantly improved with the right
42
government policy. Lack of adequate support from government on problems that need to be solved at an industry-wide or nation-wide level is an issue for companies in both India and Sri Lanka. Agricultural companies across Sri Lanka, for instance, are facing the challenge of low productivity. Nestle Lanka, for example, suffers from low productivity of its dairy farmers. Sri Lankas production per cow is 3 litres, compared to Indias 9-10 litres, Pakistans 20 litres and New Zealands 30 litres.78 The government has increased the purchase price of milk, which has increased the supply of milk, but the productivity has not changed. This productivity issue is not one that can be solely solved with financing; ideally the Sri Lankan government would be involved in attempts to systematically increase the countrys milk production capacity as it would require working with technical experts from other countries and making use of artificial insemination on a national scale. Tourism is another sector whose growth is currently stifled due to a lack of government support, as is the case in Sri Lanka, where tourism is likely to grow exponentially and contribute significantly to GDP growth over the next several years. There is currently a gap, however, between the countrys current capacity and what is needed to accommodate the 1.5 million tourists per year expected by 2016. Though extensive infrastructure development is required, the private sector is reluctant to make the necessary investments without active government support to promote tourism (especially to promote Sri Lanka as a high-end destination). In India, GEWP experiences negative impacts on its businesses when local politicians promise the distribution of free drip irrigation systems for farmers during election season. Government subsidies are furthermore allowing inefficient competitors to stay in business. Removing these subsidies would force manufacturers of drip irrigation products to stay innovative. When companies supply these products to the government (as opposed to GEWPs model of selling directly to farmers), they are not forced to optimize the effectiveness of their products. Waterhealth International also disagrees with government subsidies on water, stating that the distorted price of water does not incentivize people to understand the true scarcity, and therefore value, of purified water. On the other hand, several inclusive businesses have benefitted significantly from support from the government. Vortex, for example, has received government support to set up ATMs in rural areas. AISECT and Edubridge, two education and skills training organizations, have received a credit line from the National Skills Development Corporation at a concessionary rate, which proved critical to their scale. In the case of AISECT, these funds are financing expansion into new states, the cost of manpower, as well as content development and process improvement throughout the company. Government policy can therefore either support or restrict the growth of inclusive businesses. By partnering with businesses, governments can provide crucial support to inclusive initiatives, if not financially then by supporting their image/credibility.
LACK OF TALENT
A common issue for IBs in India and Sri Lanka is the shortage of technical and managerial talent. Apollo, a leading hospital chain in India, is experiencing a problem faced by the healthcare sector as a whole in India; the lack of skilled manpower. This is a bottleneck faced by other sectors too; Star Agri, an agricultural production company, finds it hard to find talented business managers.
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Funding to 5.3 FUNDING NEEDS OF INCLUSIVE BUSINESSES date of IBs equity and debt
SOURCES OF FUNDING TO DATE
To date, the inclusive business initiatives in our study had been funded from a variety of sources. Businesses that were recently incorporated to serve the BOP specifically have mostly been funded with a combination of equity and debt from early stage impactoriented investors and/or angel funders. Some companies received financial support from social incubators or from government bodies, such as the National Skills Development Corporation.79 Equity The majority of equity funds have been raised by venture capital funds, including impact investors and other funds with a social focus. Specific funds that have invested in our survey Sources of equity funding: respondents include Aavishkar, Aavishkar IndoUS SIDBI, Venture Partners, and BOMA LLC. BOMA LLC One third of the equity acquaintances.
Figure 34: Debt received to date
100% = number of respondents 21 17
SIDBI VC IndoUS funding Venture these Partners
Sources of equity fundin Aavishkar BOMA LLC SIDBI VC IndoUS Venture Partners
Figure 33: Equity received to date

Equity VC
42%
< $1 mm
41%
Promoters and friends Private Equity Angel Investors Other*
33%
$1-5 mm $5-10 mm >$10 mm
31% 14% 14% Equity received
13% 9% 4% Sources of equity
*Other =
Internal profits, Government Banks for Agricultural and Rural Development SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sources of debt Sri Lanka funding:
1 National Bank
ng to date of IBs equity and debt
IB
Axis Bank NABARD1 Hub Ventures initiatives was IDBI Bank NSDC Union Bank of India Debt SBI Intellecash
from promoters themselves, or
The majority of debt raised by IBs has been from commercial banks, such as Axis Bank, Hub Ventures, IDBI Bank and Intellecash. Almost 15% was also raised by government financial institutions, such as the National Bank for Agriculture and Rural Development (NABARD), the National Skills Development Corporation, the State Bank of India and Union Bank of India. Credit Guarantee Though only a very small minority of businesses in our study had received a credit guarantee, they came from a combination of commercial banks, such as Rabobank and BOMA LLC,49 and private sector companies, such as Fab India.
Commercial banks Government banks Microfinance Institutions Private funds
67%
< $1 million
65%
14% 10% 10%
$1-5 million $5-10 million > $10 million
18% 18% Debt received
Sources of debt
*Other =
and
Internal profits, Government Banks for Agricultural and Rural Development SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
1 National Bank
FINANCING REQUIREMENTS
As depicted in the figures below, inclusive businesses across all sectors represented in our survey require an investment amount that matches ADBs proposed deal size, but especially those in the Telecom, Education and Energy sectors.
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Funding to date of IBs equity and debt

Figure 35: Credit guarantees raised to date
100% = number of respondents 5 Commercial banks 3
40% < $1 mm 67%
Private sector company
60%
$1-5 mm $5-10 mm
>$10 mm 33%
Sources of credit guarantees

*Other =
Credit guarantees received
1 National Bank
Sources of equity funding: Aavishkar BOMA LLC SIDBI VC IndoUS Venture Partners
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Figure 36: Required investmentInformation sectors, especially size, by sector

N = 56
Telecom, BPO and IT 57%
Our proposed deal size meets the requirements of companies across multiple Technology, Education and Energy
29%
14% 7 17% 6 29%

7 5 11 4 8 3 3 1
< $1 million $1 - 5 million $5 - 10 million > $10 million
Education
Energy Retail Agri-business Water and sanitation Healthcare Telecom and IT Textiles, garments and handicrafts BFSI Real estate / construction 36% 29%
67%
43% 60% 18%
17%
40% 45% 50%
50%
13% 13% 33% 33%
25% 33% 33%
50% 33% 33%
50%
50%
45
45
It is also compatible across geographies and modes of engagement

Figure 37: Investment size by geography and mode of engagement
Requirement of deal size by geography 100% = number of respondents, N = 56
9 17
29% 42%
Requirement of deal size by mode of engagement 100% = number of respondents, N = 107

42 5% 33% 30% 20 5% 20% 28% 44% 29
10%
31
16 > $10 million $5 - 10 million $1 - 5 million < $1 million
33%
11% 41% 33% 35% 19% 24%
28%
25%
24%
22% 6%
38%
45%
34%
31%
3% Including LIS Consumer Supplier Employee Distributor
LIS only
Non LIS
Though the required investment amount does not seem to vary significantly according to BOP engagement model, several inclusive businesses mentioned the need for longer investment timelines than traditional commercial investments. Tourism, for example, is a sector for46 which large investment sizes are required, and returns on investment take time to generate. For example, Aitken Spence, the owner of a hotel chain in Sri Lanka, estimated an approximate cost of $40 million to build a 500-room hotel, and a rangeuse grant fundingreturns could be made by investors. Inclusive businesses would of 8-10 years before to increase training, R&D
Figure 38: Ideal grant-funded investments
and their use of technology
% respondents who identified reason as significant1, N = 68 Training R&D IT systems and processes Hiring people Market research Plant and machinery Other HR systems and processes Finance and accounting systems New office space
1 Respondents
Technical Assistance financing would be an ideal source of funds to address various inclusive business needs.
59% 51%
EMPLOYEE TRAINING
Were inclusive businesses from our survey to be eligible for grant funding, or to qualify for potential technical assistance, across all sectors, the top need for inclusive businesses would be the training for their employees, suppliers and distributors. Nestle Lanka, for example, would use TA support to train its 15,000 dairy farmers that provide it with milk, to improve their productivity. Nestle cannot incur this cost from its own reserves, as it would be too high and distract from the business core activities.
40% 37% 32% 22% 18% 18% 16% 15%
Another agricultural company, Star Agri, 47 has pointed to the herculean task of educating its wide network of farmers in concepts that are crucial to their livelihoods, such as the importance of following weather reports, forecasted crop prices, managing and storing harvested produce, and managing their finances. Though Star Agri is
chose more than one option SOURCE: Results from Dalberg-administered survey of inclusive businesses in India
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taking on the cost of this training itself, further training is an area into which it would benefit from TA funding. Jaipur Rugs, a Rajasthan-based manufacturer of high quality hand-knotted carpets would benefit from further developing the skills of its 40,000 carpet weavers, and developing business literacy to improve upward communication from the weavers to managers. All these companies are currently taking on the cost of such trainings themselves, as they have no choice and doing so is crucial to their business. Since every business is constrained by its own funding capacity and manpower, and there is an obvious trade-off with other areas which could be supported with these resources (especially activities that are core business priorities). They are inevitably growing more slowly than would be the case if this investment could be made with grant funding. A few IBs, such as Aitken Spence, Industree Crafts and AISECT, have set up foundations to absorb grant funds from government and other sources to be deployed towards training.
RESEARCH AND DEVELOPMENT

The second key area IBs would like to strengthen is Research and Development (R&D). Given that R&D projects are usually relatively riskier initiatives and are regarded as an investment rather than revenue-generating activity for the business, most IBs would use grant funding for this cost. Greenlight Planet, for example, would use TA funding to work on developing new models of solar lamps.
DEVELOPING IT SYSTEMS
The third area that IBs would like to strengthen is the use of IT systems and processes to improve their operational efficiency. IBs across sectors referred to the desire to improve their processes through the use of technology. Waterhealth International (WHI), for example, recognized the need to build an online enterprise resource planning system to streamline its operations. The costs involved in procuring a custom-made system were too prohibitive for the company, however, so WHI created the system itself. Unfortunately, due to the significant financial and non-financial resources that were devoted to developing this system, WHI is now reluctant to share its platform with other businesses. As technological investments are often costly, but generate multiple benefits, this is an investment that inclusive businesses would make with grant funding.
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5.4 IMPLICATIONS FOR ADB

INDIA
Small and medium companies, across modes of engaging the BOP, need ADBs support in the early growth stage more than larger firms. Inclusive businesses in the early growth stage where funding requirements are in the range of $1$10 million are not likely to receive affordable debt from local banks, regardless of strong growth potential, social impact, and mode of engaging the BOP. Their equity requirements also remain unmet due to the low limit on funds available with existing seed fund providers and impact investors in the country. Larger companies are able to attract commercial funding more easily. Star Agri, for example, has recently raised $30 million from IDFC, Indias leading infrastructure finance company. ADB could fill a big gap in this sector and provide crucial funding (equity and debt) to inclusive businesses that dont yet have a brand to support it. Given that the key challenge facing firms in accessing debt is the lack of collateral, ADB should consider setting up a credit guarantee scheme that enhances the ability of these IBs to access bank loans at reasonable rates.
SRI LANKA
Investments in consumer models are likely to be less impactful in the long term. Unlike India, Sri Lankas BOP population has a relatively higher quality of life, especially with regards to access to water, energy, education and healthcare. The presence of trade unions also ensures that workers in organized sectors, such as tea harvesting, have the ability to negotiate for certain benefits and working standards. Tea plantation workers, for example, who are considered to be among the most deprived segment of the population, tend to earn a minimum of $4 per day, excluding other benefits such as social security and housing. Furthermore, as Sri Lankas population is declining and labour shortages are increasing wages, Sri Lankas BOP is likely to experience increases in income in the future, which would propel them out of the BOP classification. Businesses that focus on providing basic services at affordable prices to consumers therefore will likely not be as successful, as this population will start preferring aspirational goods. Investments that maximize job creation would lead to greater social impact. Considering Sri Lankas weak job market, investing in SMEs, would generate much needed jobs. Furthermore, setting up business operations in rural areas, where there are few employment opportunities, creates a ripple effect as complementary businesses start mushrooming to service key industries. Companies operating in the Northeast of the country would have an especially large impact on the local communities, which have the countrys worse socioeconomic indicators due to the recently ended war.
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6. PE MARKETS ASSESSMENT
The following private equity market assessment for India and Sri Lanka adopts a two pronged methodology for data collection: 1) primary data collection from direct interviews with a broad range of fund managers, and 2) synthesis of secondary information from a literature review. Our team interviewed 21 fund managers, representing both impact investors and commercial investors. The profiles of these 21 fund managersselected sample of 21 below. managers 6. Composition of Dalbergs are represented in the figure fund
Figure 39: Composition of Dalberg's sample of 21 fund managers
21 No IB-focus No IB, but SME-focus 6 4 Other Agriculture 21 3 2 Sri Lanka India (LIS) 2 2 EM1 21 5 Early 21 8
Agnostic
IB-focus 11
16
India 12
Growth
13
By portfolio focus
1.
By sector focus
By geographic focus
By target stage of investment2
EM refers to emerging markets; our sample consists of 5 funds that have a footprint in both India and Sri Lanka, here termed as having an EM focus; SOURCE: Dalberg analysis across interviewed fund managers
While selecting fund managers to be part of the study, Dalbergs team focused on 4 key parameters: inclusive business-focus; sector-focus; geographic-focus; and target stage of investment.
30
Of the 21 funds interviewed, 11 have a direct focus on inclusive businesses. Additionally, 16 are sector-agnostic, but often select sectors carefully to maximize financial and/or social return, while the remaining funds are focused on more developed sectors such as agriculture, healthcare, energy, and information technology/IT-enabled services. While Dalbergs team found several relevant fund managers to interview in India from a reasonably large pool of private equity players, Sri Lankas PE market on the whole is very nascent. As a result, the sample includes only 2 funds from Sri Lanka (LR Global and Aureos), compared to 14 from India, and another 3 that focus on emerging markets globally and have a footprint in both India and Sri Lanka. Two of the India-based funds have an exclusive focus on Indias low-income states. Further, the sample includes adequate representation from early-stage (9 out of 20) and growth-stage (11 out of 20) investors. Secondary information sources such as Bain & Cos India Private Equity Report and Grant Thorntons Private Equity in the Indian Corporate Landscape, both published in 2011 in partnership with the Indian Venture Capital Association, were also used to provide an understanding of the overall PE market and trends.
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KEY FEATURES OF THE INDIAN PRIVATE EQUITY MARKET
India has seen PE growth across multiple sectors; fund managers in India and Sri Lanka are optimistic about prospects for PE in the long-term. The performance of Indias public markets has been strong Figure 40: Market capitalization of compared to other countries in the region. The total value of countries in South and Southeast Asia Indias market capitalization was 93.6%80 of the countrys GDP Market capitalization Country in 2010, the highest among low and low-middle income as % of GDP (2010) countries in South and Southeast Asia. Similarly, Indias private India 93.6 equity market has seen significant deal activity in the past 5 Philippines 78.8 years. Grant Thornton has recorded nearly 1,400 private equity Indonesia 51.0 deals (excluding real estate) in India from 2005-10, amounting Sri Lanka 40.2 to $36 billion in value. Deal activity has additionally not been Nepal 30.8 limited to just a few sectors. IT & IT-enabled services, real Pakistan 21.6 estate, banking, financial services, and insurance (BFSI), and pharmaceutical industries had all seen more than 100 deals Vietnam 19.2 during this period81. In 2010, India saw the largest increase in Bangladesh 15.6 deal activity among the big Asia-Pacific markets, when private equity deal value more than doubled from that of 2009, to $9.5 SOURCE: World Bank data billion (including venture capital, private equity, and real estate investments). Although there are conflicting statistics on the number of funds in the market, private equity experts estimate 300-400 active funds in India today.
Figure 41: Number and volume of PE (non real estate) investments in India
Number of deals Avg. deal size, $ millions
6. Number and volume of PE (ex-VC) investments (2007-12)
28
27.8 22.2
600
24
20 16 12 8 4 0 2007
Value of deals, $ billions
22.4
22.2
400
14.5
Below: Value of deals, $ billions Above: Average deal size, $ millions
13.7
200
0 2008 10.7 2009 4.05 2010 8.2 2011 10.2 2012E 7.8
13.9
SOURCE: Venture Intelligence, MINT, Grant Thornton, Dalberg analysis
Fund managers that Dalberg spoke with (both impact and commercial investors) said32they were positive about the Indian economy in the long-term (more than 5 years from now), the period most relevant for PE funds. Key reasons for their positive outlook were the presence of a large and growing market across sectors (N = 8), favourable demographics (N = 6), quality of human capital (N = 4), and potential for social impact (N = 4).
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These factors were also cited as favourable to the growth of certain sectors, such as healthcare. The Responses to the question: "What largely recession-proof healthcare market in India, already valued at approximately $65 billion82, isis your gener 83 expected to double within the next 5 years . Further,economy?" features benefit the private the markets sector, which accounts for 80% of healthcare services in the country. The potential to increase access to healthcare in India, where women are 10 Figure 42: Responses to the question: "What is your times as likely to die during pregnancy and childbirth general outlook for India's economy?" as in the US, is also a strong incentive for impact investors to invest in the sector.
7% At the same time, fund managers express certain Negative 29% 14% concerns around the current stifling business environment, including non-supportive regulation (N = 8) and lack of infrastructure (N = 5). The recent cancellation of 2G licenses in the telecom industry, 43% Neutral for example, has significantly eroded investor confidence in the sector and to a large extent, in the 79% Indian market in general. Indian businesses are increasingly hungry for infrastructure such as power Positive 29% and logistical infrastructure, and the government has lagged behind in increasing supply to match this demand, especially in low-income regions. Over next 12 months Over next 5 years Consequently, the lack of basic services, such as SOURCE: Dalberg interviews with fund managers electricity, provides opportunities for impact investors to fund inclusive businesses that increase access to such infrastructure for base of pyramid populations.
The PE market in Sri Lanka, in contrast, is relatively nascent. Few PE funds started fundraising immediately after the war ended in 2009, but failed to attract significant investor confidence, especially since the end of the war coincided with the global recession, and did not reach first close. Aureos and IFC have survived these turning points in the market, but even with the lack of competitors face limited deal flow. However, with the macroeconomic condition improving and an increasing number of investors building their presence in the country, new funds are being set up, suggesting a clear opportunity for PE in the near-medium term. Few funds currently focus on early-stage and early growth financing in India, pointing to an opportunity for the ADB; Sri Lankan fund managers believe in the growth potential of SMEs. While there are 300 funds focusing on investments of over $20 million in size 84, the number of private investors for smaller deals in India remains relatively insufficient a trend reflected across other BRIC nations. In particular, early-stage and early-growth financing remain key gaps in the market. The nascence of the early-stage investment space, including angel investment and venture capital, is evidenced by the fact that nearly 70% of all sources of deal flow in BRIC countries are family/private businesses, as compared to 46% globally.85 In addition, the limited venture capital funding in India to date has largely been directed towards breakthrough or disruptive technologies and business models. The existence of a gap in the early-growth financing space, typically termed the missing middle, is noted by fund managers across investment sizes. Growth equity funds (typically investing over $20 million per deal) are set up such that smaller deals would be inefficient and expensive to manage. On the other end of the spectrum, impact investors (typically investing less than $2 5 million per deal) have limited resources to deploy. Further, impact investors have expressed difficulty in finding Series B investors to provide follow-on financing to their investees. Growth equity investors
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providing larger ticket-size investments, show limited interest in these exits due to their inability to provide the more hands-on assistance that early-stage businesses require. There is therefore a clear need for impact-oriented, mid-sized equity. In Sri Lanka, fund managers believe attractive investment opportunities will be in the SME space. Larger companies often do not offer strong valuations, and the PE market is too nascent and illiquid for high-risk venture capital investments. Exits have remained a challenge, and investments in SMEs would provide a diversified set of exit options. Most funds are dependent on foreign sources of capital and fund raising from Indian institutions is seen as a challenge; Sri Lanka is expecting large investment from DFIs. It is estimated that 80% of funds raised in 2011 by private equity fund managers were sourced from a combination of foreign institutional investment, foreign direct investment, and foreign venture capital investment86. Sources include Development Finance Institutions (DFIs), High Net-Worth Individuals (HNIs), university endowments, foundations, and other private investors. Of the 11 funds that shared details with Dalberg on their Limited Partnership (LP), 8 have been invested in by DFIs. Both impact investors and commercial fund managers with inclusive businesses in their portfolios have claimed that raising funds from domestic sources has been a challenge, suggesting that foreign capital will likely remain an important source of capital for Indias private equity market in the years to come. Due to recent regulatory restrictions in the telecom sector and Indias poor short-term economic outlook, however, foreign investment in India has recently declined significantly. Successful fund managers in Sri Lanka have traditionally attracted investment from DFIs. While IFC is wholly funded by the World Bank, Aureos has enlisted a number of other DFIs to invest in their South Asia Fund, which has set aside a portion of funds for investment in Sri Lankan businesses.
INVESTMENT STRATEGIES AND RELEVANCE TO ADBS INCLUSIVE BUSINESS AGENDA

A. Multiple funds in India, both impact and commercial investors, are already investing in inclusive businesses; Sri Lankan PE funds do not narrow focus from SMEs. Though the definition of inclusive business, as per ADB, is relatively unknown among fund managers, the majority of funds interviewed for this study (11 out of 21) were found to have significant exposure to such businesses at times the majority of their portfolios consist of inclusive businesses. Through a specific investment philosophy or focus within their investment strategy, the portfolios of these fund managers often include a subset of inclusive businesses. The majority of companies funded by investors such as Aavishkaar and Lok Capital, for example, would qualify as inclusive businesses, as a result of their targeted investment philosophy. According to Aavishkaar, [our] fund provides risk capital to businesses that have the potential to make a difference to the base of the pyramid and scale up profitably. Lok Capitals goal is to promote inclusive growth by supporting the development of social enterprises to deliver basic services to serve the BOP segment in a scalable, affordable and commercially viable manner. As is evident, these investment philosophies at times favour particular models of engaging the poor, e.g., Lok Capital would primarily consider investing in businesses that engage low-income populations as consumers. On the other hand, Pragati Fund and SIDBI-VCs Samridh Fund target small-and-medium-enterprises (SMEs) in low-income states in India, and have therefore shaped their investment strategy to target what would most likely be inclusive businesses. According to these funds, the very presence of SMEs in traditionally deprived regions will have significant development impact. At a minimum, fund managers expect that such businesses will hire locally, develop their employees skills and invest in local supply chains.
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Additionally, other funds were found to invest in sectors that are inherently inclusive. Rabo Equitys India Agribusiness Fund, for example, is one such example. By virtue of investing in agribusinesses, all of the funds investments have either a direct or indirect impact on those individuals dependent on agriculture for their livelihoods, representing approximately 52% of Indias population87, and over 80% of who may be considered members of the BOP. These findings point to the existence of multiple experienced funds and fund managers through whom the ADB could route its investments into inclusive businesses. B. Sri Lankas PE market is nascent, with a small number of fund managers currently active, and DFIs are likely to remain chief source of investment. Sri Lankas PE market, on the other hand, is shallow with few fund managers currently active, and hence stands in sharp contrast to that of India. The markets journey in Sri Lankas early years post the war has been challenging. 2 fund managers Calamander and Leopard Capital attempted to set up PE funds exclusively focused on Sri Lanka, but failed to generate sufficient interest among investors. Not only has this stunted the development of the PE market, it has also somewhat eroded promoters confidence in private equity as a source of financing. However, there are signs that the market is picking up. Other than the few funds that are currently active, including IFC and Aureos, a few more funds are currently being set up. These funds are all targeting the SME space, in the investment size range of $5 10 million, encouraged by the growth opportunity in Sri Lanka, where 6%+ growth is expected to sustain over the short-medium term. However, given the nature of the market, which has seen very little PE activity in the past, getting traction early will be a challenge. As a result, Sri Lankan funds adopt a sector and geography agnostic investment approach, and recommend the same for any potential ADB intervention in the country. As a result, there are no funds that focus on inclusive business exclusively, and finding fund managers in Sri Lanka that fit ADBs investment thesis will likely generate limited interest. Our view is that it is likely to find investments within the portfolio of current fund managers that could match ADBs investment criteria of inclusive businesses, but at this stage of maturity of Sri Lankas PE market, it will be a challenge to truly adhere to it. At the same time, there is a large opportunity to strengthen the capital markets in Sri Lanka if ADB takes on the role of first-mover, other investors may follow suit soon, backed by Sri Lankas promising economic outlook. This is because raising funds has been a significant challenge for Sri Lankan fund managers difficulty in fundraising has led to the failure of PE funds in the recent past. As a result, two approaches have emerged. The first type of fund managers is looking to raise funds domestically, since they have found attracting foreign investment without a significant investment track record difficult. The second is relying on DFIs as the primary source of investment. Bar none, fund managers in Sri Lanka would welcome any engagement from ADB, for which any investment in Sri Lanka presents a high risk-return profile. C. Most funds are sector and geography-agnostic; the few that are focused pose limits on only one of the two parameters, given the challenge of finding adequate deals. Within the sample of fund managers interviewed in India, most funds were sector and geography agnostic. Funds that were sector-focused did not restrict opportunities further by focusing on a specific region, and funds exclusively focused on low-income states did not restrict themselves to investing in only a few sectors. Only a few sectors such as agribusiness, healthcare, and energy offer sufficient number of opportunities for sector-focused funds. Opportunities in these sectors have started to make sense for commercial investors as well.
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The Sri Lankan capital market, following from the previous discussion does not offer sufficient depth across sectors, or geographies within the country. Even the few successful fund managers that focus on SMEs as a whole face significant challenges in deal flow. As a result, fund managers typically do not narrow down their focus to a few select sectors. In terms of developing a pipeline of opportunities for the short-medium term, fund managers are focusing in asset-light industries within the value chains of fast growing sectors. For instance, while tourism and hospitality will be fast growing sectors, fund managers would focus on businesses that provide tourism-related education or skills. Other fast growing sectors include shipping, logistics, infrastructure, agribusinesses, retail, and construction. On the other hand, geographic focus within Sri Lanka will severely restrict deal flow in an already small market.
FEEDBACK ON ADBS PROPOSED INVESTMENT APPROACH

For this study, fund managers were asked to provide feedback on ADBs proposed investment approach and requested to comment on sectors, geographies, instruments and deal sizes that should feature in ADBs investment strategy. The findings are presented below: A. Sectors: ADB should adopt a sector-agnostic approach, but should prioritize service oriented businesses and check for level of regulation. STRATEGY Key decision parameters used by fund managers suggest
education, healthcare, water, Figure 43: Sector prioritization analysis

Sector Fund managers score 1 Education Healthcare Financial services Agri. and agribusiness Water and sanitation Energy IT/ITES Hosp. and tourism Food and beverage Transp. and logistics Manufacturing Retail Pharmaceutical Textiles Forestry Real estate 2 3 3.1 3.1 2.7 2.7 2.6 2.4 2.3 2.3 2.3 2.2 2.0 2.0 2.0 1.9 1.8 1.6 4
and tourism should be priority sectors

Inherent ESG risk1 Potential for social impact2 Avg. deal size $ million (2005-10) 9.9 31.5 15.3 48.4 13.4 18.9 26.9 20.2 15.2 15.1 64.3 Total deal volume $ million (2005-10) 286 5,850 366 3,772 3,708 661 1,185 988 471 2,124 13,043
Regulatory risk score
Medium Medium Medium High Low Low Low Low Low Low Medium High High High Low Medium
Low Low Low High Medium Medium Low Medium Medium Medium Medium Low Medium Medium High Medium
1. Rating based on CDCs ESG toolkit for fund managers; 2. Composite index based on (a) level of employment of BOP by sector, and (b) share of wallet of BOP households. 20 SOURCE: Dalberg research and analysis; feedback from fund managers; India Private Equity Report, Grant Thornton, 2011
Fund managers use the following key parameters to prioritize and select sectors to invest in: (1) Level of regulation. In highly regulated environments such as India and Sri Lanka, there is often limited opportunity to escape regulatory risk. However, certain sectors are inherently more prone to regulatory risk. For example, education is covered under the concurrent list of subjects, and regulation often differs drastically from state to state. Other sectors are likely to benefit from the governments mandate to promote them. For instance, Indias Electricity Act of 2003, and its subsequent amendments have made it easier for foreign investors to invest in power generation.
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(2) Inherent ESG risk. Businesses in certain sectors such as mining and heavy manufacturing are more likely to cause greater adverse environmental and social impact. As a result, inherent Environmental, Social, Governance (ESG) risk as defined by several ESG measurement frameworks that DFIs such as the International Finance Corporation and DFIDs CDC Group have created is a parameter that is used to minimize risk. DFIs often impose adherence to ESG standards as a condition for their General Partners (GPs) (3) Capital intensive nature. At the level of ADBs proposed investment size (sub $10 million), funds typically do not invest in asset-heavy sectors, such as real estate, retail, power generation, and other large infrastructure. Sectors such as education and healthcare often described as soft infrastructure form the key focus of investors in this deal size range. Even within such sectors, though, funds typically pick service-oriented businesses that are less capital intensive, and can therefore utilize the equity investment to drive scale and growth. For instance, smaller fund managers would prefer opportunities in asset-light mobile health as opposed to large hospital chains. Once sectors have been selected using the above criteria, funds typically consider potential for impact as an investment criterion on a case-by-case basis. The table above aggregates methodology adopted by fund managers and other parameters to act as proxies for gaps in financing. The table includes fund managers ratings of investment attractiveness and the level of enabling regulatory environment, across sectors. It also highlights the inherent ESG risk across sectors as per CDCs ESG toolkit for fund managers. Finally, it lists average deal sizes and total deal volume over the last 5 years to indicate the capital intensive nature (the higher the average deal size, the more the number of capital intensive opportunities in the sector) and total deal volume (the higher the funds deployed by sector, the higher the likelihood of the gap being filled by the market already) respectively. From this analysis, key sectors to highlight are education, healthcare, and agriculture and agribusiness. Fund managers find opportunities in these sectors financially attractive and relatively low on ESG risk. Additionally, average deal sizes suggest that there could be several investment opportunities in ADBs prescribed deal size ($0.5-10 million), and there appears to still be room for significant additional funding. B. Geographies: Exposure to low-income states in India will likely increase impact, but should not be the sole focus of ADBs fund. Two fund managers in our sample Pragati Fund and SIDBI-VC have an exclusive focus on lowincome states in India, such as Bihar, Jharkhand, Uttar Pradesh, Madhya Pradesh, Chhattisgarh and Orissa. These states perform poorly across most socioeconomic parameters such as life expectancy, literacy, and of course, per capita income. Both Pragati and SIDBI claim that by virtue of their investees having significant operations in these regions, their portfolios will naturally have an impact on local livelihoods. For example, a BPO established in a low-income state would naturally increase otherwise restricted employment opportunities in the region. Alternatively, low-cost hospitals in rural areas are more likely to reach severely underserved populations than hospitals in urban areas. Further, Pragati finds entrepreneurs that are committed to developing its employees skills. As a result, the opportunity to improve livelihoods and quality of life through investments in businesses operating in such regions is large. Both Pragati and SIDBI-VC are relatively new funds that are exploring the market for deals. Whether there will be sufficient deal flow remains an open question. Businesses in low-income states are typically new to private equity investments, and often lack the corporate governance structures needed to absorb this type and quantity of capital. However, funds remain confident that finding the
55
right opportunities will depend on employing a deal-sourcing team that is close to the ground, maintaining a sector agnostic approach and investing in fewer, but larger deals. As a result, funds operating in low income states will have higher management overheads. Given these challenges, all of the fund managers interviewed had recommended that ADB avoid following an investment strategy that exclusively focuses on low-income stats, given the risk of low deal flow. In Dalbergs view, the ADBs fund should have some focus on low-income regions, but not exclusively. The Bank may choose to achieve this focus by channelling investments through existing funds that focus on these regions. Beyond Pragati and SIDBI, several other fund managers have a strong footprint in these states, including Aavishkaar, which has approximately 55% of its capital deployed in the poorest states of India. This approach increases the flow of capital to regions where it is most required, without increasing competition for already scarce deals. C. Instruments and investment size: Beyond the missing middle in equity, the need for debt across the board is large; credit guarantees could help leverage ADBs funds to provide debt. Equity: 20 of the 21 funds interviewed have deployed 100% of their investments as equity. SIDBI-VC, a government run investment firm, is the only fund manager to also have an attached Non-Banking Financial Company (NBFC) that provides debt. As discussed earlier (see discussion on key insights on the PE market in India), fund managers have expressed the need for early growth equity, typically in the range of $2-10 million investments for small and growing businesses. Additionally, venture capital (sub $2 million) typically focuses on technology-based businesses, if not disruptive or breakthrough technology alone. There is room for additional players that finance early-stage inclusive businesses, products or services of which are not technology based. Such businesses often find securing debt a major challenge, and typically treat their equity investments as debt. In Sri Lanka, the $5-10 million investment size range offers fewer opportunities than the $1-5 million range. However, smaller deals are more difficult to manage given the limited exposure of early stage investment to PE investment. The focus on SMEs drives fund managers in Sri Lanka, therefore, to focus on the $5-10 million investment size range. Debt: 70% of the fund managers interviewed for this study claim that their investees find it difficult to access affordable debt primarily to finance working capital requirements. Though the need for cheaper debt is relevant to businesses of all sizes, Indias commercial banking infrastructure is particularly unsupportive of small businesses with limited assets or collateral to offer as security. This situation is exacerbated in markets like India and Sri Lanka, which have traditionally been high interest rate markets. The Indian government has set up a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) that offers loans of up to approximately $0.2 million without collateral or third party guarantee. However, the extent to which this facility has been utilized to date is unclear. Credit guarantees are important instruments to leverage the investors capital manifold and offer cheaper debt with limited collateral requirements. The availability of cheaper debt is likely to create a more enabling environment for private equity investors, who could then ensure that equity capital is utilized for the growth of the business. Technical assistance: Of the 8 fund managers operating in the SME space, 7 expressed a clear need for technical assistance on behalf of their investees, particularly for training and the purchase of equipment to mitigate environmental or social risk, within the broader ESG framework. Further, shared needs of investees such as a market primer for Africa, a market that several SME investees of
56
these fund managers are strongly considering entry in, could increase opportunities for inclusive businesses. However, fund managers have also offered a caveat that promoters are often wary of technical assistance, in particular of its demands on management bandwidth. D. Investment decisions: Financial discipline is vital to equity investments, and expectations of lower returns should be used as an opportunity to leverage other financial instruments. 18 of the 21 fund managers interviewed by Dalberg claim they do not compromise on returns to achieve investment goals. For these funds, financial discipline is typically practiced by identifying the most financially attractive opportunities after defining an investment strategy. Given that the major source of funds for private equity fund managers is foreign commercial investors, funds with target Internal Rates of Return (IRR) that are lower than market returns often find fundraising a greater challenge that those targeting market returns and above. This trend of defining a focused investment strategy, and following it with financial discipline expecting market returns forms an emerging trend in investing in inclusive businesses in India. Of the 10 funds that shared their expected market returns with Dalberg, 8 target IRRs of 18% and above. The two funds that have lower targets are SIDBI-VC (marginally lower, at 14-16% gross), which is funded by DFID and is a government-run institution, and Acumen Fund, a non-profit entity. Fund managers cited the following as key factors when making an investment decision: a) b) c) d) e) potential for financial returns potential for scale and financial sustainability quality of management team potential for social impact availability of exit opportunities
In our view, an expectation of 10-12% net IRR, as prescribed by ADB, could open opportunities to leverage other financial instruments that deliver lower returns. The need for such instruments, especially debt or credit guarantees, is large. ADBs inclusive business fund could therefore target rates of 10-12% net IRR for the fund by deploying a mix of equity and debt, and thereby achieve both financial return and development outcomes.
FUND MANAGERS INTEREST IN MANAGING ADBS FUND

Fund managers recommend leveraging existing channels to reach inclusive businesses, as opposed to increasing competition in a space with limited deal flow. While it may be convenient for fund managers to recommend that ADB play the role of an additional LP as opposed to a competitor fund, the reasons for the same are compelling: (1) Lack of available talent. All fund managers interviewed reported that available talent is limited, and that finding the right fund manager is a critical step, in which most unsuccessful funds have failed. As existing fund managers are unlikely to forego relationships with, and commitments to, their current LPs, the market is further devoid of available talent to manage an ADB fund. (2) Need for strong management team on the ground. Deal sourcing is a common challenge quoted by fund managers. If ADBs inclusive business fund is focused on a particular geography, low-income states for instance, the fund would need a highly capable sourcing team that typically spends over 50% of their time in the field. (3) Expectations of limited deal flow and increased valuations. As mentioned above, in a market with limited deal flow, GPs follow similar if not largely the same deals in their
57
pipelines. More competition by way of another General Partner would increase competition and likely drive up valuations. This would take away from ADBs intended catalytic effect. (4) Challenge of remaining sector-agnostic. It would be difficult to establish a narrow sector focus, e.g., healthcare or education, for the fund without a team with significant deal-making experience in the sector and a ready pipeline. To mitigate this risk, the fund should adopt a sector agnostic strategy, as mentioned in the previous section. However, remaining sector agnostic would delay the uptake of a new fund and makes managing technical assistance across investments a major challenge. Fund managers often provide their LPs with an option of co-investment in some deals, which could be an opportunity for ADB to gradually build up their presence in the direct investment route, should it choose that path. While some funds do provide the option to non-LPs as well, LPs have priority coinvestment rights. As a result, while only 4 of the 10 fund managers with inclusive businesses in their portfolios expressed an interest in managing ADBs fund, all of them expressed a strong interest in engaging ADB as an LP. Additionally, 4 fund managers claimed that they are already in talks with ADB, or that ADB has been an investor in one of their funds previously. Additionally, fund managers believe raising additional funds from foreign investors will not be a challenge, but Indian investors are likely to remain a small source of capital.
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7. DONOR MAPPING
The term donor can be ambiguous it could mean an agency primarily giving grants to non-profit organisations, or an impact investor looking for social and financial return. While the intended outcome of generating social impact is consistent across all definitions, for the purposes of this study, we use the term investor to refer to any impact-oriented investor who deploys funds through equity or debt (potentially in conjunction with technical assistance) instruments to for-profit businesses to generate social impact. The investors we have engaged in this study could be classified into three types: (1) Bilateral aid agencies. As part of their overseas development assistance (ODA) programs, several countries have set up offices within their embassies in India and Sri Lanka to primarily deploy grants and concessionary loans. Primary focus of these agencies is often two-fold, given that they operate under the close watch and direction of the government of the host country: (a) to build infrastructure in the foreign country to catalyze growth, and (b) to further bilateral cooperation between the countries through business linkages and technical assistance. Examples: KfW, USAID, DFID, JICA. (2) DFI-funded investors. Since bilateral and multilateral agencies are often not permitted to take equity positions in businesses in host countries, they route their equity investments through globally structured investment funds. 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. A few may also be able to make equity investments directly in businesses. Examples: IFC, CDC (DFID funded), Swedfund (SIDA funded), Norfund (NORAD funded). (3) Independent private funds. Domestic and foreign HNIs can also route their investments for social impact through funds and foundations. Foundations are typically grant-making agencies. Domestic HNIs typically operate through single-investor private equity funds or family offices. Examples: Gates Foundation, Premji Invest, Catamaran Ventures. The views contained in this section reflect the results of interviews with of 9 such investors, and findings from research on activities of various kinds of investors. The investors our team interviewed includes 3 bilateral aid agencies (KfW, DFID, SIDA), 3 DFI-funded investors (IFC Sri Lanka, CDC, Swedfund), and 3 independent private funds (Catamaran, SD Tata Trust, Omidyar Network).
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LANDSCAPE OF KEY INVESTORS IN INCLUSIVE BUSINESSES
Few bilateral aid agencies, DFI-funded investors, and independent private foundations supply debt or equity financing for inclusive businesses. Bilateral and multilateral aid agencies are not legally permitted to invest in businesses in India. Some bilateral agencies such as DFID, however, with guidance of the Government of India, have been allowed to deploy equity through government channels. An example of this is DFIDs recent participation in SIDBI-VCs new fund, Samriddh, which focuses exclusively on low-income states in India, in close alignment with DFIDs country strategy. Despite these efforts, the share of equity capital among bilateral donors portfolio of investments remains small. The majority of their investments are in the form of large-scale concessionary debt to the host government to help achieve its primary development goals. Often, these goals are large-scale infrastructure projects. For example, JICA has financed the Delhi Mass Rapid Transport System Project and KfW has financed the construction of new power plants, channelling its loans through government agencies such as Power Finance Corp., Indian Renewable Energy Development Agency (IREDA), Rural Electrification Co-operation (REC) and India Infrastructure Finance Company (IIFCL). DFI-funded investors, in contrast, route their investments through a number of private sector channels. They employ a combination of direct equity investments, direct loans, and investment in PE funds to support inclusive businesses. For example, Swedfund has taken both equity and debt positions in Artheon Battery Company, and invested in Baring Indias Fund II. Another example is that of the IFC in Sri Lanka, which, in addition to providing debt and equity directly to local firms, has also invested $20 million in LR Global, a SME-focused PE fund, in order to rapidly expand its dealmaking capacity in the post-conflict economy.
Figure 44: Illustrative approaches of major investors deploying equity/debt to IBs in India 7. Instruments and size of investment

Investment in funds Bilateral aid agency KfW JICA IFC DFI funded investor FMO Direct equity Direct debt
Current exposure Planned entry
Target size of investment1 Medium-Large Large Medium Small, Large
DFID
CDC Premji Invest
Small, Large
Small, Large Medium Small-Medium Small
Independent family fund
Catamaran Omidyar BMGF
N/A
1. Small represents sub $10 million investment in end-beneficiary; Medium represents $10-50 million, and Large, $50 million+ SOURCE: Dalberg analysis
59 Finally, independent private foundations typically build up years of expertise in niche sectors by deploying primarily grants or returnable instruments. For instance, the SD Tata Trust has decades of
60
experience in organizing agricultural communities, and the Gates Foundation in agricultural extension and healthcare. Private equity funds with significant investment from HNIs, such as Omidyar Network and Catamaran Ventures, typically operate with a dual objective to achieve both social and financial return. Such investors primarily deploy equity capital. Majority of bilateral funds are directed through government channels to mainly large-scale infrastructure projects, while more independent investors follow a sector agnostic approach. As mentioned earlier, bilateral aid agencies work closely with host governments and aim to help them achieve their primary development objectives, which often revolve around developing new infrastructure. As a result, such organisations are by default restricted to operate in a narrow space of sectors constituting heavy infrastructure such as power generation. Entities more detached from government operations, such as DFI-funded investors and private funds and foundations can invest smaller amounts through other financial instruments. Among the listed organisations in the figure below, the level of dependence on the host government largely decreases from top to down. Not surprisingly, this correlates with the number of sectors the organization has exposure to. The more independent investors such as DFI-funded investors and independent private investors typically adopt a sector-agnostic approach.
Figure 45: ExposureConcentration & Gaps 7. Sectors of major investors deploying equity/debt to priority sectors in South Asia

Agriculture KfW Bilateral aid agency JICA FMO DFID IFC DFI funded investor1 CDC Swedfund Norfund Premji Invest Independent family fund Catamaran BFSI Energy & Envt Education Healthcare Water & Sanitation
Infra.
Omidyar
BMGF
1. CDC operates an offshore fund of funds, several GPs of which have large exposure to India/Sri Lanka ; FMO has recently invested in an offshore fund focused on inclusive businesses; IFC is an independent onshore investor; DFID has recently invested in a domestic onshore fund SOURCE: Dalberg analysis
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BFSI and energy have attracted significant financing from various investors; agriculture, healthcare, water and sanitation are likely to receive increasing funding, especially from private foundations. A deeper look into sectors other than large-scale infrastructure reveals that some sectors have received interest from all types of investors. Banking and financial services, owing to the widespread interest in microfinance, and renewable energy / energy efficiency have seen investments from various types of investors.
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Typically, bilateral aid that is not directed towards heavy infrastructure goes towards sectors that do not attract significant private investment, e.g., water and sanitation. In contrast, independent private investors weigh financial returns higher, and focus on sectors that offer attractive investment opportunities from the perspective of both financial and social returns. Beyond energy and microfinance, education has seen significant interest from private investors. Some sectors have traditionally been recipients of grants and concessional debt from bilateral aid agencies, i.e., agriculture, healthcare, and water and sanitation. These sectors are gathering increasing interest and funding from private donors. This could imply that these sectors present increasingly attractive opportunities from a financial return perspective in the medium term.
FEEDBACK ON ADBS PROPOSED INVESTMENT STRATEGY

A. Sectors: Investors believe that a sector agnostic approach should mitigate deal flow risk. Most investors deploying equity directly to inclusive businesses have expressed that deal flow is a significant risk, much in line with impact investors perception. Investors believe that ecosystems catalyzing growth in some sectors are more conducive to inclusive business growth than those in others. For example, government agencies such as NSDC increase the supply of credit for the skills development sector, while water and sanitation doesnt benefit from similar enabling institutions. Investors believe that a sector agnostic approach, with balanced exposure to both types of sectors, would mitigate both deal flow and overexposure risk. In line with criteria used by fund managers for sector prioritization, smaller investors prioritize exposure to sectors based on the level of capital intensity. This effectively rules out investments in sectors such as microfinance. According to one private investor, it takes a $20 million investment at minimum, on average, to stabilize a microfinance business. Similarly, asset-heavy businesses like hospital chains and power generation are left open for commercial investors to promote. Given the variance in types of investors that we have spoken to, it is difficult to identify trends that would inform sector exposure across the sample. However, tourism, post-harvest agro-processing, education and healthcare are priority sectors for a number of investors. B. Geographies: Most impact investors are increasingly focusing on low-income states in India; ADB could increase capacity of new funds, which have gathered strong investor interest. An increasing number of investors such as IFC and DFID (and, as a result, CDC) are focusing exclusively on low-income states in India. This is primarily driven by direction (and at times backlash on amount of returns generated) from their shareholders taxpayers in their home countries to make investments beyond the purview of commercial investors. As a result, DFID is redirecting its equity capital to funds such as Samriddh, an LIS-focused SME PE fund managed by SIDBI Venture Capital IFC and CDC are LPs in Pragati, another LIS-focused SME PE fund. C. Instrument and investment size: Indian and foreign equity investors have identified gaps in the early-stage and early growth-stage financing markets; supply of debt is restricted on account of regulation, and ADB could fill the gap through credit guarantee schemes. Investors reiterate that the real gaps in the equity market are in early to early-growth stages of financing for small and medium inclusive businesses. For example, KfW has taken an LP position in Aavishkaar, which is deploying money in early stage businesses. Investors do not perceive there to be any major gaps in equity or debt financing for large-scale IBs or IB initiatives of large firms. Feedback from sample investors on the large need for debt for SMEs resonates with that from fund managers. Currently, few working solutions exist for investors to deploy debt to SMEs. Notably, JICA
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and KfW have engaged SIDBI (as per Government of India direction) to deploy debt to SMEs in the renewable energy and energy efficiency sector. One potential solution, suggested by several investors could be in the form of credit guarantees. NABARD and SIDBI are currently engaging several investors to set up focused credit guarantees to businesses that can offer limited collateral to secure debt. Credit guarantee schemes offer significant opportunity to leverage an investors funds the ratio of invested capital to disbursed debt in typical credit guarantee scheme is 1:10, which could be further improved with co-investment from other donors. Further, the economics of credit guarantees look promising. Typical administration of fees of 1-2% of disbursed debt has been known to largely cover the cost of guaranteeing full recovery of non-performing loans. A successful credit guarantee scheme would help catalyze the banking system and create a new asset class.
INTEREST IN COLLABORATING WITH ADB ON PROPOSED FUND

Investors have expressed strong early interest in collaborating with ADB, but encourage ADB to complement existing efforts of investors. At this early stage of development of the fund, with several critical decisions around investment strategy and operationalisation approach pending, investors are hesitant in committing to a partnership, or discussing terms of a potential partnership in detail. However, since ADBs overall investment philosophy of return-oriented investment in inclusive businesses is largely aligned with strategies of other DFIs, all bilateral aid agencies and DFI-funded investors have expressed a strong interest in collaborating with ADB. Beyond adding to the overall resource pool of the fund, some specific areas where collaboration could be fruitful are technical assistance and sharing lessons learned. Fund managers expectation of limited interest from domestic investors was reinforced from our conversations. Domestic investors who are largely grant-oriented are more interested in lending their expertise to ADB in specific areas of common interest, e.g., SD Tata Trust has decades of experience dealing with producer companies and cooperatives, and could help ADB in generating an initial deal pipeline, or in providing technical assistance to ADBs agribusiness investments. Strong interest in collaboration from HNI-owned private funds, in particular Omidyar Network and Catamaran Ventures was particularly noted.
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BIBLIOGRAPHY
Ahluwalia, M. Economic Reforms in India since 1991: Has Gradualism Worked?, 2011. Bain & Company. India Private Equity Report, 2011. Central Bank of Sri Lanka. Annual Report, 2011. Central Bank of Sri Lanka. Economic and social statistics of Sri Lanka, 2011. Central Statistical Organization, Government of India. Millennium development goals India country report 2011, 2011. Chaudhuri, S., Gupta, N. Levels of living and poverty patterns: a district-wise analysis for India, Februrary 2009. Department of Census and Statistics, Sri Lanka. National Accounts Annual Report, 2011. DISE. State elementary education report card 2010-11, 2011. Economic Advisory Council to the Prime Minister of India. Economic Outlook for 2010-11, July 2010. Export Import Bank of India. Annual report 2011 2012, March 2012. Foundation for MSME Clusters (FMC), clusters in India, 2010. Goldman Sachs. DreamingWith BRICs: The Path to 2050, October 2003. Grant Thornton. A Force for Growth: Global Private Equity Report, 2011. Grant Thornton. The Fourth Wheel: Private Equity in the Indian Corporate Landscape, 2011. Grant Thornton. India PE Report 2011, 2011. Groh, A., Liechtenstein, H., Lieser, K. "The Global Venture Capital and Private Equity Attractiveness Index, 2011. IFAD. Republic of India: Country strategic opportunities programme, 2011. IFC. Doing Business Economy profile: India, 2012. IFC. Doing Business Economy profile: Sri Lanka, 2012. ILO. General employment trends 2012. IMF. The Demographic Dividend: Evidence from the Indian States, 2011. India Human Development Survey. Human development in India January 2010. J.P. Morgan. Impact Investments: An emerging asset class, November 2010. KPMG. Private equity investing in India, 2007. McKinsey Global Institute, The Bird of Gold: The Rise of Indias Consumer Market, May 2007. Ministry of Finance and Planning. Annual Report 2011, 2011 Ministry of Labour & Employment, Government of India. Report on Employment & Unemployment Survey, 2010.
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Ministry of Micro, Small & Medium Enterprises, Government of India. Fourth all India census of Micro, small & medium enterprises. Monitor Group. Emerging Markets, Emerging Models, march 2009. Nilekani, N. Indias Demographic Moment, 2009. NSSO. Key Indicators of Household Consumer Expenditure in India - 2009-2010, October 2011. Planning Commission, Government of India. Faster, sustainable and more inclusive growth: An approach to twelfth five year plan, October 2011. PricewaterhouseCoopers. The World in 2050, 2011. Reserve Bank of India. Macroeconomic Indicators 2011, 2011. Sri Lanka Tourism Development Authority. Annual Report, 2011. Steering Committee on Urbanization, Planning Commission. Report of the working group on urban poverty, slums, and service delivery system, October 2011. The World Bank. Perspectives on poverty in India, 2011. World Economic Forum. The Global Competitiveness Report, 2011. WRI and IFC. The Next 4 Billion, 2005. UNICEF & WHO. Progress on Drinking Water & Sanitation 2012 update, 2012. UNIDO. Cluster development and BDS promotion: UNIDOs experience in india, March 2000. UNDP. Human development report 2011, 2011.
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ENDNOTES
1
As defined by ADB, the Base of the Pyramid (BOP) is defined as individuals earning $3-$4 per day, per capita, or less. Inclusive businesses are enterprises that engage the BOP in their core business operations as either: consumers, distributors, suppliers or employees 2 th Indias 2011 HDI rank was 134th of187 countries and MPI for the same year stood at 0.283 putting it at 76 of 209 countries in 2011 3 Grant Thornton India PE Report 2011 4 Environmental, social and governance 5 CDC and IFC have invested in Pragati, a low-income-states focused SME fund; IFC has invested in LR Global, an SME-focused fund in Sri Lanka 6 Factsheet on Foreign Direct Investment, Department of Industrial Policy and Promotion, Ministry of Commerce & industry, Government of India 7 Ernst & Youngs 2012 Attractiveness Survey 8 IMF, World Economic Outlook, April 2012 9 World Bank, PWC Report and Dalberg analysis 10 CIA World Factbook, Planning Commission of India 11 Planning Commission, 2011 12 Exim Bank of India report 13 IMF, World Economic Outlook, April 2012 14 India Human Development Survey 2010 15 World Bank database 2012 16 OECD Factbook, 2011-12 17 The Demographic Dividend: Evidence from Indian States, IMF, 2011 18 Report on Employment and Unemployment, Labour Bureau of India, 2010 19 The Financial Times 20 Indias Demographic Moment, Nandan Nilekani, 2009 21 The nine states include Uttar Pradesh, Rajasthan, Madhya Pradesh, Chhattisgarh, Orissa, Jharkhand, Bihar, Assam & West Bengal 22 Report on Employment & Unemployment Survey (2009-2010); Labour Bureau, Ministry of Labour and Employment, Government of India 23 The remaining percentage is classified as not reported 24 Planning Commission - 2011, Government of India 25 Census of India 26 Government of India, Committee on Slum Statistics/ Census 2011 27 Key Indicators of Household Consumer Expenditure in India - 2009-2010, NSSO October 2011 28 McKinsey Global Institute report, The Bird of Gold: The Rise of Indias Consumer Market 29 The Next 4 Billion, WRI and IFC, 2005 30 Asian Development Bank 31 The Global Competitiveness Report, World Economic Forum, 2011-12 32 United Nations Population Divisions 33 PFCE at current prices (2011-2012); Central Statistics Office, May, 2012 34 Planning Commission of India, April, 2012 35 Indias financial year runs from April to March 36 IT industry backs Murthy, Premji on policy paralysis article in the Times of India, 14 June, 2012; Business Standard, 13 June, 2012; Govt. can policy paralysis with more reforms experts article in The Mint & The Wall Street Journal, 27 Nov, 2011
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37 38
IMF Press Release, June, 2012 Ministry of Finance and Planning, Annual Report 2011 39 Lanka Business Online, July, 2010 40 World Economic Outlook Database 41 Department of Census and Statistics, National Accounts Annual Report 2011 42 IMF, June, 2012 43 Department of Census and Statistics, National Accounts Annual Report 2011 44 Asian Development Bank Outlook for Sri Lanka Forecast 2012 45 Textiles also includes wearing apparel and leather 46 Department of Census and Statistics, Sri Lanka, National Accounts Annual report, 2011 47 Central Bank of Sri Lanka, Annual Report, 2011 48 UNCTAD Data, 2012 49 Central Bank of Sri Lanka, Press Release, June, 2012 50 Central Bank of Sri Lanka, Annual Reports, multiple years 51 Ministry of Finance and Planning, Annual Report 2011 52 Human Development Report 2011, country statistics 53 UNDP Data Explorer 54 OPHI Country briefing, December 2011 55 World Bank Data 56 Classification as per World Bank 57 Statistics Branch of the Ministry of Education and Higher Education, School Census 2006 58 WHO & UNICEF Joint Monitoring Programme (JMP) for Water Supply and Sanitation 59 United Nations, Department of Economic and Social Affairs. 60 Working age refers to ages between 15 - 64 61 UN data 62 Asian Times Online 63 Demographic and Health Survey, 2006 64 Department of Census and Statistics, Labour Force Survey Annual Report 2010 65 UNESCAP Data Explorer 66 Sri Lanka Tourism Development Authority, Annual Report 2011 67 Central Bank of Sri Lanka, Press Release: External Sector Performance April 2012 68 Central Bank of Sri Lanka , Annual Report 2011 69 Dalberg estimates based on Household Income Expenditure Survey 2009-10, Department of Census and Statistics, Sri Lanka 70 Ministry of Finance and Planning, Annual Report 2011 71 Lanka Business Online, March, 2011 72 Asian Tribune, November, 2010 73 IMF Press Release, June, 2012 74 These survey results are only from Indian companies, due to limited responses from Sri Lankan companies 75 Indias lowest income states are Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, and Rajasthan 76 Direct quotation from Dalberg interview with Aitken Spences Hotel Division, July 9 2012 77 Team members is the official name of MAS factory workers 78 Direct quotation from Dalberg interview with Nestle Lanka, July 11 2012 79 Such as the Rural Technology and Business Incubator, associated with the Indian Institute of Technology in Madras 80 World Bank data 81 The Fourth Wheel: Private Equity in the Indian Corporate Landscape, Grant Thornton, 2011
67
82 83
Dalberg estimate based on per capita expenditure on health in 2010, $54, from World Bank data Feedback from investors in the sector 84 As reported by fund managers Dalberg has interacted with 85 A Force for Growth: Global Private Equity Report, Grant Thornton, 2011 86 Bain India Private Equity Report, 2011 87 CIA Factbook, 2009 estimate
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DRAFT REPORT: ANNEXES
JULY 31, 2012
STUDY
ADB Inclusive Business Market Study for India and Sri Lanka Draft Report: Annexes
Contents
1 2 3 4 5 6 7 8 Inclusive businesses surveyed.......................................................................................................... 2 List of fund managers interviewed .................................................................................................. 6 List of donors interviewed ............................................................................................................... 7 Case studies of inclusive businesses ................................................................................................ 8 Deep dives on potential fund manager partners for ADB ............................................................. 24 Economic factsheet on low-income states .................................................................................... 27 Deep dives on priority sectors ....................................................................................................... 32 Government schemes relevant to ADBs fund............................................................................. 344
1 INCLUSIVE BUSINESSES SURVEYED

Company name
Apollo Hospitals (Reach division) 3S Shramik - Div. Saraplast Aarusha Homes Pvt. Ltd. Artisans Micro Finance Babajob.com Bodhicrew Services Pvt. Ltd. Carzcare Champion Agro Limited d.light Design Inc. Desicrew Solutions P Ltd., Desta Drishtee Development and Communication Ltd Edubridge Learning Pvt. Ltd. Ekgaon Eko India Financial Services Eram Scientific Solutions Excellent Renewable Pvt. Ltd. Does not wish to disclose Forus Health Pvt. Ltd. G. V. Meditech Ltd.
Sector
Presence in LIS/NES/Both
BOP Engagement model C
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Healthcare Water & Sanitation Real estate Retail Telecom, BPO & IT Education Retail Agri-business and agriculture Energy (incl. renewable) Telecom, BPO & IT Retail Retail Education Telecom, BPO & IT Telecom, BPO & IT Water and sanitation Renewable Energy BFSI Healthcare (nonpharma) Healthcare (nonpharma) Agri-business and agriculture (incl. seeds)
2
21
Global Easy Water Products
Company name
Sector


22 23 24 25 26 27 28
Glocal Healthcare Systems Gram Tarang Employability Training Services Pvt. Ltd. Greenlight Planet Healthpoint Services India Hippocampus Learning Centres Hotel Saravana Bhavan Industree Crafts Pvt Ltd
Healthcare (nonpharma) Education Energy (incl. renewable) Healthcare (nonpharma) Education Hospitality and leisure/tourism Textiles, garments and handicrafts Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Textiles, garments and handicrafts Healthcare (nonpharma) Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Real estate and construction (incl. housing) Telecom, BPO & IT Healthcare (nonpharma) Agri-business and agriculture (incl.
3
29
InI Farms Pvt. Ltd.
31
ITC Limited, Agri Business Division
32
Jain Irrigation Systems
33 34
Jaipur Rugs Company Pvt. Jayashree Industries Jk Paper Ltd, Plantation activities, Farm Forestry
35
36
Kanan Devan Hills Plantations
37
Lafarge India
38 39 40
Logistimo India Medplus Health Milk Mantra Dairy Pvt Ltd
Company name
Sector
BOP Engagement model C D E S
seeds) 41 Mobile Works Telecom, BPO & IT Telecom, BPO & IT Water and sanitation Education Education Energy (incl. renewable) Textiles, garments and handicrafts Energy (incl. renewable) Telecom, BPO & IT Agri-business and agriculture (incl. seeds) Energy (incl. renewable) Banking & financial services (incl. insurance and microfinance) Agri-business and agriculture (incl. seeds) Banking & financial services (incl. insurance and microfinance) Energy (incl. renewable) Telecom, BPO & IT
42
Multi Commodity Exchange of India, Gramin Suvidha Kendra Piramal Water Pvt. Ltd. (brand name: Sarvajal) Projects and skill development department Prolific Systems & Technologies Pvt Ltd Promethean Power Systems Rangsutra Rural Off-grid market RuralShores Business Services Pvt. Ltd. SAVE - Saline Area Vitalization Enterprise Limited SELCO Solar Light Private Limited
43 44 45 46 47 48 49
50
51
52
Share
53
Shree kamdhenu electronics
54
Shriram transport finance company limited
55 56
Simpa Networks Source for Change, Piramal Foundation
Company name
Sector
57
Star Agri Swabhimaan Distribution Services Pvt Ltd Tata Swach
Agri-business and agriculture (incl. seeds) Retail Water and sanitation Agri-business and agriculture (incl. seeds) Healthcare (nonpharma) Telecom, BPO & IT Education Water and sanitation Water and sanitation Water and sanitation Real estate and construction (incl. housing) Agri-business and agriculture (incl. seeds) Healthcare (nonpharma)
58 59
60
Under the mango tree
61 62 63 64 65 66
Vaatsalya Healthcare Vortex Engineering V-Shesh Access Services Private Limited WaterHealth India WaterHealth International Inc. Waterlife India Pvt Ltd
67
Wonder Grass initiative
68
Zameen Organic
69
Ziqitza Health Care Limited
SOURCE: Results of survey conducted by Dalberg
2 LIST OF FUND MANAGERS INTERVIEWED

Fund manager 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Aavishkaar Actis Acumen Fund Aureos Capital Interviewee Vineet Rai Ritu Kumar (Has now left) Nissanka Weerasekara, Balaji Srinivas Focus on 1 IB? Yes No Yes No (SME) Yes Yes Yes Yes
2
Sector focus Agnostic Agnostic Agnostic Agnostic Agnostic Agnostic Agnostic Healthcare Agnostic IT/ITES Agnostic Agnostic Agnostic Energy Agnostic Agri. Agnostic Agri. Agnostic Agnostic Agnostic
Geographic focus India EM EM EM India India EM India EM India India Sri Lanka India India LIS India LIS India India India Sri Lanka
Stage of investment Early Growth Early Growth Early Growth Early Growth Growth Early Early Growth Growth Growth Growth Growth Early Growth Early Growth Growth
Bamboo Finance Eric Berkowitz Elevar Equity Gray Ghost IIP Imprint Capital Indo-US Lok Capital LR Global NEA Nereus Capital Pragati Rabo Equity Samriddh Fund SEAF Song Advisors Zephyr To be named Sandeep Farias Marc Clayton Hand Varun Sahni Laura Spiekermann Rajesh Raju Vishal Mehta Chanaka Wickramasuriya Vamesh Chovatia Jonathan Winer Narayan Shadagopan Rajesh Srivastava Ananta P. Sarma Hemendra Mathur Has now left Mukul Gulati Indika Hettiarachchi
Yes No Yes No No No No (SME) Yes No (SME) Yes Yes No (SME) No
SOURCE: Results of interviews conducted by Dalberg
Dalbergs assessment of overlap between fund managers current portfolio and ADBs target definition of inclusive businesses, i.e., any business that engages the poor as consumer, supplier, distributor, or employee; All fund managers mentioned in the list have some exposure to inclusive businesses, but ones marked No have a more indirect approach to targeting IBs. 2 Interview confirmed, to be conducted
6
3 LIST OF DONORS INTERVIEWED

Donor 1 2 3 4 5 6 7 8 9 KfW Omidyar Network DFID Catamaran Ventures SIDA SD Tata Trust Swedfund IFC Sri Lanka CDC Group NABARD SIDBI Contact point Rukmini Parthasarathy, Marcus Baer, Florian Arneth Ashu Sikri Bala Balasubramanian Arjun Narayan Christina Wedekull Sanjiv Phansalkar A. K. Nehru Ehsanul Azim Guy Alexander V. Tagat K. G. Alai
4 CASE STUDIES OF INCLUSIVE BUSINESSES

Our team has interviewed 15 businesses that would naturally fit with ADBs mandate of investing in inclusive businesses. These businesses have delivered or are in a strong position to deliver both financial and social return. These case studies present an overview of the business and some key data points around its finances (when disclosed) and impact achieved till date. More importantly, each case study highlights the salient features of a companys model of engaging the poor, assesses its potential to create sustainable impact, and outlines its key challenges to scaling. The case study also reflects on the companys need for financing, and its preference for a particular financial instrument, if any. Our sample of case studies covers a breadth of sectors, geographies, and modes of engagement, and should present a collection of insights that could serve as a head start to developing a pipeline of potential inclusive business investments in India and Sri Lanka.
Inclusive Business Case Study Aarusha Homes

Affordable housing for migrants and low-income populations Sector: Housing Location of operations: Urban centers in South India Year of establishment: 2007 Turnover: $650,000 Extent of BOP engagement: 700 BOP consumers; 95 BOP employees Background on Business Aarusha Homes was started to address the lack of affordable housing options in Indias urban areas. Each year, this problem affects millions of low-income migrants into the countrys major cities, often forcing them to live in unsafe and unsanitary conditions. Aarusha provides low-cost accommodation housing to these migrants and low-income individuals in Hyderabad and Bangalore. Aarusha charges rents starting at INR 2,000 ($40) per person per month. Mode of BOP Engagement BOP as Consumers Aarushas primary mode of engagement with the BOP is as consumers of its affordable housing services. The majority of Aarushas consumers are employees of entry point jobs, such as security guards and facilities management staff. On average, a typical security guard earns around Rs 30 ($0.60) per hour. BOP as Employees Aarusha Homes employs over 90 BOP individuals to work in its housing facilities. A portion of these employees also live in Aarushas facilities, so they are consumers of this service as well. Impact to date and future growth plans Aarusha has served over 700 consumers to date, and employs over 90 BOP individuals. With operations in two cities currently, Aarusha plans to begin operations in a third city (Chennai) this year. In addition to providing rooms, the company also plans to add low-cost apartments to its portfolio of products. This would capture some of the more upmarket value found in housing for newlywed couples or young families. Challenges A key challenge of working in the housing sector in India is the occurrence of corruption. Property developers often prefer for negotiations to happen off the books and for transactions to be made in cash. As Aarusha has refused from inception to work under these circumstances, there is a limited pool of professional developers with whom it could potentially partner. Aarusha has also faced similar problems with state governments. The company had initially partnered with the government, to provide housing to low-income public workers. They had to eventually stop the partnership when the government failed to pay them for this service. Aarusha is still communicating with state officials to receive its due payment, but as they refuse to pay a bribe, this process is consuming much of the teams efforts. Source of financing to date and future needs Aarusha was started with equity from its promoters, and later received $40,000 in equity financing from Elevar Equity. To finance its working capital needs, however, Aarusha is looking to raise debt, preferably at concessionary rates.
Inclusive Business Case Study AISECT

Pan-India network of skills training centers for rural youth Sector: Education (IT and vocational skills training) Location of operations: Pan-India Year of establishment: 19853 Turnover: Not disclosed Extent of BOP engagement: 10,000 BOP micro-entrepreneurs; 1,000,000 BOP students Background on Business AISECT is primarily engaged in the areas of skill development and training. Having developed the course content, AISECT operates a franchise model and leverages partnerships with universities, such as the Indira Gandhi National Open University (IGNOU), as well as central and state government skill-building organizations, such as the National Skill Development Corporation (NSDC). AISECT trains its trainers and presents degrees and certificates to students upon completion of their course. Mode of BOP Engagement BOP as Consumers ASIECTs primary consumers are BOP students from semi-rural and rural areas. In fact, 6,000 of its 10,000 centers are located in villages. Interestingly, despite its franchise model, AISECT has adopted a flexible fee structure that takes agriculture seasons into account. Students may take a course at one of AISECTs centers and pay the fee when their family has earned money from selling their harvested crop. BOP as Distributors AISECT has franchised its model and standardized processes. In addition to training its vast network of trainers, an internal team of 60-70 people conducts regular quality checks. The franchisee is responsible for marketing efforts, and retains 70-80% of the revenue generated. Impact to date and future growth plans AISECT currently has 10,000 centers across 27 states and 3 union territories. The National Skill Development Corporation (NSDC) is aiming to reach 500 million individuals by 2022. As their largest partner, AISECT plans to grow rapidly through this partnership. Furthermore, the company plans to enter the higher education rural BPO sectors. Challenges Key challenges faced by AISECT include the lack of infrastructure in the states in which it operates, and an overall shortage of adequately skilled trainers. Source of financing to date and future needs AISECTs major partner to date has been the NSDC, which has supported the company with soft loans (6-8% interest rates) to expand into other states, to meet staffing needs, and to develop content and improve processes. AISECT would consider accepting equity investments, however its current priorities are obtaining new partners and expanding to new geographies.
AISECT started as an NGO in 1985.

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Inclusive Business Case Study Aitken Spence Hotels

Chain of inclusive hotels in India and Sri Lanka Sector: Tourism, Hospitality Location of operations: Pan-Asia Year of establishment: 2004 Turnover: $2 million Extent of BOP engagement: 7.2 million BOP consumers Background on Business A subsidiary of the Sri Lankan-based Aitken Spence conglomerate, Aitken Spence Hotels currently operates a chain of 24 hotels and resorts in Sri Lanka, the Maldives, India and Oman. Mode of BOP Engagement BOP as Suppliers Though it may be easier to supply inputs from larger suppliers, Aitken Spence purposefully partners with local farmers to supply its resorts with agricultural produce. In order to ensure certain quality standards of its inputs, Aitken Spence trains local farmers on optimal management and preservation of their produce. In addition, it provides them with the tools they may require, such as seeds, fertilizer and crates. BOP as Employees Aitken Spence directly employs more than 2,000 local BOP individuals to work in its resorts as facilities management staff, kitchen staff, and tour guides. The company absorbs local high school graduates into its hotels, guaranteeing them a career path and steady income. Impact to date and future growth plans Though it may be easier to engage with more established and standardized suppliers of agricultural produce, energy and other inputs that are crucial to the operation of hotels, Aitken Spence has purposefully chosen to engage the BOP communities in its areas of operation, thereby giving them the opportunity to benefit as much as possible from the resorts presence. Challenges Like many other businesses in Sri Lanka, Aiken Spence is currently challenged with the high costs of capital, preventing it from growing faster. Though foreign investors have expressed an interest in the company, they prefer investment timelines that are not long enough to allow for returns (5 years as opposed to the 8-10 years required to experience returns on investment). Furthermore, the Sri Lankan government has not been investing adequately in the infrastructure needed to accommodate the growing tourism industry. Source of financing to date and future needs As it is a subsidiary of one of Sri Lankas largest conglomerates, Aitken Spence has benefited from substantial internal reserves, and the ability to leverage its reputation to form joint ventures with international partners. The current cost of capital, however, is hindering Aitken Spences expansion plans, for which it would seek loans at concessionary rates (6-8%). Given that a typical 500-room hotel costs approximately $40 million to construct, Aitken Spence would look to receive investments between $10 to $20 million.
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Inclusive Business Case Study Apollo REACH

Chain of super-specialty hospitals in rural and semi-urban areas Sector: Healthcare Location of operations: Pan-India Year of establishment: 2008 Turnover: $2.4 million Extent of BOP engagement: 5,000+ BOP customers
Company logo
Background on Business Apollo Hospitals Group has owned and managed a network of hospitals and medical facilities in India since 1979. In 2008, the Group launched a network of smaller satellite facilities, called Apollo REACH Hospitals. Operating in underserved regions and offering super-specialty medical care at affordable rates to people living at the BOP, Apollo REACH now manages 3 hospitals in rural and semi-urban areas. Mode of BOP Engagement BOP as Consumers Apollo REACH, like most healthcare organisations, serves the BOP as consumers, increasing their access to healthcare services. These consumers currently have to travel to cities for specialty healthcare. Due to this additional step in the value chain, many patients remain untreated in the villages. Apollo REACH attempts to bridge this gap. Each hospital houses 150-200 beds, 40 intensive care unit beds, and 5 operation theatres. Each hospital also offers super-specialty medical services (e.g., cardiology, orthopedics, neurosurgery, etc). Impact to date and future growth plans Apollo REACH has developed a model for establishing hospitals in rural or semi-urban areas that is significantly more cost efficient than traditional urban hospitals. As a result, REACH hospitals can charge 20-30% less than other major hospitals. One of the biggest drivers of Apollo REACHs geographic expansion is additionality, since they would not enter areas where there are other similar hospitals, or would offer services that other hospitals do not. Apollo REACH plans to expand to 25 facilities in the next 2-3 years. Apollo REACH plans to grow its revenues by over 20% annually. By leveraging a hub-and-spoke model, Apollo REACH has effectively countered the challenge of limited talent in rural areas. Apollos plans for geographic expansion will be centered around their established hospitals in major cities, to build in the flexibility of temporarily shifting doctors from the cities to the villages on a needs basis. Challenges Scalability is Apollo REACHs major challenge. At the facility level, after reaching the saturation point in terms of revenues, an increase infrastructure is required, i.e., increasing the number of beds. At the chain or network level, the challenges are similar to those of other businesses lack of skilled personnel, high CAPEX, and heavy burden of expensive debt. Source of financing to date and future needs Till date, Apollo REACH has been funded by equity from Apollo Hospitals and IFC. Each hospital costs approximately $5 million to establish, implying that the initiative will need close to $75 million in investment in the next 3 years. Of the total pool of investments coming in, Apollo REACH would prefer 60% as debt, 25% as grants, and the remainder as soft loans with a 15 year tenor.
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Inclusive Business Case Study CIC Agri

Seed-to-shelf agricultural production company Sector: Agriculture Location of operations: Pan-Sri Lanka Year of establishment: 1993 Turnover: $67 million Extent of BOP engagement: Over 20,000 BOP farmers Background on Business A subsidiary of one of Sri Lankas largest conglomerates, CIC Holdings, CIC Agri is a large agricultural production company. It contributes to 6% of Sri Lankas overall agriculture-related GDP. Mode of BOP Engagement BOP as Suppliers CIC Agri engages over 20,000 BOP farmers as suppliers of several agricultural products. These are smallholder farmers, with less than 1 hectare of land. CIC Agri provides these suppliers with agricultural inputs (including seeds and fertilizer), and then buys the harvested product back from the farmers at fair prices. BOP as Employees CIC Agri directly employs approximately 2,500 BOP individuals in its factories, processing units and farms. Furthermore, it indirectly employs over 2,000 contracted employees. BOP as Consumers CIC Agris farmers are also consumers of its consultancy services, through which it advises its farmers on how to optimize their yields and productivity. Impact to date and future growth plans CIC Agri directly impacts the lives of over 20,000 farmers, by guaranteeing them the highest possible income for their crop. Farmers benefit from a guaranteed, fair income, and extension services on how to improve the quality of their crop. Currently contributing to 6% of Sri Lankas total agricultural production, CIC Agris impact on its supplier farmers is very significant and sustainable. It plans to grow by 20% every year. Challenges Like many other businesses in Sri Lanka, CIC Agri is currently facing difficulties in obtaining affordable financing. Furthermore, Sri Lankan agriculture faces a productivity problem. The productivity of individual farmers is not optimal, and improving this requires a significant resources, to both educate farmers in optimal farm management, and to invest in the necessary technology (such as machinery, fertilizer, seeds, etc). Source of financing to date and future needs As a private subsidiary of a public holding company, CIC Agri has grown to date with its parent companys internal reserves, loans from local banks and an equity investment by an Indian company Due to its relationship with its parent company, CIC Agri would consider an equity investment with caution. It would consider, however, commercial private equity investments from foreign investors.
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Inclusive Business Case Study DesiCrew Solutions

Rural Business Process Outsourcing (BPOs) Sector: Business Process Outsourcing (BPO), IT Location of operations: Pan-India Year of establishment: 2007 Turnover: $700,000 Extent of BOP engagement: 200 BOP employees Background on Business DesiCrew Solutions was started to bring white collar jobs to rural youth in India. As a Business Process Outsourcing (BPO) company with 4 centers across Karnataka and Tamil Nadu, DesiCrew creates attractive rural employment opportunities, thereby reducing the migration of educated youth to urban areas. DesiCrews headquarter office receives orders from its corporate clients, which are then assigned to one its 4 rural BPO centers, where the service is delivered. Desicrews clients include domestic and international clients. Their early supporters include Infosys and HDFC Life Insurance. Mode of BOP Engagement BOP as Employees DesiCrews primary mode of engaging the BOP is as employees in its BPO centers. These employees are originally from the surrounding rural areas, and are university-educated. They would previously have had little choice but to migrate to nearby urban centers for skilled jobs offering a certain salary. With the presence of Desicrew, however, they are able to stay closer to home and support their families. Once hired, employees are trained in specific processes and IT skills. Impact to date and future growth plans Desicrew currently operates 4 BPO centers in Karnataka and Tamil Nadu, which altogether employ approximately 200 people. Given DesiCrews transparent career path, employees can stay close to home without having to sacrifice a fulfilling career. DesiCrew also has a positive impact on its employees sense of personal satisfaction. When asked what they enjoy about their job, employees point to the opportunity to manage small teams and directly engage with international clients. At the community level, DesiCrews centers reduce the migration of educated and talented youth away from rural areas and into large cities. Challenges A key challenge faced by DesiCrew is the need to keep costs low and standardized across its 4 centers. This would not only lead to greater profitability, but it would allow any order to be assigned to any of its BPO centers. Keeping its costs low is critical for DesiCrew to remain competitive in the BPO market. Source of financing to date and future needs DesiCrew was incubated at the Rural Technology and Business Incubator (RTBI), associated with the Indian Institute of Technology in Madras (IITM). As a result, it received seed funding of $10,000, and then secured an interest-free loan from Villgro (another social incubator based in South India). DesiCrew has since raised equity funding from an Indian venture capital fund. Though it is currently able to receive raise debt against receivables to finance its working capital needs, DesiCrew would look to raise equity in the future, to further scale its business.
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Inclusive Business Case Study Global Easy Water Products

Affordable drip-irrigation technology for smallholder farmers Sector: Agriculture Location of operations: Pan-India Year of establishment: 2004 Turnover: $3.5 million Extent of BOP engagement: 41,000 BOP consumers Background on Business Started as a for-profit subsidiary of International Development Enterprises India (IDEI), Global Easy Water Products (GEWP), sells affordable drip irrigation technology to smallholder farmers across India. Mode of BOP Engagement BOP as Suppliers Though it may be easier to supply inputs from larger suppliers, Aitken Spence purposefully partners with local farmers to supply its resorts with agricultural produce. In order to ensure certain quality standards of its inputs, Aitken Spence trains local farmers on optimal management and preservation of their produce. In addition, it provides them with the tools they may require, such as seeds, fertilizer and crates. BOP as Employees Aitken Spence directly employs more than 2,000 local BOP individuals to work in its resorts as facilities management staff, kitchen staff, and tour guides. The company absorbs local high school graduates into its hotels, guaranteeing them a career path and steady income. Impact to date and future growth plans Though it may be easier to engage with more established and standardized suppliers of agricultural produce, energy and other inputs that are crucial to the operation of hotels, Aitken Spence has purposefully chosen to engage the BOP communities in its areas of operation, thereby giving them the opportunity to benefit as much as possible from the resorts presence. Challenges Like many other businesses in Sri Lanka, Aiken Spence is currently challenged with the high costs of capital, preventing it from growing faster. Though foreign investors have expressed an interest in the company, they prefer investment timelines that are not long enough to allow for returns (5 years as opposed to the 8-10 years required to experience returns on investment). Furthermore, the Sri Lankan government has not been investing adequately in the infrastructure needed to accommodate the growing tourism industry. Source of financing to date and future needs As it is a subsidiary of one of Sri Lankas largest conglomerates, Aitken Spence has benefited from substantial internal reserves, and the ability to leverage its reputation to form joint ventures with international partners. The current cost of capital, however, is hindering Aitken Spences expansion plans, for which it would seek loans at concessionary rates (6-8%). Given that a typical 500-room hotel costs approximately $40 million to construct, Aitken Spence would look to receive investments between $10 to $20 million.
15
Inclusive Business Case Study Greenlight Planet

Off-grid solar lighting products for rural consumers Sector: Energy (renewable) Location of operations: Pan-India Year of establishment: 2008 Turnover: Not disclosed Extent of BOP engagement: 230 employees; 1,000 distributors; 1,000,000 consumers Background on Business Greenlight Planet sells affordable off-grid solar lighting products to BOP consumers in India and East Africa. Their products include an award-winning Sun King lamp, priced at $17 (Rs. 850), and a Sun King Pro for $32 (Rs. 1,600), the latter of which includes a mobile phone charger. Greenlight currently has operations in 4 states in India (Bihar, Maharashtra, Odisha, Uttar Pradesh) and in Kenya. Mode of BOP Engagement BOP as Distributors Partly due to the high costs associated with using existing distribution channels, Greenlight Planet has created an innovative, decentralized distribution network that directly serves BOP populations. Village-level entrepreneurs, Sun King Saathis, are recruited and trained by Greenlight district managers and team leaders. Distributors are responsible for educating consumers on the benefits of using solar lights. Greenlight has found that successful distributors are not involved in any other entrepreneurial activities, which ensures that they are motivated by the sales commission to maximize sales. Further, they should be local, trusted and credit within the local community. BOP as Employees Greenlights team leaders and district managers are village-based, and also belong to the BOP. BOP as Consumers Greenlights target consumers are BOP, rural populations with no or limited access to grid electricity. Impact to date and future growth plans Greenlight Planet generates impact on multiple levels. Customers have access to a reliable source of clean energy, allowing them to be more productive during hours when there is no sunlight, and reducing the environmental, health and safety risks of being dependent on kerosene lamps. For its distributors and employees, Greenlight is generating increased income levels, and training them in very relevant and useful entrepreneurial skills. Greenlight plans to reach 10 million customers through 10,000 distributors by 2015. Challenges Greenlight Planet has been unable to access affordable, local working capital to finance its inventory. Source of financing to date and future needs Greenlights primary source of funding has been a $4 million Series A equity investment from its angel funder and Bamboo Finance, a venture capital fund. In addition, it has received $250,000 in debt funding from Deutsche Bank, the Lemelson Foundation and Ashoka. Greenlight Planet would need $5-10 million in future financing, the ideal composition of which would be 20% equity, 70% debt and 10% grant funding.
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Inclusive Business Case Study Industree Crafts Pvt. Ltd.

Retailing handicrafts produced by rural artisans Sector: Manufacture and retail Location of operations: Pan-India, Asia Year of establishment: 1996 Turnover: $3 million Extent of BOP engagement: 3,360 suppliers Background on Business Industree Crafts works with rural artisans and self-help groups (SHGs) to produce textiles, garments and other handicrafts, which it retails under the Mother Earth brand across India. Based in a desire to enable rural entrepreneurs, Industree creates new supply chains and retail channels, connecting rural artisans to urban consumers. Though this model is not as efficient or lucrative as sourcing products from factories, Industree prioritizes an improvement in livelihood opportunities for the rural BOP. Mode of BOP Engagement BOP as Suppliers Industree engages BOP suppliers as part of its core business operations. It assists in the formation of SHGs and organizes rural artisans into cooperatives and associations. Industree then provides collateral to these SHGs and acts as a guarantor for bank loans. Almost 100% of the fabric used in Industrees products and 40% of all products made come from SHGs. As Industree expands, it also invests in supply chain infrastructure to facilitate collection of its products from remote areas. Through its Foundation, the company identifies and creates new "handicraft clusters, and invests heavily in training for quality and consistency. The company supports the Foundation in financial and non-financial ways. Impact to date and future growth plans Industree currently works with 18 SHGs and 300 handicraft clusters across 9 states in India, representing over 3,300 rural suppliers in total. By turning traditional art into aspirational lifestyle products, Industree has improved the livelihood opportunities of thousands of rural individuals, and has promoted entrepreneurship among its BOP suppliers. Over the next three years, the company intends to work with 10,000 suppliers across the country. Industree has aggressive growth plans and has recently started exporting to European markets. Challenges Primary challenges faced by Industree include poor infrastructure in the states in which it operates, the low availability of adequately skilled labour, and an unsupportive regulatory framework for early stage companies in India. Source of financing to date and future needs In 2011, Industree received a $1 million equity investment from Grassroots Business Fund. The company has also received a $200,000 technical assistance grant to be used towards customer care training and brand building. For their next round of fundraising, Industree will look to raise a further $6-7 million, largely in the form of equity.
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Inclusive Business Case Study Jaipur Rugs

Hand-knotted carpets made by rural artisan women Sector: Handicrafts Location of operations: Pan-India Year of establishment: 1999 Turnover: $16.8 million Extent of BOP engagement: 40,000 suppliers (weavers), 200 employees Background on Business Based in Rajasthan, India, Jaipur Rugs is a manufacturer of hand-knotted carpets. Jaipur Rugs directly engages with a network of over 40,000 rural artisan weavers to make its carpets, which are then exported to countries around the world. Mode of BOP Engagement BOP as Suppliers Jaipur Rugs main mode of engaging the BOP is as suppliers. The company indirectly employs more than 40,000 rural artisans to make its hand-woven carpets, which are then exported to over 30 countries around the world. Raw materials to make the carpets are provided directly to the carpet weavers, along with design patterns and specifications. Carpet weavers make the carpets in their homes, where they have looms, and the finished product is delivered back to the companys headquarters. Each weaver is paid per square foot of carpet made. BOP as Employees In addition, Jaipur Rugs employs more than 200 full-time employees, most of whom are also from low-income backgrounds. Though educated, these employees have been trained extensively to work with advanced technological tools and to develop a valuable design-related skillset. At Jaipur Rugs, these employees have been encouraged to take on more responsibility and to develop their professional skills much more than they would have experienced in a more traditional company. Impact to date and future growth plans Jaipur Rugs has reached a network of more than 40,000 rural artisans across 6 states. It expects this number to grow to 50,000 artisans within 3 years time. Its full-time employees will also grow, by 50% to a total of 300. In addition to providing these weavers with employment and a steady source of income, working with Jaipur Rugs gives women greater autonomy within the household. Challenges With its very extensive network of rural artisans, Jaipur Rugs model requires significant logistical organization to work efficiently. A continuous question asked by the companys management is how to further increase its operations and efficiency. Furthermore, as significant resources are dedicated to skills training for the companys weavers, a challenge has been to find the right partners that could develop literacy and entrepreneurial skills among its weavers. Source of financing to date and future needs Started with internal reserves, Jaipur Rugs received a $1 million investment from the Grassroots Business Fund. When considering future investors, Jaipur Rugs is conscious of partnering with investors who have similar social priorities.
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Inclusive Business Case Study MAS Intimates

Innovative manufacturer of intimate apparel and sportswear Sector: Apparel, Textiles Location of operations: Pan-Asia Year of establishment: 1986 Turnover: Not disclosed Extent of BOP engagement: 40,000 employees Background on Business Located in Sri Lanka, MAS Intimates is the regions leading manufacturer of intimate wear and sportswear. It is the preferred supplier of apparel to global brands, such as Victorias Secret, Nike, Calvin Klein, Ann Taylor, Speedo and Gap. A subsidiary of MAS Holdings, MAS Intimates employs more than 50,000 youth from BOP backgrounds across Sri Lanka. Mode of BOP Engagement BOP as Employees MAS Intimates employs more than 50,000 individuals from BOP backgrounds, 80% of whom are women. The majority of employees are from rural and semi-urban areas. They are often recruited to work at MAS with minimal previous work experience and are trained in the skills required for their position. Impact to date and future growth plans MAS Holdings currently operates 34 facilities in Sri Lanka, and 1 in India. When the company started, it solely focused on manufacturing apparel for its clients. Since then, however, MAS has captured increasing value along the entire production chain. The company now also produces accessories, such as elastics, and lace, and manufactures textiles. Furthermore, it has also started its own lingerie brand, called Amante, whose products are currently sold exclusively in India. MAS impact on its employees is multifold. In addition to the technical skills and steady source of income gained by employees at MAS, the company strongly encourages the development of general professional and life skills. Employees are encouraged to proactively think about their career paths within the organization, and to pursue their interests, whether or not they are related to MAS. To promote ownership and critical thinking among employees, small teams of workers have weekly meetings to discuss how any challenges faced along the production line can be mitigated. Challenges A continuous yet relatively trivial challenge faced by MAS Intimates is the attrition of its employees. Given Sri Lankas tight labour market and the presence of equally lucrative alternative job opportunities, MAS workers are sometimes attracted to a more traditional office job. Attrition is an issue for the apparel sector as a whole, however, and given MAS very strong reputation as a preferred employer, this problem is not very acute. Another challenge is related to continuously maximizing efficiency. The pressure to minimize costs of production as much as possible has become especially acute, as Western economies contract. Source of financing to date and future needs From its start in 1986 with just a few sewing machines, MAS has grown into one of Sri Lankas largest conglomerates. It has grown with a combination of internal capital reserves, and several joint ventures with American and European companies.
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Inclusive Business Case Study Shree Kamdhenu Electronics Pvt. Ltd.

Technological products and solutions for dairy collectives Sector: Information Technology Location of operations: Pan-India, Asia Year of establishment: 1996 Turnover: $1.3 million Extent of BOP engagement: 40 BOP employees; 1.05 million BOP consumers Background on Business Started in Gujarat in 1996, Shree Kamdhenus product, Akashganga, addresses two core issues faced by rural dairy farmers: accurately measuring the quantity of milk supplied by farmers to dairy collectives; and determining the quality of milk supplied. Mode of BOP Engagement BOP as Consumers Shree Kamdhenu Electronics sells its microprocessor-based electronic measurement and quality testing products to dairy farmer collectives. These innovative tools allow each farmers milk to be measured for quantity and quality individually, making the entire process of milk collection transparent and efficient. Earlier, milk from all the farmers was first collected into one container, and then tested for quality. Farmers were therefore receiving a price for the quality of the collectives milk, which offered no incentive for individual farmers to improve their own quality. BOP as Employees Over 50% of all people employed by Shree Kamdhenu Electronics belong to the BOP population. Impact to date and future growth plans With over 3,500 installations in 12 states across India, Akashganga has directly impacted over 1 million farmers and indirectly impacted over 4 million individuals to date. This product directly impacts the lives of dairy farmers by ensuring that they are paid accurately for the quantity and quality of milk they individually supply. Due to this and reduced wastage at the collection point, farmers are getting a higher price for their produce, and have an incentive to supply better quality of milk. The company plans to reach 1.2 million farmers and 100 BOP employees by 2015. Challenges A key challenge for Shree Kamdhenu Electronics has been raising debt, given the difficulties faced by small businesses in India in securing affordable bank loans. At an operational level, the company also faces the challenges of operating in states with poor infrastructure, the lack of an enabling business environment for early-stage companies, and at times, a low willingness from customers to pay for their product. Source of financing to date and future needs Shree Kamdhenu Electronics has raised $190,000 as an equity investment from Aavishkar and Grassroots Business Fund, $113,000 as debt, $95,000 in credit guarantees, and $10,000 as promoters equity. Ideal future financing would take the form of soft loans and would be utilized for launching new products for the dairy sector, building a factory and expanding sales across India.
20
Inclusive Business Case Study StarAgri

Integrated post-harvest management solutions for smallholder farmers Sector: Agri-business Location of operations: Pan-India Year of establishment: 2006 Turnover: 300 Million INR ($5.7 Million) Extent of BOP engagement: 500 BOP employees; 50,000 BOP farmers Background on Business StarAgri was started to address Indias vast, unorganized agricultural supply chain. It offers a host of integrated post-harvest management services, allowing BOP farmers to derive more value from their harvests. StarAgri directly engages with BOP farmers as well as corporates and processing companies. Mode of BOP Engagement BOP as Consumers StarAgri provides several services to BOP farmers, including warehousing, quality testing, and collateral management services. The company also partners with several banks, enabling smallholder farmers to receive low-cost loans. Upon storing their produce in StarAgri warehouses, farmers are provided with a receipt, which is recognized by a wide range of banks (established partners of StarAgri) as collateral. BOP as Suppliers Upon receiving orders for farm produce from Indian corporates, StarAgri procures this produce directly from thousands of rural farmers. By removing middlemen from the process, StarAgris farmers receive a higher price for their produce. Futhermore, StarAgris quality-based procurement allows farmers to receive higher prices for high-quality produce (as opposed to traditional auction systems, where all farmers receive the same price per crop, regardless of quality). Impact to date and future growth plans With 750 warehouses spread across 10 states, Staragri has served more than 50,000 farmers to date, and currently employs more than 500 people. It plans to reach 2.5 million farmers in the next 5 years. StarAgris range of integrated services allows farmers to exercise greater ownership over value they earn from their produce. Previously, farmers had little choice but to accept the nontransparent prices offered to them by supply chain middlemen. With StarAgri, farmers are able to verify the quality of, and receive fair prices for, their produce. Furthermore, with its warehousing facilities, farmers can store and better manage their produce and sell it when the market is offering an optimal price. Challenges Initially, StarAgri had faced resistance from banks to recognise the warehouse receipts it would issue to farmers, in return for affordable loans. As the number of its farmers grew into the thousands, however, banks became interested. Another challenge is the need to educate farmers on the advantages of engaging with StartAgri to manage their produce, which requires significant company resources. Source of financing to date and future needs StarAgris launch was financed by its promoters equity totaling $2 million, and it has recently received an investment of $30 million from IDFC, one of Indias leading infrastructure financing companies. In terms of working capital, however, it would look to raise $10-20 million in debt.
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Inclusive Business Case Study Vortex Engineering

Low-power and solar-powered ATMs for rural populations Sector: Manufacturing, Financial Services Location of operations: Pan-India, Asia, Africa Year of establishment: 2004 Turnover: $2 million Extent of BOP engagement: 7.2 million BOP consumers Background on Business Vortex has designed a rugged ATM specifically for rural areas, which are characterized by intermittent power supplies. Vortexs innovative ATMs consume 90% less power than traditional ATMs, and can therefore be solar-powered. Due to the subsequent lower costs of operation, these ATMs can be financially viable with fewer transactions, and therefore are very suitable for deployment in rural areas. Vortex sells its ATMs directly to banks, which can then extend their financial services to rural populations. Its clients include both public and private banks. Mode of BOP Engagement BOP as Consumers Though Vortexs direct consumers are banks, the end beneficiaries of its ATMs are rural BOP populations, who gain increased access to formal financial services. The majority of rural populations in India live several kilometers away from the nearest bank branch, often requiring half a day of travel to conduct financial transactions. Impact to date and future growth plans To date, Vortexs ATMs have increased access to financial services for approximately 7.2 million rural consumers across India, including its lowest income states. The presence of ATM machines in rural areas has a very significant impact on BOP consumers, including reduced time and money spent travelling to the nearest banking center. Furthermore, more accessible ATMs lead to an increase in rural savings. In addition to India, Vortexs ATMs have been exported to other countries, including Nepal, Bangladesh and the United Arab Emirates. Over the next 3 years, the company aims to reach 50 million consumers. Challenges The key challenge faced by Vortex is the initial reluctance by banks to adopt this innovative ATM. Despite its design being very suitable for Indian rural areas, some banks view the product as too risky and continue purchasing the more expensive but less appropriate ATMs from larger manufacturers. Source of financing to date and future needs Vortex was incubated at the Rural Technology and Business Incubator (RTBI), associated with the Indian Institute of Technology, in Madras (IITM), where it received seed funding. Since then, Vortex has successfully raised more than $12 million from various investors, including the IFC, Bamboo Finance, Aavishkaar, Ventureast, and Tata Capital. To fund the expansion of its business, Vortex would look to raise an additional $5 to $10 million. If made available, it would devote technical assistance funds towards further research and development.
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Inclusive Business Case Study WaterHealth

Affordable housing for migrants and low-income populations Sector: Water Location of operations: Andhra Pradesh Year of establishment: 2005 Turnover: Not disclosed Extent of BOP engagement: 5 million BOP consumers, 10 distributors, 600 employees Background on Business WaterHealth combines the use of decentralized purification centers in partnership with local communities to create a scalable and sustainable solution for processing healthy drinking water. Through its solution, WaterHealth provides each person with up to 20 litres of safe drinking water per person per day, at an investment of approximately $10 per person. Mode of BOP Engagement BOP as Consumers WaterHealths primary mode of engagement with the BOP is as consumers of its affordable safe drinking water solution. Beneficiaries of WaterHealths services would otherwise only boil water, which doesnt remove any inorganic impurities. BOP as distributors WaterHealth engages village level entrepreneurs in a build-operate-transfer model, working closely with the community. In the operate phase, the company engages locals who are often a part of the BOP themselves to run the plant on a daily basis. BOP as Employees WaterHealth builds plants sustainably, by engaging the local population as construction workers. Impact to date and future growth plans WaterHealth is currently focused on building its presence in Africa, with the intention of building 2530 plants this year. Similarly, the company plans to expand to 300-400 plants in India. Within India, WaterHealths corridor of interest extends from Rajasthan, Gujarat, Chhattisgarh, Andhra Pradesh and Karnataka. WaterHealths expansion plans will remain in concentric circles, seen to be the most effective model of geographic expansion. Challenges A key challenge for WaterHealth is competition from subsidized sources of water, and resulting challenges with pricing. Government has adopted the approach of subsidizing water utilities. As a result, these utilities lose money and their quality progressively deteriorates. Generating awareness among consumers that have been spoiled by traditional water utilities in case they exist has also been a major challenge. Source of financing to date and future needs Tata capital, IFC, and other strategic investors have taken equity positions in WaterHealth. The company has a long line of credit from IFC at low rates of interest. Given WaterHealths ambitious expansion plans, it will need a large amount of investment. It would prefer most of its investments as grants, but is open to equity investment as well.
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5 DEEP DIVES ON POTENTIAL FUND MANAGER PARTNERS FOR ADB

Figure 1: Fund manager snapshot Pragati India Fund
Fund name Investors
Fund details
Pragati India Fund I CDC, IFC
Sample investment
Strategy
Jash Engineering
Mfg. of equipment used in waste water treatment
Vintage Total AUM

Avg. size of investment
2011 $ 60 million
$ 6 10 million
Target IRR Geographic focus

Sector focus Social impact metrics employed
25% + Low-income states in India

Sector agnostic
Pragati believes the market for financing small-medium sized enterprises in low-income states in India presents attractive financial opportunities for private equity. Pragati underwrites companies for being SMEs and not inclusive businesses, but it indirectly engages the poor by investing in businesses that exist in deprived regions, employ local populations, and invest in workforce development thus having the potential for significant livelihood creation. Although finding such fundable opportunities remains a challenge in these geographies, Pragati believes being close to the ground will generate strong deal flow. To further address the risk of limited deal flow, Pragati chooses to remain sector agnostic. The fund expects their investees to be family run businesses, and look for strong corporate governance.
Pragati is a relatively recent financial-first, commercial fund and does not have explicit impact measurement systems. Since DFIs such as CDC and IFC are LPs of the fund, Pragati follows strong ESG-oriented metrics. Key contact
N. Shadagopan
SOURCE: Interview with fund; Dalberg research
Figure 2: Fund manager snapshot Aavishkaar

Fund name Investors Fund details Vintage Total AUM Avg. size of investment Target IRR Geographic focus Sector focus Social impact metrics employed
Several DFIs such as IFC, CDC, FMO, and KfW have invested in Aavishkaar; they expect regular reporting on ESG issues and private sector development impact across its investments. However, Aavishkaars impact measurement systems are not based on GIIRS. Key contact
Aavishkaar India Micro Venture Capital Fund CDC, IFC, FMO, KfW, NABARD, Rockefeller, others
Sample investment Strategy
Vortex Engineering
Developer and mfg. of low-cost ATMs
2005 $ 120 million $ 0.1 1 million 20-22% Pan-India Sector agnostic
Aavishkaar was one of the first funds set up to provide equity finance to early-stage inclusive businesses. The fund diversifies its exposure across education, healthcare, agriculture, ICT, and energy. Although Aavishkaar does not focus exclusively on low-income states, its strategy of investing in rural areas where few other fund managers are willing to go, ensures that over 50% of its invested capital has a footprint on low-income states. Aavishkaar takes a venture-capital style approach to develop sectors and industries in nascent geographies. Aavishkaar has so far made 33 investments in prerevenue companies, underwriting risks of limited experience of entrepreneurs and lack of local enabling institutions, and has still delivered strong financial returns.
Vineet Rai
SOURCE: Interview with fund; Dalberg research; ImpactBase
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ADB Inclusive Business Market Study for India and Sri Lanka Draft Report: Annexes Figure 3: Fund manager snapshot Aureos
Aureos has a proprietary impact measurements framework, the Aureos Sustainability Index. Beyond this, Aureos also follows IFC perfor mance standards and is a signatory of UNPRI. Key contact
Aureos South Asia Fund CDC, ADB, Norfund, FMO
Asiri Hospitals
Chain of low-cost hospitals in Sri Lanka
2004 $ 100 million (70% for India) $ 5 10 million ~25% India, Sri Lanka, Bangladesh Sector agnostic
Aureos is a global investment firm with a portfolio of emerging markets focused private equity funds. Aureos qualifies itself as a financial-first fund manager, and focuses on SMEs across sectors. It is one of the few fund managers currently focusing on Sri Lanka, and has a strong track record of investing across South Asia. Although sector agnostic, the fund plans to target infrastructure oriented sectors such as manufacturing, transportation / logistics, pharmaceutical, and healthcare in the short-medium term. Aureos follows ESG criteria closely, and often uses such parameters as screening criteria, in conjunction with capital intensity and level of regulation. Globally, Aureos has completed over 270 transactions to date, and its exits have realized IRRs of 30%.
Balaji Srinivas (India), Nissanka Weerasekara (Sri Lanka)

Figure 4: Fund manager snapshot LR Global

ESG is an important part of LR Globals investment strategy, especially given that they are targeting DFIs as their primary LPs. The fund manager does not currently employ any other impact metrics. Key contact
LR Global CDC, ADB, Norfund, FMO
N/A
2012 $ 30 million + $ 0.5 4 million 20-25% Sri Lanka Sector agnostic
LR Global, the first formal institutional PE fund to be set up in Sri Lanka in the current post-conflict environment, was spun out of the Rockefeller office by former Aureos investment professionals, when IFC provided an anchor investment of $10 million. LR Global plans to invest in SMEs, where they believe exit strategies will be easier to place, and will source deals in-house, as opposed to secondary transactions. The focus on SMEs is not narrowed by an exclusive focus on IB. However, many opportunities in LRs deal pipeline could qualify as IBs by ADBs definition. Agriculture, tourism, and infrastructure are priority sectors for LR Global, while they remain sector agnostic. Further, LR Global will focus on investing in value chains of sectors where larger players operate.
Chanaka Wickramasuriya
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ADB Inclusive Business Market Study for India and Sri Lanka Draft Report: Annexes Figure 5: Fund manager snapshot SEAF
SEAF tracks IRIS compatible metrics such as employment, wages, benefits, training, suppliers, customers, taxes, community development, formalization and corporate governance. SEAFs development impact reports are available online. Key contact
India Agribusiness Fund LIC, Omidyar, SIDBI, UBI
Abhay Cotex
Cotton seed processing company
2010 $ 33 million + $ 2 7 million 20-25% Pan-India Agribusiness value chain
To create the India Agribusiness Fund (IAF), SEAF brought its global expertise of investing in agribusinesses (40% of global portfolio in the sector) and experience of investing in India through professionals with 6 years of investment experience at Kotak. IAF is one of the countrys few IB-focused sector-specific funds, and invests in SMEs that operate in the Agribusiness value chain, except upstream players. Typical opportunities that the fund considers are B2B businesses in sub-sectors such as agricultural processing, implements, logistics, and other post-harvest industries. SEAFs investment professionals recognize the nascence of PE to this sector, and hence spend more than 50% of their time on the ground, sourcing and monitoring deals. Given a chance, SEAF would deploy TA for public or shared goods.
Hemendra Mathur
Figure 6: Fund manager snapshot SIDBI-VC

Fund name Investors Fund details Vintage Total AUM Avg. size of investment Target IRR Geographic focus Sector focus Social impact metrics employed DFID is currently training SIDBI-VC investment professionals on impact measurement, while the fund currently tracks employment. Given already high transaction and deal management costs, SIDBI prefers simple metrics that investees can easily track. Key contact Ananta P. Sarma
Samriddh Fund DFID
Sample investment Strategy 2012 $ 60 million + $ 1 5 million 15-16% Low-income states in India Sector agnostic
FabIndia
Retailer of products handmade by rural craftspeople
SIDBI is a government owned financial institution providing debt and equity to micro, small, and medium-scale enterprises in India. SIDBI VC is a wholly owned subsidiary, which has set up the Samriddh Fund with DFID. The funds sector agnostic investment strategy focuses on SMEs in low-income states in India with potential to increase incomes of low-income populations. SIDBI believes that an exclusive LIS focus ensures that their SME investees are also IBs. The fund does not focus on Northeastern states, however, due to a lack of enabling infrastructure in those regions currently. SIDBI intends to encourage its investees to enter LIS markets, and further help them by leveraging its network within the government, if needed. Any returns over 14% that the fund generates are returned to their current investor, DFID.
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6 ECONOMIC FACTSHEET ON LOW-INCOME STATES

GDP growth rates of low-income states Figure 7: Summary of key statistics on low-income states in Indiain
GDP growth rate % Bihar Chhattisgarh Jharkhand 6.6% 13.1% 10.8% 1,824
India
Number of clusters
Per capita income $ (PPP) 1,272 2,673
194 48 67 251
2,717 2,377
Madhya Pradesh
Odisha Rajasthan Uttar Pradesh 7.2% 5.4% 6.3%
12.0%
1,804
340 198
504
1,707
West Bengal Arunachal Pradesh Assam Manipur

Meghalaya Mizoram Nagaland Tripura 3.9%
7.1% 3.7% 8.4% 6.2%

9.5% 14.7% 8.9% India average = 6.5%
3,033 3,408 1,865 1,885

2,967 2,797 3,068 2,708 India average = 3,694
66
862
38 82 84 19 7 39 82
SOURCE: Dalberg Analysis, UNDP, India Competitiveness Report-2011, IBEF, UNIDO
27
Summary of key facts on low-income states in India:

State, competitiveness ranking Bihar 17 / 29 5 / 15 in LIS/NES Key facts Major industries Major clusters
Bihar recorded the second highest GDP growth among all the states DFIs like IFC, DFID, Kfw, CDC & SIDBI have Bihar as one of their focus states Bihar government is proactively giving policy incentives for Industries & Investors
Chhatisgarh 12 / 29 1 / 15 in LIS/NES
Jharkhand 21 / 29 9 / 15 in LIS/NES
Chhattisgarh accounts for about 16 per cent of the nations coal reserves and is rich in other mineral resources such as Limestone, Iron-ore, Copper, Bauxite., Chhattisgarh is presently one of the few states that has surplus power The state offers a wide range of fiscal and policy incentives for businesses and stands first among LIS & NES in the competitiveness rankings DFIs like IFC, DFID, Kfw,CDC & SIDBI have Chhatisgarh as one of their focus states Jharkhand has around 40 per cent of the countrys mineral wealth DFIs like IFC, DFID, Kfw,CDC & SIDBI have Chhatisgarh as one of their focus states Location Advantage: Closer to the ports of Kolkata, Haldia and Paradip and has easy access to raw materials.
Agriculture: Tea, Rubber, Sugarcane, Tobacco, Dairy, Paper Industries: Plastics, Transport equipment, Chemicals, Textiles, Mines, Minerals Agriculture: Food processing Industries: Mining, Minerals, Iron & Steel, Cement, Power, IT& ITes, Biotechnology, Gems & Jewellery
Manufacturing Textile sericulture Sugarcane Agro-based industries
Iron & steel ancillary units Castings & metal fabrication Gems & Jewellery Textiles Aluminum
Madhya Pradesh 14 / 29 3 / 15 in LIS/NES
Odisha 15 / 29 4 / 15 in LIS/NES
A large number of consumer goods companies have manufacturing bases in the state because it is centrally located and is equidistant to all major cities of India Madhya Pradesh has rich mineral resources and has the largest reserves of diamond and copper in India State government is actively working with World bank, IFC, DFID and other DFIs on host of developmental projects Leads in iron, steel, ferroalloy & aluminium production. It also has a strong base for coal-based power generation Has a stable political environment and is actively working with IFC, DFID and other development organizations Offers a wide range of fiscal and policy incentives for businesses
Agriculture: Rubber, Food & beverages Industries: Mining, Minerals, Iron & Steel, Engineering, Chemicals, Handloom, Plastics, Printing & Packaging, Tourism Agriculture: Agri processing, forest based industries Industries: Mining, Minerals, Auto & Auto components, Textiles, Cement, Pharmaceuticals, Minerals, Manufacturing, IT & ITes, Tourism Agriculture: Agriprocessing, Food & beverages Industries: Mining, Minerals, Aluminum, Handloom,Tourism , Electronics, Iron, steel & Ferroalloy
Iron & steel ancillary units Engineering & fabrication Auto components Textiles Casting & metal fabrication
Engineering & fabrication Auto components Textiles Food processing
Food processing industries Handloom Handicrafts Textiles Agro & Forest based industries
28
State, competitiveness ranking Rajasthan 15 / 29 4 / 15 in LIS/NES
Key facts
Major industries
Major clusters
Uttar Pradesh 19 / 29 7 / 15 in LIS/NES
It is a natural corridor between the wealthy Northern and the prosperous Western states of the country, which makes it an important trade and commerce centre Rajasthan is one of the most attractive tourist destinations in India Rajasthan offers a variety of unexploited agricultural and mineral resources, which is indicative of scope for value addition and exports Rajasthan s GDP growth rate fell from 11% for the year 2010-11 to 5.4% for the year 2011-12 Newly formed state government in Uttar Pradesh is seen as an industry friendly government Government is actively working with Gates foundation, DFID and others The state has witnessed high infrastructural growth , which is seen as a positive facilitator for industrial growth, in the past few years
Agriculture: Agriprocessing Industries: Cement, IT & ITes, Ceramics, Mining, Minerals, Steel, Chemicals, Auto & Auto components, Textiles, Gems & Jewellery, Marble
Ceramics Textiles Marble slates Auto & Auto components Food processing Gems & Jewellery
West Bengal 20 / 29 8 / 15 in LIS/NES
One of the most needy Low Income state Under the new government , the erstwhile communist state is actively looking for a larger role by the private sector for its growth It has a good geographical advantage due to its proximity with sea ,North east and other landlocked countries
Arunachal Pradesh 28 / 29 15 / 15 in LIS/NES
Undulating topography and varied agroclimatic conditions offer vast potential for horticulture and growing a variety of fruits, vegetables, spices, aromatic and medicinal plants, flowers and mushroom Central government is taking up many initiatives to improve infrastructure and other amenities in the state
Agriculture: Agro processing, Food processing Industries: IT & ITes, Ceramics, Mineral based industries, Tourism, Sports goods, Leather based industries, Textiles, Handloom & Handicrafts, Auto & Auto components Agriculture: Tea, Jute products, Agri & Agri allied industries Industries: Mining, Minerals, Petroleum & Petrochemicals, Leather, Iron & Steel, IT, Auto & Auto components, Biotechnology Agriculture: Cane & bamboo, Horticulture Industries: Art & crafts, Weaving, Carpet weaving, Wood carving, Ornaments, Tourism, Saw mills & plywood, Power, Mineral based industries
Engineering equipment Textiles Leather products Auto & Auto components Rice mills Foundry
Textiles Handicrafts Handloom Food processing
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State, competitiveness ranking Assam 22 / 29 10 / 15 in LIS/NES
Key facts
Major industries
Major clusters
Assam is the largest economy of the Northeast region and is the most industrially advanced state in the Northeast India Assam is rich in natural resources such as natural oil and gas, rubber, tea, and minerals such as granite, limestone and kaolin The state is rich in water resources. Other potential areas of investment include power and energy, mineral-based industries, tourism and crude oil refining Manipur has significant potential for growing various horticultural crops because of varied agro-climatic conditions A wide variety of rare and exotic medicinal and aromatic plants grow in Manipur and Entrepreneurs get easy access for processing and marketing such plants With 79.8 per cent literacy rate, Manipur offers a largely educated workforce. Good Knowledge of English is an added advantage of the Manipuri workforce Meghalaya is endowed with abundant natural resources in terms of flora, fauna, medicinal plants, forests, coal, lime stone, feldspar, quartz, sillimanite, granite, industrial clay and uranium Meghalaya has a literacy rate of 75.5 per cent and a majority of local population speaks and understands English The state provides good support through various central and State Government agencies
Agriculture: Tea, Food processing, Horticulture, Sericulture Industries: Coal, Oil & Gas, Limestone, Cement, Tourism, Traditional cottage industry
Tea Handicraft Handloom Food processing
Manipur 27 / 29 14 / 15 in LIS/NES
Agriculture: Food processing, Sericulture Industries: Tourism, Handlooms, Handicrafts, Bamboo processing
Bamboo Handicraft Handicraft Handloom Food processing
Meghalaya 24 / 29 12 / 15 in LIS/NES
Mizoram 25 / 29 13 / 15 in LIS/NES
Mizoram contributes 14 per cent to the countrys bamboo production; the climate is ideal for setting up agricultural and forestry produce-based industries With a literacy rate of 91.6 per cent, Mizoram offers a highly literate workforce. Knowledge of English is an added advantage With improving connectivity and the establishment of trade routes with neighbouring countries, trade facilitation has improved significantly over the last decade
Agriculture: Agro processing, Food processing, Horticulture, Dairy & Livestock Industries: Tourism, Mining, Cement, Steel processing, Handlooms, Handicrafts, Hydroelectric power Agriculture: Bamboo, Sericulture, Food processing, Medicinal plants, Horticulture Industries: Tourism, Energy, IT, Minerals & Stones, Handlooms & Handicrafts
Foundry Handicraft Handloom Food processing
Handicraft Handloom
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State, competitiveness ranking Nagaland 23 / 29 11 / 15 in LIS/NES
Key facts
Major industries
Major clusters
Tripura 18/ 29 6/ 15 in LIS/NES
Nagaland has a high literacy rate of 80.1 per cent. Majority of the population in the state speaks English, which is the official language of the state The state provides institutional support through various central and State Government agencies viz., North East Council, Ministry of Development of North Eastern Region and Nagaland Industrial Development Council Tripura is rich in natural resources such as natural oil and gas, rubber, tea and medicinal plants Tripura is connected with the rest of Northeast India by National Highway (NH)-44. Improved rail, air connectivity and establishment of trade routes have further facilitated the trade At 87.8 per cent, Tripuras literacy rate is higher than the national average rate
Agriculture: Bamboo, Sericulture, Horticulture Industries: Tourism, Handlooms, Handicrafts, Minerals, Mining Agriculture: Tea, Rubber, Bamboo, Sericulture, Medicinal Plants, Horticulture Industries: Natural Gas, IT & ITes, Tourism, Handlooms, Handicrafts
Handicraft Handloom
Handicraft Handloom Bamboo Leather
Sources: Dalberg Analysis, UNDP, India Competitiveness Report-2011, IBEF, UNIDO
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7 DEEP DIVES ON PRIORITY SECTORS

Figure 8: Sector snapshot of water and sanitation
Key indicators across LIS & NES: Access to water and sanitation
% of population with access to improved water sources
Northeastern States (NES)
Key trends and facts:

The Planning Commission has allocated 4.6 times the amount reserved for improved sanitation in the 12th 5-year plan (2012-17), amounting to $6.8bn
% of population with access to improved sanitation

Other low-income States (LIS)
17 18 15
Bihar Chhatisgarh Jharkhand M. P.

Odisha Rajasthan
52
93 82
Government along with bilateral aid and loans from multilateral development banks loans have created successful PPP models Government of Indias Total Sanitation Campaign (TSC) is operational in 578 rural districts with an outlay of $3.35bn; for each sponsored project, the central govt shares 60% of total cost, while the state and the community contribute 20% each Key policies: JNNURM, National Water Policy & other state policies
81 77 83 95 91
23 17 25 26 60
Uttar Pradesh West Bengal
Arunachal
Assam Manipur 33 75
93
70
89
96
Meghalaya Mizoram Tripura
50 80 60
66 98 94
84 India avg. NOTE: Data for Nagaland is N/A

SOURCE: MDG States of India Report 2010; WHO
51 India avg.
Figure 9: Sector snapshot of energy access
Key indicators across LIS & NES: Energy access

% of people using solid fuels for cooking

Central government is taking up various key initiatives such as Solar Mission to electrify the off grid locations
% of people using kerosene lamps for lighting


Odisha Rajasthan
90 88 87 80 86 76 80 77 44 31 62 32 55 23 53
82
Central government is focusing more on Nuclear Energy & Solar Energy to electrify the un electrified villages and under electrified villages Solar Mission is expected to create more than 100,000 jobs and attract USD 820mn investment Central government has announced taxfree bonds of USD 1.90bn for financing projects related to power sector Key policies: Solar Mission, Electricity Act 2003, Electricity Act During 2006, Revised tariff guidelines, National Biomass Cook stoves Initiatives (NBCI)
Arunachal
Assam Manipur
70
80 69
19
62 25
Meghalaya Mizoram Tripura 45
83 14 79 16
37
67 31 India avg. India avg. NOTE: Solid fuels include biomass fuels, such as wood, charcoal, crops or other agricultural waste, dung, shrubs and straw, and coal.
SOURCE: India Census, 2011
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Figure 10: Sector snapshot of healthcare
Key indicators across LIS & NES: Healthcare

# Doctors per 10,000 population

Healthcare is an increasingly attractive sector for the PE & VC industry
# Nurses per 10,000 population


Odisha Rajasthan
4.0 4.1 3.9 4.9 2.7 4.0 7.5 6.0 7.1
2.8 5.7 6.2 5.8
Total expenditure on healthcare is expected to increase to $81.2 bn by 2015 To meet domestic demand, India needs $143 bn investments in healthcare by 2030
12.8
5.0
14.1
2.8
Government of India has decided to increase expenditure on healthcare to 2.5% of the GDP by 2017, from the current 1.4% Government allots high priority to proposals related to hospitals, life saving drugs and equipment
Key policies: National Rural Health Mission (NHRM), National Urban Health Mission (NUHM)
10.4
Arunachal Assam Manipur 3.2 2.8 6.2 17.9
Meghalaya Mizoram Tripura 2.5
4.5
12.3 9.2
5.3
11.8
6.1 7.4 India avg. India avg. SOURCE: HRH Report I; Public Health Foundation of India; World Bank
Figure 11: Sector snapshot of education
Key indicators across LIS & NES: Education

Gross enrollment ratio

Pupil to teacher ratio
By 2020, India needs 800 more universities and 35,000 colleges to meet the demand
Bihar Chhatisgarh Jharkhand

M. P. Odisha
64 76 76 90 69 87 61 85 30 12 44 24 41 35 26
58
The sector witnesses spends of more than $10.4 bn, which is estimated to grow at 18.0% annually Key policies: Right to Education Act (RTE), and Foreign Educational Institutions Bill (FEIB) RTE makes access to primary education a fundamental right and mandates 25% reservation for underprivileged students in schools FEIB allows FEIs to setup multidisciplinary campuses and award degrees; it mandates FEIs to invest at least 51% of capital expenditure required and regulates the admission process, fee structure, period of operation
Rajasthan Uttar Pradesh West Bengal
Arunachal Assam
91 76
18 21
Manipur Meghalaya Mizoram Tripura
77 89 102 97
19 16 14 20
72 India avg.
30 India avg.
SOURCE: UNESCO; CIA Factbook; State Elementary Education Report Card, DISE (2010-11)
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8 GOVERNMENT SCHEMES RELEVANT TO ADBS FUND

Below we have highlighted some government programs that ADB should strive to work together with. The resources devoted to these schemes and programs also indicate the level of priority that the Government of India has assigned to the issue in question. Most of these programs are already large, and would benefit greatly from a complementary approach from other actors. The following brief descriptions of each such government program are meant to provide some background and overview.
NATIONAL SKILL DEVELOPMENT CORPORATION (NDSC)

NDSC is a not-for-profit company set-up by the Government of India under the Ministry of Finance. The Government of India holds 49% of the company, with the private sector controlling the remaining 51%.4 It is structured as a Public-Private-Partnership. The National Skill Development Fund that funds the activities of the NSDC is set up as a trust that is owned completely by the government of India and is run by professional fund managers. The trust can receive financial contributions from donors, private entities, governments (both central and state), financial institutions etc. The Prime Minister of India is the chairperson of the National Council on Skill Development. Set up as part of the National Skill Development Mission (NSDM), its primary objective is to promote the development of skills in the country. It does so by catalyzing the creation of large, scalable, forprofit vocational training initiatives. The NDSC provides funding to private sector initiatives and also enables support systems like quality assurance, information systems and training initiatives for the trainers. Its target is to contribute about 30% to the overall target of the NSDM of skilling / upskilling 500 million people in India by 2022. As part of its mission statement, the NSDC focuses on the underprivileged section of the society, backward regions and significantly on the unorganized and informal sector. One of the core operating principles of the NDSC is to target market failure and not compete with private financing. It does that mainly though funding innovations targeting labour market outsiders. The NSDF is the operating arm of the NSDC and was created with a corpus of $188 million (Rs. 995.10 crore).5 Currently, its corpus stands at $472 million (Rs. 2,500 crore) and it has made a commitment of $256 million (Rs. 1356.41 crore) till march 2012.6 Established in October 2009, the NDSC has so far trained 181,691 people and placed 144,238 people. So far, it has funded 32 training institutions and 4 sector skill councils. Skilling of Indias workforce presents a $22 billion opportunity.7
4 5
NDSC website Coordinated Action on Skill Development, Planning Commission 6 Business Standard, May, 2012 7 NSDC, May, 2011
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NATIONAL INNOVATION FOUNDATION (NIF)

National Innovation Foundation India (NIF) is an autonomous body under the Department of Science and Technology, India.8 It was set up in February 2000 at Ahmadabad to provide institutional support for scouting, spawning, sustaining and scaling up the grassroots innovations. NIF conducts a biennial national competition for grassroots green technologies developed by farmers, mechanics, artisans and others through their own genius without any recourse to professional help. NIF validates these innovations with the help of experts and ascertains the novelty in these innovations. If the innovation is deemed novel, NIF files a patent on behalf of the innovator. NIF also funds value addition initiatives in these innovations to upscale them and make them more useful for a larger segment of people. To determine the feasibility of the commercializing of technology, NIF conducts market research and test marketing. Those technologies which are found to be commercially viable are licensed to willing entrepreneurs. A Micro Venture Innovation Fund (MVIF) of $750,000 (INR 4 Crore), sponsored by Small Industries Development Bank of India (SIDBI) , supports the activities of prototype development, test marketing and pilot production by providing necessary capital in the form of loans. Since 2003, a total of 168 projects have received financial support through this fund.9 NIF is mandated to build a national register of ideas, innovations and traditional knowledge practices related to agriculture, plants, animal health, and human health. With the help of the Honey Bee Network, NIF has been able to document more than 150,000 ideas, innovations and traditional practices.
8 9
NIF website MVIF online database of list of projects supported

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JAWAHARLAL NEHRU NATIONAL SOLAR MISSION:

The Jawaharlal Nehru National Solar Mission (also known as the National Solar Mission) is a major initiative of the Government of India and state governments to promote ecologically sustainable growth while addressing Indias energy security challenges.10 The Mission has set an ambitious target of deploying 20,000 MW of grid connected solar power by 2022. It is aimed at reducing the cost of solar power generation in the country through (i) long term policy; (ii) large scale deployment goals; (iii) aggressive R&D; and (iv) domestic production of critical raw materials, components and products, to achieve grid tariff parity by 2022. The Mission has adopted a 3-phase approach - 2010-13 as phase 1, 201317 as phase 2 and 201722 as phase 3. An evaluation of progress, review of capacity and targets for subsequent phases, based on emerging cost and technology trends will be done at regular intervals during this period. The missions targets are: To create an enabling policy framework for the deployment of 20,000 MW of solar power by 2022 To ramp up capacity of grid-connected solar power generation to 1,000 MW within three years by 2013; an additional 3,000 MW by 2017 through the mandatory use of the renewable purchase obligation by utilities backed with a preferential tariff To create favorable conditions for solar manufacturing capability, particularly solar thermal for indigenous production and market leadership To promote programs for off grid applications, reaching 1,000 MW by 2017 and 2000 MW by 2022 To reach 15 million sq. meters installed solar thermal collector area by 2017 and 20 million by 2022 To deploy 20 million solar lighting systems for rural areas by 2022 So far, National Solar Mission facilitated a 62% increase in investments in solar energy in India to $12 billion during the year, the fastest investment expansion of any large renewable energy market in the world.11 NVVN, the nodal agency for solar projects, has selected 37 projects accounting for a total of 1,480 MW (32 projects 5MW each; 1 project 20 MW; 3projects 100 MW each).
10 11
MNRE website The Hindu, June, 2012

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NATIONAL RURAL LIVELIHOOD MISSION (NRLM)

The National Rural Livelihood Mission (NRLM) was launched by the Ministry of Rural Development (MoRD), India in June 201112. Aided in part through investment support by the World Bank, the mission aims at creating efficient and effective institutional platforms of the rural poor enabling them to increase household income through sustainable livelihood enhancements and improved access to financial services. NRLM has set out with an agenda to cover 70 million Below Poverty Line (BPL) households across 600 districts in the country covering 6,000 blocks, 250,000 Gram Panchayats and 600,000 villages through self-managed Self Help Groups (SHGs) and federated institutions. It supports them for livelihoods collectives for a period of 8-10 years. In addition, these BPL households are facilitated to achieve increased access to their rights, entitlements and public services, diversified risk and better social indicators of empowerment. NRLM believes in harnessing the innate capabilities of people and complements them with capacities (information, knowledge, skills, tools, finance and collectivization) to participate in the growing economy of the country. The key features of the NRLM are: (1) Social mobilization: Universal social mobilization through formation of SHGs under NRLM. The related mission is to bring every BPL household under the SHG network. (2) Institution building: Setting up SHG federations at various levels to nurture the SHGs; enable them to become good quality institutions, help SHG members in articulating their demands, enable collective action for getting their entitlements with various government departments, developing backward and forward marketing linkages, maintenance of accounts, conducting audits and documentation. (3) Financial inclusion: Based on the eligibility criteria, NRLM would provide financial support with intent to inject financial resources into the institutions of poor for meeting their credit needs for both, consumption purposes and also for investment in livelihoods promotion (4) Livelihood program: Major focus of the NRLM is to stabilize and promote existing livelihoods portfolio of the poor. The NRLM livelihoods promotion priorities are: a. 'Vulnerability reduction' and 'livelihoods enhancement' through enhancing and expanding existing livelihoods options and tapping new opportunities b. 'Skilled wage employment' - building skills for the job market outside c. 'Enterprises' - nurturing self-employed and entrepreneurs (for micro-enterprises) (5) Convergence & partnerships: a. Ensuring that states agencies (SRLM) develop partnerships with major government programs and build synergies to address different dimensions of poverty and deprivation b. Working in tandem with civil society organizations, industries, educational institutions, banks and other resource organizations who share the similar objectives
12
NRLM Website
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INDIA INCLUSIVE INNOVATION FUND (IIIF):

India Inclusive Innovation Fund (IIF) is a $1 Billion fund setup in February, 2012 by the National Innovation Council, a division in the Prime Ministers Office.13 This fund is setup as an effort to drive and catalyse the creation of an ecosystem of enterprise, entrepreneurship, and venture capital, targeted at innovative solutions for the bottom of the pyramid. The IIIF is built on the principle that innovative enterprises can profitably, scalably, and competitively engage citizens at the bottom of the economic pyramid and in doing so, provide goods and services that will transform their lives for the better.14 The fund proposes to invest in a new generation of Indian entrepreneurs who will build, and are in the process of building, world-class enterprises that focus on the problems of the poor, without compromising on economic success. In doing so, the fund will help create a new Indian model of innovation, one that bridges growth and equitability. The fund will support investment at different stages of the enterprise development cycle from early stages, through later phases of scaling-up of potentially successful solutions and business models. The fund proposes to seek capital from a range of sources: seed fund contributions from the government and its agencies; contributions from various Indian public sector enterprises, banks, and so forth; and contributions from private investors, corporate organizations and investment firms. Crucially, the fund will also explore the possibility of establishing soft incubation capacity and resources expertise and programs that will support individual investee entrepreneurs and companies, in successful enterprise development and performance. This effort will address social impact objectives, by kick-starting an ecosystem of capacity-building around BOP-focused enterprises and entrepreneurship; and economic return objectives, by providing entrepreneurial teams with the capacities needed to successfully deliver on their ideas. The Government of India has announced an initial investment of $20 million (INR 100 Crores) in the fund.15 The fund is currently in the process of conceptualization, design, and development. It plans to start its operations once it has $100 million. Hence, it is actively scouting for $80 million from private sector and other non government agencies.
13 14
Times of India, Jan, 2012 National Innovational Council Website 15 Indian Express, November, 2011
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RURAL INNOVATION FUND

The Rural Innovation Fund (RIF) is a fund managed by the National Bank for Agricultural and Rural Development (NABARD) to foster innovation in the rural sector. The RIF supports innovation in farm, non-farm and microfinance sectors that have the potential to promote rural livelihood opportunities and employment. The support the fund offers can be in the form of a loan, grant, incubation fund support or a combination of the three up to a maximum of $56,600 (INR 0.3 Crores). Individuals, NGOs, community based organisations, self help groups, farmers clubs, Panchayati Raj Institutions and private sector companies can all apply for funding to the RIF. The preferred areas that the fund supports relate to agricultural productivity, rainwater harvesting and distribution of water, generation and distribution of energy, rural sanitation and waste disposal, managing common property resources, rural housing and habitat development, financial inclusion, rural tourism and rural health care. Since the inception of the fund in 2005, NABARD, through the RIF, has supported 455 projects till date with disbursements of $8.11 million (INR 43 Crores). In 2011-2012 alone, the RIF has disbursed $1.92 million (Rs. 10.18 crore) supporting 80 projects. 16
16
NABARD website
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List of abbreviations used

ADB BOP BMGF DFI DFID ESG FDI FMO GDP GDP (PPP) HDI IB IFC IPO IRR JICA KfW LIS LP MPI NORFUND NSDC PE R&D SIDA SIDBI SME Swedfund TA VC Asian Development Bank Base of the pyramid Bill & Melinda Gates Foundation Development finance institution Department for International Development Environmental, Social and Governance (criteria for investment) Foreign direct investment Netherlands Development Finance Company Gross domestic product Gross domestic product at purchasing power parity Human development index Inclusive business International Finance Corporation Initial public offering Internal rate of return Japan International Cooperation Agency Kreditanstalt fr Wiederaufbau, a German government-owned development bank Low-income states Limited partner Multidimensional poverty index Norwegian Governments Investment Fund for Developing Countries National Skill Development Corporation Private equity Research and development Swedish International Development Cooperation Agency Small Industries Development Bank of India Small and medium enterprises Swedish Governments Investment Fund for Developing Countries Technical assistance Venture capital
Table of Contents
1. 2. Context and methodology ............................................................................................................... 4 Recommendations ........................................................................................................................... 5 2.1 2.2 2.3 3. 3.1 3.2 3.3 3.4 4. 4.1. 4.2. 4.3. 4.4. 5. 5.1 5.2 5.3 5.4 6. 6.1 6.2 7. 7.1 7.2 Relevance ............................................................................................................................ 5 Strategy ............................................................................................................................... 7 Fund Operationalisation .................................................................................................... 10 Overview of performance on economic and social indicators .......................................... 11 Key trends shaping the economy ...................................................................................... 15 Size of the market at the base of the pyramid .................................................................. 19 Climate for enterprise and investment ............................................................................. 20 Overview of performance on economic and social indicators .......................................... 22 Key trends shaping the economy ...................................................................................... 25 Size of the market at the base of the pyramid .................................................................. 28 Climate for enterprise and investment ............................................................................. 29 Overview of our methodology .......................................................................................... 30 Analysis of findings ............................................................................................................ 32 Funding needs of Inclusive Businesses .............................................................................. 44 Implications for ADB .......................................................................................................... 48 Overview of our methodology .......................................................................................... 49 Analysis of findings ............................................................................................................ 50 Overview of our methodology .......................................................................................... 59 Analysis of findings ............................................................................................................ 60
Macroeconomic assessment of India ............................................................................................ 11
Macroeconomic assessment of Sri Lanka ...................................................................................... 22
Inclusive business mapping............................................................................................................ 30
PE markets assessment .................................................................................................................. 49
Donor mapping .............................................................................................................................. 59
Bibliography ........................................................................................................................................... 64 Endnotes ................................................................................................................................................ 66
List of Figures
Figure 1: Framework to organize insights collected in the study ........................................................... 4 Figure 2: Total and equity-only FDI inflows into India .......................................................................... 11 Figure 3: Gross domestic product (GDP) at PPP ................................................................................... 11 Figure 4: Historic and planned sector growth rates ............................................................................. 12 Figure 5: Contribution of sectors to GDP and labour force employment............................................. 12 Figure 6: Percentage of India's population in 9 poorest states ............................................................ 14 Figure 7: Projections for India's working age population ..................................................................... 16 Figure 8: Distribution of urban and rural population ........................................................................... 16 Figure 9: Increase in the number of urban towns ................................................................................ 17 Figure 10: Annual household consumer expenditure in India (1987-2010) ......................................... 18 Figure 11: Market size of India's BOP ................................................................................................... 19 Figure 12: India's credit ratings by various rating agencies .................................................................. 21 Figure 13: Gross domestic product of South and Southeast Asian countries ...................................... 22 Figure 14: Weighted contribution to GDP growth rate by sectors ....................................................... 23 Figure 15: Composition of FDI inflows .................................................................................................. 24 Figure 16: Age profile of Sri Lankas population ................................................................................... 25 Figure 17: Unemployment in Sri Lanka by education level and age group .......................................... 26 Figure 18: Segmentation of market at the base of the pyramid .......................................................... 28 Figure 19: Distribution of survey respondents ..................................................................................... 30 Figure 20: Primary BOP engagement mode of survey respondents..................................................... 32 Figure 21: Additional BOP modes of engagement ................................................................................ 33 Figure 22: Consumer model strategies ................................................................................................. 33 Figure 23: Distributor model strategies ................................................................................................ 34 Figure 24: Supplier model strategies .................................................................................................... 35 Figure 25: Employee model strategies.................................................................................................. 35 Figure 26: Benefits to company of being inclusive ............................................................................... 36 Figure 27: Benefits to the BOP of inclusive businesses ........................................................................ 37 Figure 28: Level of social impact measurement ................................................................................... 38 Figure 29: Geographical spread of IB operations ................................................................................. 39 Figure 30: Perceptions of operating in low-income states ................................................................... 40 Figure 31: Critical growth factors.......................................................................................................... 40 Figure 32: Key risk factors ..................................................................................................................... 41 Figure 33: Equity received to date ........................................................................................................ 44 Figure 34: Debt received to date .......................................................................................................... 44 Figure 35: Credit guarantees raised to date ......................................................................................... 45 Figure 36: Required investment size, by sector .................................................................................... 45 Figure 37: Investment size by geography and mode of engagement................................................... 46 Figure 38: Ideal grant-funded investments .......................................................................................... 46 Figure 39: Composition of Dalberg's sample of 21 fund managers ...................................................... 49 Figure 40: Market capitalization of countries in South and Southeast Asia ......................................... 50 Figure 41: Number and volume of PE (non real estate) investments in India ...................................... 50 Figure 42: Responses to the question: "What is your general outlook for India's economy?" ............ 51 Figure 43: Sector prioritization analysis................................................................................................ 54 Figure 44: Illustrative approaches of major investors deploying equity/debt to IBs in India............... 60 Figure 45: Exposure of major investors deploying equity/debt to priority sectors in South Asia ........ 61
1. CONTEXT AND METHODOLOGY

In May 2012, the ADB commissioned Dalberg Global Development Advisors to undertake a study on the Inclusive Business1 Market in India and Sri Lanka as part of a larger project titled Promoting Inclusive Growth through Business Development at the Base of the Pyramid. The objective of the market study was to assess the feasibility of setting up an inclusive business private equity fund in India and Sri Lanka. Dalbergs analysis focused on answering the following key questions: (1) Relevance. Is PE funding relevant for the growth of IBs in India and Sri Lanka? (2) Strategy. What should ADBs investment strategy be? (3) Operationalisation. How should ADBs fund be operationalised? These key areas of analysis - relevance, strategy and operationalisation were then broken down into sub-questions as described in the table below: METHODOLOGY
Our analysis is presented along 3 topics:
Figure 1: Framework to organize insights collected in the and (1) Relevance of ADBs potential IB fund, (2) investment strategystudy(3) fund operationalisation
Key questions addressed in our study
a. Are macroeconomic conditions conducive for IB growth?
Relevance
b. Are macroeconomic and business conditions favorable for VC/PE investment? c. Is there demand from inclusive businesses to seek out VC/PE investment? a. What size of enterprise and investment should the fund target? b. Which sectors should the fund prioritize?
Strategy
c. Should geography be a factor, and if so, where should the fund focus? d. Which financial instruments should the fund deploy? e. Should mode of engagement be an investment criterion? f. Which company-specific parameters should influence investment decisions? a. How should ADB engage existing PE funds investing in IBs?
Operationalisation
b. Who should ADB target to raise funds from? c. What are some other key considerations to set the IB fund up for success?
The approach Dalberg used to answer the above questions had four distinct parts: A. Assessment of macroeconomic and microeconomic conditions in India and Sri Lanka B. Mapping of inclusive businesses operating in India and Sri Lanka through an online survey of 7 130 businesses, and interviews with 20 potential investees for ADB C. Assessment of strength of capital markets in both countries through interviews with 21 fund managers with exposure to inclusive businesses D. Mapping of potential co-investors (donors) in ADBs fund through interviews with 11 agencies including family foundations, banks, DFI-funded investors and bilateral aid agencies The detailed methodology adopted within each of these work streams is described in the relevant sections of the report.
2. RECOMMENDATIONS
Based on findings across multiple work streams, we believe that ADB should adopt a three-pronged strategy to supporting the development of IBs in India and Sri Lanka 1. Invest in an existing PE fund to provide equity support in the $1-$10 million range to early and early growth stage, small and medium-sized inclusive businesses (IBs) The fund should adopt a sector-agnostic approach with a light preference for education, health, water and tourism sectors The fund should adopt a geography agnostic approach but may consider investing part of its funds in existing low-income state focused funds Mode of engagement with BOP should not be a major criterion for investment; focus should be on innovative high-growth models that are not capital-intensive and more service-oriented The fund management team should have experience in sourcing, managing and exiting investments of under $5 million, the likely size of majority of deals The funds allocation for Sri Lanka should be limited with the expectations of securing not more than 1-2 deals per year Set up a credit guarantee scheme (separate from the PE fund) to support IBs in gaining access to debt, a major area of need in both India and Sri Lanka Set up a technical assistance (TA) facility to provide grant support to investees of the fund for activities that are non-revenue generating and support the creation of public goods In Sri Lanka, the TA facility should also focus on promoting inclusive business practices among the wider business community
2.
3.
The following sections of this chapter present our findings and recommendations in detail, organized by the 3 broad questions outlined in Chapter 1 Relevance, Strategy, and Operationalisation.
2.1 RELEVANCE
PE funding is relevant for growth of small and medium IBs in both India and Sri Lanka; diverse conditions warrant a differentiated approach to investment in both countries. In order to answer this question, Dalbergs team looked at both demand and supply factors. On the demand-side, we examined whether macroeconomic conditions support the growth of IBs and whether IBs look to PE firms to support their growth. On the supply-side, we looked at whether macroeconomic conditions and capital markets support PE investment. In India, the growth of private business is supported by the countrys positive long-term economic prospects driven by favourable demographics and consumption growth. The segment of the private sector expected to grow the fastest is the collection of approximately 12 million small and medium enterprises (SMEs) that employ over 30 million people. Within this large set, there are thousands of inclusive businesses that engage members of Indias vast BOP population (>1 billion) and need growth financing in the range of $1-10 million. Impact investors are particularly optimistic about the growth of enterprises that provide access to basic services like energy, water, education and health as Indias massive BOP population suffers deprivation across multiple development parameters2. For the VC/PE community (supply-side), Indias most attractive features are the size of its stock market, IPO issuing activity and expected economic growth. PE market statistics show that the number of deals is increasing, indicative of more opportunities for PE investment. While an unclear
regulatory environment and inadequate infrastructure do pose challenges to doing business in the country, we feel that these will dissipate over a 10 year period. In Sri Lanka, conditions warrant a different, more measured approach. Sri Lankas economy has grown at over 8% since 2009, when its 26-year long civil war ended. The government has initiated a number of measures to stimulate the growth of businesses in sectors like tourism where the target is to attract 1.5 million tourists by 2016 from 850,000 in 2011. The results of these efforts are beginning to show from 2011 to 2012 the country jumped 9 places in the Doing Business Rankings and is ranked 89th of 183 countries which is second best, behind Maldives, in the South Asia region. Fund managers (there are 2 active fund managers at present) expect investment opportunities to emerge in the SME sector, especially in services and manufacturing companies catering to the needs of larger firms in inherently inclusive sectors like tourism, agri-business and renewable energy. These businesses are expected to engage hundreds of BOP members as employees and suppliers addressing Sri Lankas problems of a high youth unemployment rate (20%). Consumer-oriented IBs are less relevant in Sri Lanka due to the relatively small BOP population (<2% of Indias at 12 million people) and the high level of access to basic services contributing to Sri Lankas low multidimensional poverty score of 0.021 compared to India 0.283. It must also be kept in mind that PE is a relatively new asset class in Sri Lanka. The total number of investible opportunities ready to absorb PE funds is said to be in the range of 100-150. This number is hard to verify as accessing opportunities in Sri Lanka is entirely dependent on proprietary networks, unlike in India where the PE market is highly intermediated. Many IBs we spoke with expressed a preference for concessionary debt over equity given the prevailing high interest rates. A lot of groundwork will need to be done to convince business owners to sell their stake. Exit options must also be thoroughly explored before investment. The corpus of money raised by IPOs on the Colombo Stock Exchange increased nearly fivefold from 2010 to 2011, but the LKR 19.2 billion ($165 million) raised by the 13 listings in 2011, is small in absolute terms. Overall market capitalization as a percentage of GDP continues to remain very low at 40.2% of GDP, compared to other nations like India (93.6%), Philippines (78.8%) and Indonesia (51%). While the small size of the Sri Lankan PE market and relatively weak stock market must not be ignored, we believe that risks can be effectively managed by taking a measured approach to investment. ADB should set aside a limited amount to invest through an experienced fund manager with the expectation of making a maximum of 1-2 IB investments a year.
2.2 STRATEGY
Our findings in response to this question are divided into five parts: a) b) c) d) e) Target size of investment and investee Sector focus Geography focus Mode of engagement and other criteria for investment Instruments to deploy and expected returns
a) Target size of investment and investee ADB should target inclusive SMEs seeking equity infusions in the $1-10 million range with the expectation that most deals will be below $5 million; financing needs of large IBs are being adequately met by the market. Stakeholders across various categories IBs, fund managers and donors have echoed the view that ADBs fund should focus on supporting the growth of small and medium-scale IBs that roughly correspond to the Indian governments small and medium industry classification, i.e. firms with less than $2 million invested in plant and machinery. These firms have limited access to external sources of finance as banks practice collateral-based lending and very few equity investors provide support in the $1-$10 million range, required for early growth financing. Larger firms, on the other hand, have several alternate financing options, including commercial PE (there are over 300 PE funds in India, majority of whom invest upwards of $10 million per deal); commercial bank loans, corporate debt and the stock market. While USD $1-10 million is seen as a relevant range for ADBs fund, investors expect a higher proportion of deals to be below $5 million given the nascent stage of development of most IBs in India and Sri Lanka today. This has several implications for the way ADBs fund must be managed. Smaller deals are often sourced through a proprietary route by experienced, well-networked fund managers. The leadership of these smaller companies (often lead by a single entrepreneur) tends to demand greater involvement from the fund managers team and require more assistance across multiple areas including but not limited to finance, human resources, marketing and corporate governance. ADB should factor these realities into the fund design and any future due diligence of fund managers. b) Sector focus ADB should adopt a sector agnostic approach, but prioritize 4-5 sectors that deliver strong social and financial returns; preferred sectors should be education, healthcare, water and tourism. Though the overall market for PE deals in India is substantial (460 deals in 2011), very few sectors, barring large infrastructure, real estate, finance and telecom, see sufficient annual deal flow to warrant exclusive focus. Highly inclusive sectors like agriculture saw fewer than 4 deals per year between 2005 and 20103. The relative lack of depth in any specific sector has resulted in very few sector-specific PE funds - over 80% of the 300+ PE funds active in India today are sector-agnostic. Given the newness of the asset class in Sri Lanka, adopting a sector-agnostic approach is perceived by many as the only feasible approach. Acknowledging the constraints imposed by the stage of PE market development, we recommend that ADB adopt sector-agnostic approach with a light focus on 4-5 sectors that deliver high financial and social returns, in addition to being relatively asset-light and free of risks such as over-regulation
and ESG concerns. Based on Dalbergs analysis of these factors and risks, inclusive businesses in education, healthcare, water and tourism appear to be the most attractive. c) Geography focus ADB should adopt a geography-agnostic approach and may consider investing part of its fund in existing low-income states (LIS) focused funds. Low deal flow is a key reason cited by many impact-oriented investors as the key reason for maintaining a pan-India investment approach instead of focusing exclusively on Indias low-income states in the north and east. Indias high and growing incidence of urban poverty (298 million BOP live in urban areas that typically fall in high-income states) and the pan-India growth plans of majority (over 75%) of IBs that responded to our survey, are additional arguments in favour of a geography-agnostic approach. There are, at present, only two funds in India which invest exclusively in low-income states. Both were launched in 2012 with support from DFIs and DFI-funded investors like DFID, CDC and IFC and their performance is yet to be assessed. In Sri Lanka too, investors are wary of exclusively focusing on post-conflict provinces in the north & north-east and under-developed eastern and southern provinces. The higher operational costs (personnel and time) of sourcing deals from these regions were also cited as a disincentive. While uncertainty concerning deal quality and deal flow can be mitigated with an agnostic approach, the argument still remains that under-developed regions deserve special attention. Several donors and fund managers believe this can be achieved through appropriately designed monetary incentives for fund managers e.g. increase in fees and carry for deals executed in low-income states/post-conflict regions. Another, more straightforward approach to achieving focus and one that we endorse, is for the ADB to consider investing a part of its fund with existing low-income states-focused SME funds to complement and leverage the efforts of other DFIs. d) Mode of engagement with the BOP and other criteria Mode of engagement with BOP should not be a major criterion for investment; focus should be on innovative high-growth models that are not capital-intensive and more service-oriented. The ADB should invest in innovative businesses that engage the BOP in a variety of ways. We find that successful IBs tend to utilize more than one mode of engagement, sometimes even three or four. In the Indian context, all modes of engagement are relevant and have high potential for social impact and financial returns. The relatively small size of the BOP in Sri Lanka and high level of human development, reduce the relevance of pursuing consumer-oriented models in Sri Lanka. Across the board, stakeholders have mentioned that mode of engagement should not be used as a criterion for investment. The more important questions to ask are whether the business model is a capital-intensive one, as is the case with most real estate and microfinance firms; whether the model is service-oriented; and, how, if at all, technology is leveraged by the model. These factors are seen to play a greater role in determining the scalability and long-term impact of an IB business model than the mode by which they engage with BOP. e) Instrument and returns expectations ADB should observe financial discipline across all instruments that it deploys; reasonable net financial return expectations provide an opportunity to service the large need for non-equity instruments. In our assessment, ADBs expectation of net financial returns in the range of 10-12% can be met by observing discipline across the instruments deployed by the fund. This implies that expected returns
8
on equity and debt should be no less than market rate (typically in excess of 20% for equity and 14% for debt, gross). A strategy that is focused solely on equity will not address the large underserved need for debt for working capital, which is currently a critical barrier to growth of inclusive businesses, largely for want of collateral/security. ADBs reasonable overall returns expectations and impact-orientation provide an important opportunity to address this issue by allocating a portion of funds to stimulate greater lending to IBs. This could be achieved through a credit guarantee scheme, targeted at IBs/existing investees that are keen to access debt from the commercial banking sector. Such an intervention would also be very timely. A number of PE funds are currently contemplating launching Non-Banking Finance Companies to provide debt to businesses A technical assistance (TA) or grant facility, comprising roughly 5% of the total fund, is another important mechanism to supporting the growth of high potential IBs. TA is seen as most relevant for non-revenue generating activities such as R&D, ESG4 improvement and the creation of public goods such as training and awareness generation.
2.3 FUND OPERATIONALISATION

ADB should partner with a few select existing IB-focused funds managed by experienced fund managers and aim to secure preferential rights. India has several funds targeting IBs, many of which have fund managers with deep experience in investing for both impact and financial returns. Feedback from fund managers suggests that obligations with existing funds and challenges in raising capital for a new fund in the current environment (albeit with ADBs sponsor capital) may prevent experienced managers from responding to an invitation to set up a new fund. This feedback was corroborated by feedback from other donors and investors, majority of whom have taken a fund-of-funds approach. CDC and IFC, two of the largest DFI-supported PE investors, have only recently invested in impact-oriented SME funds5 where managers are still in the process of fund raising, a clear opportunity for ADB to collaborate. These funds are an attractive investment option for ADB as their managers have completed the due diligence process, have local networks and experience, critical elements for an IB-focused fund. We recommend, therefore, that ADB invest into IBs in India through one or two established funds managed by experienced teams. This approach, coupled with preferential rights such as coinvestment rights, right to offer debt, position on the funds advisory board, lower management fees, etc., could help ADB achieve the same outcomes as setting up a new fund without the risks associated with engaging less experienced fund managers. This approach is even more relevant for Sri Lanka where deal sourcing is largely non-intermediated and most under-the-radar opportunities can be accessed only by experienced fund managers.
10
3. MACROECONOMIC ASSESSMENT OF INDIA

A number of secondary data sources were used to conduct an assessment of macroeconomic conditions in India. These sources include government census reports, economic publications and surveys, data published by international organizations such as the ADB, UN, World Bank and CIA, and other key BOP-focused reports including The Next 4 Billion.
3.1 OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

Post-liberalization in 1991, Indias growth has been led by strong FDI inflows across sectors pointing to multiple areas of opportunity; gross fixed capital formation remains high at 35% of GDP, indicating strong prospects for future growth. The impact of the economic reforms of 1991 and the resulting attractiveness of the Indian economy as an investment destination can be gauged by the level of Figure 2: Total and equity-only FDI inflows foreign direct investment (FDI) that India has attracted. In into India Foreign Direct Investment (FDI) growthFDI inflowssectors to $73.5 million and by 2010; 1991, and top amounted this figure had increased to equity inflows in after reaching a peak $ billions Sectors attracting highest $24.1 billion 2011-12 Figures in USD in 2008 of $43.4 billion (billions) 6. India currently ranks 4th in the 40 Computer software number of FDI18 projects, behind US, China and UK, and 3rd in 4% 30 & hardware terms of FDI value, behind China and Brazil7. Total 9%
20 10
Metallugical industry Foreign has been directed across various sectors, indicating multiple areas of growth and opportunity. The 11% Telecommunication 0 services sector, including both financial services and non2000 2004 2008 2012 12% Others financial services like business process outsourcing, has SOURCE: Department of Industrial policy and promotion received the highest FDI inflow, of $31.97 billion over the last 12% Construction activities 12 years. Capital-intensive services like telecommunications, housing & real estate and construction continue to receive significant amounts of 17%FDI, 3. Gross Domestic Product at PPP Drugs & pharmaceutical underscoring the high growth prospects of these Figure 3: Gross domestic product (GDP) at PPP industries.
Equity
Power
9% investment
Overall investment, largely gross fixed capital formation, has grown exponentially in India since 2001, when it represented 23% of GDP. In 2011, this figure stood2011-2012 at 34%. A good indicator of a countrys future growth prospects, Indias gross fixed capital formation is expected to continue to be around 35% of GDP in the near future8. A booming services sector has led Indias growth story over the last decade, but a languishing agriculture sector has limited the inclusiveness of this growth.
26%
Service sector
$ trillions 60
China India US
40
20
2
Brazil Japan
2000F 2010F 2020E 2030E 2040E 2050E

SOURCE: World Bank data
Over the last decade, Indias GDP has been growing at an average of around 8% per annum, making it one of the fastest growing major economies in the world. At a total size of $1.45 trillion, the Indian economy is the 11th largest by nominal GDP and at a total size of $4.82 trillion (PPP), the 3rd largest by Purchasing Power Parity (PPP) behind the US and China. Multiple forecasts predict this trend continuing to accelerate, and by 2020 Indias GDP in PPP terms is expected to rise to $8.01 trillion9. While Indias economy as a whole has been growingly rapidly, the key economic sectors of agriculture, industry and services have been growing unevenly. Data from past five-year plans, 9th Plan (1997-2002), 10th Plan (2002-2007) and 11th Plan (2007-2012) point to the fact that the
11
agriculture and allied services sector, which employs over 50% of the countrys population, has grown significantly slower (less than 3.5% annually) than the services sector (approx. 7.5% annually). 3. has significantly limited the inclusiveness of rates This Historic and planned sector growthIndias growth.
Figure 4: Historic and planned sector growth rates
% growth rates
9th plan (97-02) Agriculture, Forestry and Fishing Industry Mining & quarrying Manufacturing Elect., gas & water Construction Services Trade, hotels & restaurants Transport, storage, and communication Banking and financial services 2.5 4.3 4.0 3.3 4.8 7.1 7.9 7.5 8.9 8.0 10th plan (02-07) 2.3 9.4 6.0 9.3 6.8 11.8 9.3 9.6 13.8 9.9 11th plan (07-12) 3.2 7.4 4.7 7.7 6.4 7.8 10.0 7.0 12.5 10.7 12th plan (12-17) Low Growth Estimate * 4.0 9.6 8.0 9.8 8.5 10.0 10.0 11.0 11.0 10.0 High Growth Estimate* 4.2 10.9 8.5 11.5 9.0 11.0 10.0 11.2 11.2 10.5
Community, social & personal services

GDP
7.7
5.5
5.3
7.8
9.4
8.2
8.0
9.0
8.0
9.5
* Low growth target - 9% target ; high growth target -9.5% Note: Classification of sub-sectors into industry & services is done according to planning commission of Indias method SOURCE: Faster, Sustainable and More Inclusive Growth An Approach to the Twelfth Five Year Plan 2012-2017; Planning Commission-2011, Government of India
The sections below describe the trends and issues across these key sectors:
AGRICULTURE AND ALLIED SERVICES
3. Contribution of sectors to GDP and labor force em

Figure 5: Contribution of sectors to GDP and labour force employment
The agricultural sector, comprising of activities such as crop farming, horticulture, animal husbandry and fisheries, provides livelihood to roughly half of Indias population, and is a high-impact sector in the context of inclusive growth. Its contribution to Indias GDP, however, has reduced from 29.3% in 1990-91 to 18% in 2011201210. In the most recent 11th plan period (2007-12), agriculture grew by only 3.2%, as compared to the target of 4%. Furthermore, within that period, the sector stagnated at 0.1% growth for two consecutive years between 2008 and 2010.
: asdasd
Industry
$ 1.8 trillion 18%
488 million
Agriculture
26%
52%
14%
Services 56% 34% Sectoral contribution to GDP (2011) Labour force by sector (2009)
Under-investment in critical infrastructure, inefficient land-use patterns and seasonal uncertainties are to be SOURCE: CIA Factbook blamed for the sectors poor performance. In the 12th 5-year plan (2012-2017), the government plans to achieve growth rates over 4% by focusing on non-farm activities, such as post-harvest operations, rural supply chain management, and warehousing, which can all contribute significantly towards the expansion of employment and income opportunities.
INDUSTRY
Though industry has grown faster than agriculture (a 7.4% growth rate11 during the recent plan period), growth has still been below expectations (10-11%). Within that period, the growth of the
12
sector, which includes mining and quarrying, manufacturing and energy, dropped from 12.2% in 2006-2007 to 3.9% in 2011-2012. Furthermore, its contribution to Indias GDP decreased from 28.7% to 26%12. In addition to contributing heavily to overall GDP growth, a growing industrial sector is essential for absorbing surplus labour from the agricultural sector. Growth in industry has been impeded by challenges in land acquisition and poor energy and water infrastructure. In more recent times (2011-12), the high interest rates imposed by the central bank to combat inflation have been blamed for the slow growth of industrial output, as measured by Indias Index of Industrial Production.
SERVICES
The services sector in India has grown sharply over the past decade and continues to do so. Services comprise of financial services, information technology and information technology-enabled services (IT and ITES), tourism and hospitality, health, education and construction. Combined contribution of all service-oriented industries to Indias GDP has grown from 54% in 2006-07 to 59% in 2011-12. The services sector is currently growing at a healthy 10% annually. This growth in the service sector has been led primarily by private enterprises, aided by Indias large pool of workers, both skilled and unskilled. The sectors activities have resulted in massive job creation, and it has become a catalyst of urbanization and urban migration. The construction industry alone provides direct/ indirect employment to 35 million people and is expected to employ 92 million people by 2022. Indias limited inclusiveness of growth is reflected in its significant economic inequality and poor performance on human development indicators. Despite emerging as one of the worlds largest economies, Indias per capita income still places it in the low-middle income bracket, as per World Banks definition of country lending groups. At $3,694 (PPP), Indias per-capita income places it at the 129th place in the world; just below Iraq13. In 2004-05, the average per capita income of Indias bottom quintile by income was $176 (INR 9,305) but $1,997 (INR 105,845) for the top quintile, an eleven-fold difference in income levels. As per the India Human Development Survey 2010, consumption-based inequality measured by the Gini coefficient stood at 0.38, which is considered to be moderately unequal by world standards and is slightly below most low-middle income developing countries, where the consumption-based Gini coefficient ranges from 0.40 to 0.50. At 0.52, Indias income-based Gini coefficient is much higher than that commonly observed in emerging economies, reflecting its significant levels of inequality14. On a per person basis, therefore, India may be considered a lower-middle income economy with huge disparities in levels of income. Indias progress with regard to human and social development has not been as robust as its economic growth. High GDP growth rates have not translated to a proportional reduction in poverty, improvement in health outcomes, access to education and skill development, and an overall improvement in quality of life. While India has the 3rd highest GDP (PPP) in the world, it was ranked 134th out of 187 countries on the UNDP Human Development Index in 2011. Though there is no commonly accepted measure of poverty in India, the Tendulkar Committee, the most recent official endeavour to estimate poverty, placed the percentage of people living below the poverty line at 29.8% of the population (355 million people) in 2009-2010, down from 37.2% in 2004-2005. The same committee placed the urban poverty line at $0.54 (INR 28.65) per day and the rural poverty line at $0.42 (INR 22.42) per day. However, the committees methodology has come under criticism for placing the poverty line too low, and is currently under review.
13
3. Multi-dimensional poverty index (MPI) mapping of Indian

Figure 6: Percentage of India's population in 9 poorest states
States
% share of total population
In addition to income-based poverty, most Indian citizens lack access to basic services of a reasonable quality. There is less than 1 hospital bed per 1000 people in India while the world average is 3 beds per 1000 people. There are over 40 children per classroom in India while the world average is just under 2415. Taking access parameters into consideration, the Oxford Poverty and Human Development Initiativedevelopers of the Multi-Dimensional Poverty Index estimated that in 2011, 53.7% of the population was living below the poverty line. There are more poor (as per MPI) in eight Indian states than in the 26 poorest African countries combined. 421 million people in the Indian States of Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal live in multi-dimensional poverty.
AS (3%)
RA (6%)
UP (16%) MP (6%)
BI (8)%
WB (8%) JH (3%) OR (8%) CH (2%) 0.001 0.100 0.101 0.200 0.201 0.300 0.301 0.400 0.401 0.500
NOTE: UP - Uttar Pradesh; RA Rajasthan; MP Madhya Pradesh; CH Chhattisgarh; OR Orissa; JH Jharkhand; BI Bihar; AS Assam; WB West Bengal SOURCE: Oxford Multidimensional Poverty Index 2011 ; India Census Data 2011
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3.2 KEY TRENDS SHAPING THE ECONOMY

India could take advantage of its favourable age demographics and develop a competitive advantage in possessing 25% of the worlds workforce; demographics in low-income states are particularly well positioned to drive growth. OECD estimates that in 2020, India will have a population of 1.3 billion people16, surpassing China to become the most populous nation in the world. Against the backdrop of new economic opportunities, Indias teeming millions, once seen as a major burden, are being seen as assets to propel the country onto a higher growth trajectory. According to the IMF, a substantial proportion of growth that India experienced since the 1980s can be attributed to the countrys age structure and age demographics17. Currently 54% of Indias 1.2 billion people are under the age of 25 and 63.5% of Indias population, roughly around 760 million people, falls in the working-age bracket of 15 to 59 years18. Further, 300 million people will enter the labour market by 2025, providing 25% of the worlds workers19. The continuing demographic dividend is estimated to add roughly 2 percentage points to Indias per capita GDP growth every year. There are multiple implications of millions of young people entering the workforce. According to David Bloom - the demographer who first coined the term demographic dividend - young, unencumbered workers are seen to spur entrepreneurship and innovation, enabling significant gains in productivity, savings, and capital inflows. Additionally, India will be experiencing an increase in the number of working age people just when other large countries see the average age of their populations decline, opening up opportunities for the export of workers from India to the rest of the world. In 2020, the average age in India will be only 29 years, compared with 37 in China and the United States, 45 in Western Europe, and 48 in Japan20. Demographics are also believed to have played a role in influencing the growth rates of Indian states. Authors of the IMF working paper feel that some of Indias economically strong states have already reaped a demographic dividend over the last couple of decades. Per their analysis, the states of Karnataka, Tamil Nadu and Gujarat can attribute between 2.4 and 3 percent of their annual per capital GDP growth rate in the 1980s to a favourable age distribution. According to the authors, the 9 economically weaker states21 in the country, home to more than half the population, may have just entered the sweet spot in terms of the age structure of their populations to start experiencing a demographic dividend. Bihar, a traditionally low-growth state, has been the fastest growing state for the last two years with its GDP expanding by 14.8% and 13.1% in 2010-11 and 2011-12 respectively. A percentage of this growth could be attributed to favourable demographics. The value of Indias demographic dividend will depend in great measure on whether the public and private sector have the political will and foresight not only to create jobs but also to train the new workforce, encourage global trade, improve a failing education system, provide better housing, lure capital to support innovation, and implement policies that engender confidence in the economy.
15
3. Figure 7: Projections for India's working age population

Population in billions by age group 1.1 1.2 1.4 1.5 23% 1.7 20%
Demographic projection for India

1.7 18% 0-14 years 15-59 60+
35%
31%
27%
58%
62%
64%
65%
65%
62%
7% 2001
8% 2010
10% 2020
12% 2030
16% 2040
20% 2050
SOURCE: United Nations Population Divisions
An increasing proportion of Indias labour force comprises casual labour, driven by the large shift in employment patterns from farm-based to non-farm based temporary or contractual jobs. In 2010-11, 36% of Indias population was either employed or available for employment. With 790 million people in the working age population, Indias labour force is roughly 430 million strong. 40 million people, 9.4% of the labour force, are unemployed. 7 The National Sample Survey Offices statistics released in 2011 indicate that there has been a shift in employment pattern across the country with the number of casual workers increasing by 21.9 million and the number of regular workers reducing by half from 2004-05 to 2009-10. Based on other macro-economic data it appears that there is a structural shift taking place with people from the rural sector taking up temporary and contract jobs in labour-intensive industries like construction, manufacturing and the rapidly growing services industry that can absorb low-skilled labour quickly.
Despite the shift, the agriculture & allied services industry continues to be the largest employer in the country employing 46% of total employment. Over 50% of all people employed in rural areas work in agriculture or allied industries. The other significant employment industries in rural areas are construction, manufacturing and wholesale and retail trade. Together with agriculture, these industries employ over 77% of the rural labour making them high-impact sectors with respect to employment. 3. Rapid urbanization has been fueled by a shar
Figure which lack municipal rural In urban areas, manufacturing, wholesale & retail and towns,8: Distribution of urban and facilities community services stand out as industries employing the population highest percentage of the labour force. Billions
1.4
In terms of size of the enterprises, 66% of the employed people work in enterprises that have less than 10 employees. A further 3% work in enterprises with between 10 and 19 employees and only 7%22 in firms with over 20 employees23. Rapid migration away from rural areas has led to widespread, unplanned urbanization; there is a large opportunity to tackle the resulting urban poverty. Urbanization in India is fuelled by migration of the rural
1.2
1.0 0.8 Urban Rural 26% 74% 72% 70% 28% 30%
35%
65%
1991
2001
2011
2021
SOURCE: Census of India, Dalberg research and analysis
16
population to existing urban areas and by growth of new urban areas. In 2001, 285 million people lived in designated urban areas. This increased to 380 million in 2011 and as per the Government of Indias projections; over 600 million people will live in urban areas by 2030. Between 2001 and 2011, India witnessed a 54% increase in the number of urban towns from 5,161 in 2001 to 7,935 in 2011. Most of this increase, 2,532 towns, is on account of growth of census towns, rather than statutory towns, which saw an addition of only 242 between 2011 and 201124. Statutory towns are towns that have statutory governing structures like municipalities or town corporations. Census town do not have urban governing structures and are largely rural or semiurban areas that turn urban on account of densification of their population. Census towns have poor civic urban infrastructure like roads, water, sanitation, etc.
towns
000s +54% 7.9 +10% 4.7 Statutory Town 3.0 5.2 4.0
fueled by a sharp increase in number of census ilities Figure 9: Increase in the number of urban With the share of urban population increasing at a rapid pace,
instances of urban poverty have also increased. As per the available data on urban poverty, roughly 80 million in urban India live below the national poverty line25. As urbanization increases across the country, more and more migrants settle in unauthorized tenements often categorized as slums given the lack of legally available affordable housing. Per the 2011 census, 93 million people currently live in slums, a figure that is expected to grow 105 million by 201726.
As per Planning Commission recommendations, the government will need to attract private investment in all 3.9 Census areas of urban infrastructure like drinking water supply, 1.7 1.4 Town sewage treatment, urban roads, urban transport, power, as well as large infrastructure projects. The committee on Indian 2011 2001 1991 Urban Infrastructure and Services, appointed by the Ministry SOURCE: Census of India, Dalberg research and analysis of Urban Development, estimates that $0.7 trillion (INR 39.2 trillion) will be required over the next 20 years to meet the requirements of the projected urban population. With increase in per capita income, consumption expenditure across the country has also increased. As per the National Sample Survey Offices (NSSO) 2011 report on household consumer expenditure in India, the Monthly Per Capita Consumption Expenditure (MPCE) (Mixed Reference Period) has 8 increased substantially in both rural and urban areas. The average MPCE was estimated to be $18 (INR 953) in rural India and $35 (INR 1,856) in urban India in 2009-10, up from $11 (INR 579) and $21 (INR 1,104) in 2004-05, an increase of 65% and 68% respectively. With rising incomes, the composition of consumption expenditure is also changing. As per the NSSO report27, in 1999-2000 food constituted 59.4% of total expenditure in rural areas and 48.1% in urban areas. In the decade since, expenditure on food as a percentage of total spending in rural areas had declined to 53.6% in rural areas and 40.7% in urban areas. This shift in spending on necessities like food and clothing to discretionary items that improve the overall quality of life like healthcare, education, personal products and entertainment, will continue to grow. The McKinsey Global Institute estimates that discretionary spending will rise from 52% of household expenditure in 2005 to 70% in 202528.
3.8
17
3. Annual household consumer expenditure for select years from 1987ADB Inclusive Business Market Study for India and Sri Lanka 2010 Draft Report
Figure 10: Annual household consumer expenditure in India (1987-2010)
Percentage of total expenditure 21% 23% 25% Other discretionary goods and services Clothing, Bedding & footwear Fuel & light Food
29% 5% 10%
31%
8% 7%
6% 7%
8% 7%
6% 9%
64%
64%
60%
56%
54%
1987-88
1993-94
1999-00
2004-05
2009-10
SOURCE: Key Indicator of household consumer expenditure in India 2009 -2010, NSSO; October 2011
18
3.3 SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

87% of Indias population qualify as Base-of-Pyramid living under $4 a day; this segment spends $667 billion (PPP) on goods and services every year. The Next 4 Billion report29 defines the BOP population as those earning $3,000 (2002 PPP terms) or less annually. Collectively, this represented 4 billion people globally at the time with 924 million living in India (95% of Indias population). ADB classifies the BOP as those earning $3-4 PPP or less per day30. As per Dalbergs estimates based on NSSO data, 1.04 billion people, or 87% of Indias population, would form the BOP population. Approximately 90% of the rural population, or 743 million people and 80% of the urban population, or 299 million people can be classified as BOP population. In other words, 71% of Indias BOP population lives in rural areas. Dalberg estimates the total market for BOP as consumers is estimated to be $667 billion in PPP terms, approximately 62% of which would constitute the rural BOP market. As per this data, 61% of consumption expenditure for rural BOPs is towards food while urban BOPs spend 53% towards food.
Figure 11: Market size of India's BOP
$ billions (2005 PPP)
3. Annual BoP household expenditure by category
692
509
84
18 12 10 7 5 2 ICT
45
Other
Total market size
Food
Energy Healthcare Houshold Transpgoods ortation
Housing Education
NOTE: BOP taken as a sum of BOP500, BOP1000 and BOP1500 segments that spend less than USD 4 PPP per day (2005) SOURCE: World Resources Institute, Next 4 Billion Report
As per the World Resource Institutes The Next 4 Billion report, the BOP market in India was 10 estimated to be USD $1.2 trillion in 2005. Of this, the BOP500, BOP1000 and BOP1500 segments, collectively classified as those earning less than USD $4 PPP per day in 2005, presented a USD $692 billion (PPP) consumer market opportunity. On an average, these three segments spent approximately 73.5% of their household expenditure on food and 12.1% on energy, the two highest expenditure heads in terms of percentage of household expenditure.
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3.4 CLIMATE FOR ENTERPRISE AND INVESTMENT

Poor enabling institutions and weak law enforcement make starting and running a business in India a struggle; investor protection and strength of the financial markets are strong positives. In the Doing Business report (2011) published by the IFC and World Bank, Indias rank was 132 of 183 countries in terms of overall ease of doing business. In terms of ease of starting a new business, India ranked 166th. In terms of the ease of getting a construction permit India was 179 th, or the fourth last in the world and in terms of enforcement of contracts, India stood 182nd of 183 countries. These challenges are being cited as some the reasons for Indias GDP slowing down to 6.5% in 20112012. Indias rank in the Global Competitiveness Index 31(GCI) has fallen from 43 in 2006-2007 to 56 in 2011-2012 among 142 countries covered in the index. Further, India ranks a poor 91st in basic requirements that include institutions (69th), infrastructure (89th), macro-economic environment (105th) and health & primary education (101st). Corruption and complicated regulatory framework, in which India ranked 99th and 96th respectively, remain high areas of concern in Indias ability to provide a conducive business environment. High inflation, high fiscal and current account deficits add to the poor macro-economic rank of 105. For businesses and investors, the large market size, where India ranks 3rd of 142 countries, seems to be the biggest draw. Its rank of 36 in the strength of investor protection is also encouraging for investors. Also, its fairly sophisticated financial market (21st rank) and innovative businesses (38th) have the ability to deploy and utilize finances well and add to its strengths in overall competitiveness. Despite a negative short-term outlook indicated by Indias poor current credit rating, long term outlook for economic growth and attractiveness for investment look positive. The economic reforms triggered the opening-up of the economy and the consequent high-growth rates, and Indias economy has several underlying factors that make it an attractive investment destination in the long-term. A large working-age population, projected to remain at over 62% of the population32, joining the workforce has the potential to deliver demographic dividends for the next few decades. Strong private final consumption expenditure (PFCE) at 56% of the GDP33 and high domestic savings of 33% of the GDP34 further underscore the long-term growth prospects of the country. While long-term trends look positive, the short-term economic outlook looks tepid at best. A low quarterly growth rate of 5.3% in the last quarter of the financial year 2011-201235 pulled annual GDP growth rate down to 6.5% as opposed to the earlier projection of 6.9%. The GDP growth rate between January and March 2012 was the worst last quarter growth rate in nine years. To add to this, the fiscal deficit is at 5.9% and inflation is close to 10%, which restricts the options available to the government to correct the situation by way of a fiscal stimulus and monetary measures. Policy paralyses, lack of reforms, administrative obstacles and instances of large-scale corruption in the government have been largely responsible in slowing down the economy. Recommendations by the government like implementing retrospective tax laws are likely to dampen the short-term investment climate further. These factors have raised concerns about Indias ability sustain the high growth rates it has experienced in recent years. The silver lining is the recognition by businesses, as cited in various reports and interviews, that the slowdown is largely the result of inaction on the governments part rather than any serious structural issues with the economy36. In terms of credit ratings, while there are strong reasons for the bearish sentiment in the short-term, the long-term view is bullish. In near term, while the economy as a whole is expected to experience
20
3. Short-term outlook by rating agencies was negative in mid-2012
slow growth some sectors are expected to perform well, explaining the investment grade rating given by most credit rating agencies.
Figure 12: India's credit ratings by various rating agencies
Rating Agency Standard & Poor Fitch Moodys Dagong Rating BBBBBBBaa3 BBB Outlook Negative Negative Stable Stable Date 25-Apr-12 18-Jun-12 05-Aug-11 11-Jul-11
NOTE: (1) For S&P, Fitch & Dagong, a bond is considered investment grade if its credit ratings is BBB- or higher. Bond rated BB+ Sometimes also refereed to as junk bonds. (2) For Moodys a bond is considered investment grade if its credit rating is Baa3 or higher. Bonds rated Ba1 and below are considered to be speculative grade, sometimes also referred to as junk "bonds. SOURCE: Websites of Standard & Poor, Fitch, Moodys & Dagong
11
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4. MACROECONOMIC ASSESSMENT OF SRI LANKA

To develop a holistic perspective on the macroeconomic assessment of Sri Lanka, we used a number of sources of data. These sources include Central Bank of Sri Lanka reports and publications, data published by international organizations such as the IMF, UN, World Bank and CIA, and other key reports including The Next 4 Billion.
4.1. OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

Sri Lankas 26 year old civil war and recently the global recession have stunted growth, but post-conflict regions are now being developed amidst strong prospects for economic growth. Since the beginning of reforms in 1977, the Sri Lankan economy has diversified from its dependence on commodities like tea and rubber, to services like banking and telecom. Sri Lankas potential for growth was not fully realized because of a civil war between the original inhabitants, the Sinhalese, and the immigrants from colonial times, the Tamils, that lasted for 26 years from 1983 to 2009.
Poor economic growth persisted in the country even after the end of the war in 2009 because of the global recession, which resulted in low exports. The resulting balance of payments crisis prompted the IMF to step in with a Stand-By-Arrangement (2009-12) to stabilize the situation. In June 2012, the IMF, at the conclusion of their staff mission to Sri Lanka, stated that Sri Lankas macroeconomic health had improved. The current account deficit had been curbed, credit growth had been moderated and reserves had been restored to stable levels.37 The Sri Lankan economy is expected to 4. Gross domestic product (GDP) based on purchasing-pow benefit from increased exports as the global economy recovers. The peaceful environment has also brought Figure 13: Gross domestic product of South and Southeast about other favourable changes that have the Asian countries potential to spur growth. Military expenditure $ billions (PPP) is expected to reduce, giving the government Vietnam 500 more flexibility in managing the budget.38 The Bangladesh lifting of unfavourable travel advisories and 400 insurance, issued due to risk of war, will 300 facilitate growth of tourism and trade.39 In the two years since the war ended, the government has spent large sums of money to resettle Internally Displaced People (IDP) and to de-mine prior conflict areas. The government is also focusing on providing sustainable livelihood opportunities to IDPs, which could result in the inclusion of IDPs in the labour force.
200 100 0 1992 1998 2004 2010 2016E Sri Lanka Myanmar Afghanistan
valuation of country
Data is not available for Afghanistan before 2002 and for Myanmar before 1998 SOURCE: International Monetary Fund, World Economic Outlook Database, September 2011
Additionally, multiple infrastructure projects in conflict affected provinces and across the country are likely to be completed by 2013. Between 2009 and 2011, $1.2 billion was spent on infrastructure projects in northern areas alone. Sri Lankas GDP is forecast to double to $189.4 billion (PPP), in the 8 years following the end of the war in 2009.40 The economy grew 8% in 2010 and 8.3% in 2011.41 As of 2011, GDP stood at $116.3 billion (PPP) which is small in absolute terms relative to the size of other countries in developing Asia such as Vietnam, Bangladesh and Pakistan (see figure below). However, it is one of the highest in the region on a per capita basis. GDP per capita reached $5,600 (PPP), after showing strong growth in
22
the post-war years, rising 8.4% in 2010 and 9.7% in 2011. This figure is expected to continue with an increase to $9,000 (PPP) in 2017. The short-term outlook for GDP growth is moderate, given the uncertainties of the global economy. Strong growth of 8% was expected at the start of this year, but the IMF has revised its forecast to 6.75% GDP growth for 2012. 42 The lower forecast is partly due to the impact of the recession and Euro Zone crisis on Sri Lankas trading partners, which will impact the countrys exports. The consequent widening of the trade deficit is expected to put further strain on Sri Lankas balance of payments situation. To avoid this, Sri Lanka might have to go in for a tighter fiscal and monetary policy, which may further slow down output and GDP growth. Sri Lankas services sector is the engine of the countrys growth; construction and hospitality industries have grown significantly in the recent past. The contribution of agriculture, industry and services to Sri Lankas GDP stood at 11%, 60% and 29% respectively in 201143. Agriculture has seen the slowest growth of all three sectors, with a compounded annual growth rate of around 3.5% over the past decade. Tea, rubber, coconut and paddy are the main crops of Sri Lanka. Along with fishing, they form the bulk (approximately 45%) of agricultural output. Fishing has 4.seen strong growth of 12.2% in 2010 and 15.5% in 2012. Output for other crops in 2011 was Sector-wise contribution to GDP growth rate Figure 14: Weighted contribution to GDP growth rate by adversely affected on account of heavy flooding. 44 Currently, about a third of the sectors population is dependent on agriculture and 8.3% 8.0% allied industries. 2% Industry (i.e., manufacturing, mining, etc.) has been the fastest growing sector since 2004, 32% with a compounded annual growth rate of 28% 3.5% 7.5%. The growth of the industrial sector has 11% been broad- based, with construction (14.2%), 34% 61% 60% 62% mining (18.5%) and textiles (10.8%) achieving 56% 56% double-digit growth in 2011.45 46 With reforms and liberalisation after the war, building 2009 2010 2007 2008 2011 capacity is the prime focus of the sector as a SOURCE: Central Bank of Sri Lanka Annual Report -2011 whole. Much of the multilateral grants and loans that Sri Lanka has received have gone towards building infrastructure that is expected to help industries.
6.0% 15% 30% 36% 6.8% 6% 10% Agriculture Industry Services
The services sector has had the largest contribution to growth in GDP over the past 5 years, making it the engine of the economy (see figure above). In 2011, Sri Lanka experienced strong double-digit growth in multiple service sectors including wholesale and retail trade (10.3%), transportation and communication (11.9%), and hotels and restaurants (26.4%).
3
The global recession has affected Sri Lankas economy deeply, indicated by low FDI inflows; recent increase in net inflows has raised hopes. Sri Lanka has been facing a balance of payments crisis which is the chief threat to its economic stability and ties in with other aspects of the economy such as the fiscal deficit and exchange rate depreciation. The crisis became unmanageable in 2009, when the IMF had to step in with a $2.6 billion Stand-By-Arrangement in order to stabilize the situation. The IMF attributed the crisis to the reliance on short term financing of high budget deficits from international markets which were badly hit due to the economic slowdown that year.
23
ADB have Business since the war ended Lanka 4. FDI inflows Inclusiveshot upMarket Study for India and Sriin 2009, but equity flows have Draft Report been contracting for the past 5 years Figure 15: Composition of FDI inflows
$ millions 1,200 Loans and advances Intra-company borrowing Foreign loans Reinvestment of retained earnings by existing companies Equity
800
400
In June 2012, a press release issued by an IMF mission stated that macroeconomic indicators such as the current account deficit, credit growth and level of reserves had shown improvements. The areas that were still under pressure were identified to be government revenue collections and interest expenditures.
Net foreign direct investments have been increasing steadily since the 2007 2008 2009 2010 2011 end of the war in 2009 but total SOURCE: Central Bank of Sri Lanka Annual Report s-2006 to 2011 inflows have been erratic. For instance, total inflows declined in 2009 and 2010 but recovered in 2011 to reach $1.06 billion.47 The poor performance in 2009 and 2010 must be referenced against global FDI flows, which declined sharply in 2008 and 2009.48 Reflective of the recovery in global FDI flows, inflows into Sri Lanka in the first quarter of 2012 exceeded inflows in 2011 in the same period.49
0
In last 2 years the sectors that attracted the most FDI were infrastructure and tourism. Infrastructure 4 projects were the main recipients of FDI in 2010, attracting nearly 60% of total inflows. 50 Tourism accounted for 20% of total inflows in 2011. Although total inflows seem to have recovered from a downturn in 2009 and 2010, the equity component of inflows has decreased significantly from around 30% of total inflows in 2007 to single digit levels between 2009 and 2011. However, based on strong prospects for economic growth in the future, Sri Lanka will likely attract increasing amounts of foreign investment. Sri Lanka has performed strongly on human development indices for its income levels; standards in education and water and sanitation are high, while malnutrition is a major concern. The country has made progress in poverty reduction, while education and sanitation parameters are also above world averages. Nutrition remains an area of concern, especially given the high food expenditure ratio. Sri Lanka has also nearly completed the process of resettling people displaced due to the war.51 Sri Lanka boasts of an unusually high Human Development Index of 0.691. 52 For instance, Turkey has a similar HDI (.699) despite having more than double the GNI per capita (PPP) of Sri Lanka. Sri Lankas Inequality-Adjusted HDI was .57- a discount of 16.2%.The reduced value incorporates the effects of inequality on various sub-dimensions such as education and health. Sri Lankas Multi dimensional Poverty Index score is 0.021, which is not only much lower than most countries in South Asia, but also lower than countries like Turkey, China and Philippines.53 The proportion of poor to total population by the MPI methodology is 5.3%, which is significantly lower than the proportion of poor estimated by other poverty measures such as the National Poverty Line (22.7%) and the World Banks $1.25 Poverty Line (14%).54
HEALTH AND NUTRITION

Sri Lanka has been able to achieve relatively good healthcare standards for its population. The number of hospital beds per 1000 people was 3.1 in 2004, in line with the world average of 3. Almost all births (99%) were attended to by skilled health staff. 55
24
Malnutrition figures however, have not progressed at the same pace, and are a cause of concern. At 21.6% the prevalence of malnutrition, measured as weight for age for children under the age of 5, is roughly the same as the average for developing Sub Saharan Africa56 and much larger compared to Turkeys 3.5%.
EDUCATION
Educational standards in Sri Lanka are also relatively good. The student teacher ratio of 19 compares favourably with a world average of 23.57 More than 95% of the teachers are either trained or graduates themselves. There is gender parity in the number of children in schools. World Bank data shows that in 2006, 99% of all children who join school reach the final primary grade, indicating a low drop-out rate in primary education.
WATER AND SANITATION

91% of Sri Lankans had access to improved drinking water sources in 2010 compared to 80% in 2000. There has been an impressive jump, from 77% to 90%, in rural areas. The figure in urban areas is a near universal, 99%. The figures are now above the world average of 88%.58 In the same period, access to improved sanitation facilities increased from 82% to 92%, keeping Sri Lanka miles ahead of the world average of 62%. Interestingly, at 93%, rural areas have now surpassed urban areas in access to improved sanitation facilities. Open defecation was eliminated in rural areas and reduced to 2% in urban areas, a small figure compared to the world average of 23%.
4.2. KEY TRENDS SHAPING THE ECONOMY

Increasing proportion of the aged within Sri Lankas age demographics may put a strain on resources, especially public healthcare, indicating an opportunity for the private sector. Demographic and labour participation trends provide certain opportunities and risks for Sri Lankas competitiveness on the world stage. The percentage of population of working age has begun decreasing although the absolute number of people will increase to around 15 million in 2035, an increase of approximately 8% from the 2010 figure.59 60
Figure 16: Age profile of Sri Lankas population
Total population in millions
17.5 18.9 21.2 22.8 23.8 24.5 24.6
4. Population distribution by age
41%
36%
32%
30%
26%
24%
22%
0-19 20-59 60+
49% 9%
54%
54%
52%
51%
49%
46%
The percentage of people aged 60 years and above is forecast to nearly double from 9.3% in 2000 to 18% in 2025.61 The parent support ratio, has also increased from 2.1 in 2000 to 4.1 in 2025. The decrease in the labour participation rate, from 50.3% in 2000 to 48.1% in 2010, will also add to the strain if the downward trend continues.
To ease the pressures created by an increasing dependency ratio, Sri Lanka 1990 2000 2010 2020 2030 2040 2050 has already begun taking measures like increasing the retirement age of public SOURCE: UN Department of Economic & Social Affairs, World Population prospects, 2010 Revision sector workers. 62 These demographics shifts may be a burden for the government which currently provides free healthcare in its facilities. 63 This may also be viewed an opportunity for private healthcare services.
11% 14% 18% 23% 27%
32%
Although overall unemployment is decreasing, there is a large need for skilled jobs among the educated youth.
5
25
Sri Lankas overall unemployment rate has reduced significantly from 8.1% in 2003 to 4.9% in 2010.64 However, when unemployment rates across age-brackets are examined, they reveal that the unemployment rate of youth aged between 15 24 years is very high compared to older age-groups. 1 in every 5 youths is unemployed compared to 1 in every 20 for the entire population. The youth unemployment rate for Sri Lanka is considerably higher than other developing countries in South Asia. The youth unemployment figures for Pakistan and Bangladesh have been below 10%, while the overall unemployment rates were similar to that of Sri Lanka. 65 In terms of unemployment rate across different educational levels, rates are shown to be higher for people with higher educational levels suggesting either a skill mismatch or insufficient employment opportunities for educated people. These are challenges that Sri Lanka will have to address in order to extract the most from the remainder of the demographic dividend.
Figure 17: Unemployment in Srirates by education level level group 4. Unemployment Lanka by education and age
Unemployment rates by education level 18% 16 Unemployment rates by age group 50%
14
12 10 8 6 4 G.C.E (O/L) G.C.E (A/L)+
40
30 15 - 19 20 - 24 25 - 29 30 - 39 40+ 2002 2004 2006 2008 2010
20
Grade 5-9
Below Gr.5 2002 2004 2006 2008 2010
10
2
0 2000 0 2000
Note: (1) Data prior to 2004 for below Gr. 5 is N/A; approximated to that of 2004 (2) G.C.E (O/L): General Certificate of Education Ordinary level (3) G.C.E (A/L): General Certificate of Education Advanced Level SOURCE: Sri Lanka Labor Force Surveys 2000 to 2010
Note: Age groups 15-19 & 20-24 are clubbed into age group 15-24 in the reports of 2008,09 & 10 SOURCE: Sri Lanka Labor Force Surveys 2000 to 2010
Sri Lanka is attracting an increasing number of tourists post war; the tourism industry will 6be an attractive opportunity for investment. The end of the civil war has resulted in the increased attractiveness of Sri Lanka as a tourist destination. The number of tourist arrivals grew from 0.45 million in 2009 to 0.85 million in 2011 and the number of tourist nights increased from 4 million to 8.5 million in the same period.66 In that period, the receipts per tourist per day also increased from $82 to $98. Growth has continued into 2012, as earnings from tourism in the first quarter, grew 25.7% over the same period last year, amounting to LKR 38.7 billion ($340 million).67 Further, luxury hotel chains like Shangri-La, Hyatt and Sheraton are expected to enter the Sri Lankan market in the next few years. Hotels and restaurants gained an edge over telecommunications, as a major recipient of FDI in 2011. This was, however, mostly influenced by the construction of 2 luxury hotels accounting for $130 million in-flows. To capitalize on the increased number of arrivals, 11 new airlines registered to fly into Sri Lanka in 2010 and 2011. The national carrier also expanded operations to tap the traffic from emerging economies.
26
The government also launched the National Tourism Strategy in 2011 to make Sri Lanka a sought after tourist destination. As part of this program, the government created the Sri Lanka Tourism Development Authority (SLTDA), to facilitate investments in tourism. The SLTDA received more than 210 investment applications in 2011. The government is keen on increasing the nations capacity to cater to 2.5 million tourists by 2016, and has reduced the taxes on items required by the industry to expand, refurbish or upgrade their services.68
27
4.3. SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

59% of Sri Lankas population forms its economic base of the pyramid, and spends $23 billion annually. 58.5% of Sri Lankas population can be categorised as base of the pyramid, if we define the upper cut off of the segment as individuals earning $4 (PPP) per capita per day.69 This figure varies across the geographies. 79.5% (0.8 million) of the estate households, 60% (9.8 million) of the rural households and 43.5% (1.3 million) of urban households can be considered as Base of the Pyramid. The market size at the base of the pyramid is of particular relevance to inclusive businesses engaging the poor as consumers. Dalberg estimates, the total market at the base of the pyramid to be $45 billion (PPP) in 2011. In 2011, BOP expenditure on food was $26 billion (PPP). Housing, which accounts for expenditure totalling $4.8 billion (PPP), was the second largest market after food. The other large markets were energy ($2.1 billion PPP), transportation ($2 billion PPP) and personal care and health ($1.9 billion PPP).
4.
Figure 18: Segmentation of market at the base of the pyramid

Food vs. non-food market size $ billions 23 Break up of non food market size 10
38%
Other Education Personal Care & Health Transport Energy
Food
13
5% 10%
11% 11% Non-food 10
25%
Housing
SOURCE: Dalberg Estimates using Household Income Expenditure Survey 2009-10, Department of Census and Statistics
Expenditure data reveals that richer deciles spent a larger percentage of their incomes on transport, 27 communication and education. Notably, the spending on education varied from 1.8% for the poorest deciles non food expenditure to 5.9% for that of the richest decile.
28
4.4. CLIMATE FOR ENTERPRISE AND INVESTMENT

Sri Lanka is continuously improving its investment climate in order to achieve its $2 billion FDI inflow target in 2012. Sri Lanka jumped 9 places from 2011 and is ranked second best, behind Maldives, in the South Asia region with a Doing Business Rank of 89 (of 183 countries) in 2012. Sri Lankas rank in the Global Competitiveness Report follows closely, when it moved Sri Lanka to rank 52 (of 142 countries) in 2011-12 from 62nd position in 2010-11. Both reports, however, stated that Sri Lankas tax policy was a road block to competitiveness. Sri Lanka ranked 173 out of 183 countries in terms of the ease of paying taxes in the Doing Business Report. The Global Competitiveness Report also identified tax rates and regulations as the most problematic factor for doing business. An additional area of concern identified by the Global Competitiveness Report was macroeconomic stability. The high government budget deficit and inflation rate caused concerns about the macroeconomic environment in Sri Lanka, leaving it with a rank of 116 out of 142 countries. In response to these concerns the government has looked to rationalize tax policy and improve investor protection laws. Tax reforms have included reducing certain tax rates, replacing multiple rates with a single tax rate and setting up a Tax Appeals Commission to expedite the appeal process.70 Sri Lanka has also introduced tax reforms, which simplify and refocus tax incentives by restricting them to only strategically important projects. 71 These incentives were set up to attract investors during the civil war period and were previously a drain on revenues. The government is also considering revamping the Board of Investments (BOI) to ensure that the BOI does not withdraw concessions or change the terms of approval once they have been granted, thereby protecting investors from ad-hoc policy changes.72 The post conflict economy is expected to see strong growth in the long-term despite the current concerns. The short term risks have been mitigated by government policy measures, which have curbed the current account deficit to safeguard reserves.73 Even the double-digit inflation figures in the pre-war years have stabilized to single digit levels for the last three years. Sri Lankas government has implemented focused policy measures to attract investments. Total investments, which are already at a healthy 27% of GDP since 2005, will also facilitate growth over the long term. Investor confidence has been reflected in the increasing flows of FDI into the country since 2010.
29
5. INCLUSIVE BUSINESS MAPPING

The following inclusive business market assessment for India and Sri Lanka adopts a two pronged methodology for data collection: 1) Firstly, primary data was collected and analyzed from a comprehensive online survey completed by senior executives of over 70 inclusive businesses (IBs). These survey respondents represent a wide range of sectors, size (measured by annual turnover), BOP engagement mode, and geographical presence across India.74 2) Secondly, in-person interviews were conducted with the senior management of a set of 21 companies in India and Sri Lanka, shortlisted from the survey responses. From these interviews, 15 businesses were ultimately chosen to be featured as case studies for this report. In addition to being proven, successful and impactful models with strong growth potential, these case studies also represent a diverse range of inclusive businesses. A profile of our survey respondents is depicted in Our 68 survey the figure below: respondents from India comprised a diverse set of companies
Figure 19: Distribution of survey respondents
68
LIS only 16% 67 3% 10% 24%
Distributor Employee Supplier
53
> 100 10-100 1-Oct 19% 9% 28%
68 Domestic PPP 1% Public sector 7% Foreign-owned 18% private sector
Including LIS
54%
Consumer Non LIS 29%
63% <1 43%
Domestic private sector
74%
Geographical presence1
1.
Engagement model2
Turnover ($ millions)
Legal entity
LIS: inclusive businesses (IBs) with operations exclusively in Indias 7 lowest income states (Bihar, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Assam, West Bengal, Rajasthan, Odhisha, North Eastern States). ; Including LIS: IBs with some operations in Indias lowest income states; Non-LIS: IBs with no operations in Indias lowest income states. 2. Companies which mentioned multiple modes of engagement were reclassified into their primary mode of engagement SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
29
In total, more than 70 responses were collected from the online survey, which represented wide geographic distribution across India. 70% of respondents were businesses with inclusive operations in one or more of Indias lowest income states, of which one third have inclusive operations exclusively in these states.75 The wide geographic distribution was present within sectors as well. Within 8 of the 11 sectors represented, more than 50% of the respondents have operations in lowincome states. Only one third of the respondents had no operations in low income states. Regarding their primary mode of engaging the BOP, 63% of respondents employed a consumer model, while 24% primarily engaged the BOP as suppliers, 10% as employees and 3% as distributors. As explained in more detail below, this distribution is only reflective of companies primary mode of engaging the BOP; several respondents utilized more than one way.
30
In terms of annual turnover, 43% of survey respondents currently have a turnover of less than $1 million, and approximately one third have a turnover of between $1-10 million. An additional one third are quite well established, with turnovers of more than $10 million, while approximately one fifth are very big corporations, with over $100 million in annual turnover. A majority of survey respondents were domestic private sector entities; almost one fifth were foreign private companies. Few companies were publicly owned or were public-private partnerships.
31

All four modes of engaging the BOP occur across multiple sectors, and at times multiple modes are employed in a single business model; the consumer-oriented model is most prevalent. As depicted in Figures 20 and 21 below, inclusive businesses within sectors adopt a variety of modes of engaging the BOP. Within agriculture, for example, though the largest component of survey respondents engage the BOP as suppliers of agricultural produce, some also employ the BOP (to work as company farmers), and consumer-focused agribusinesses sell inputs and/or advisory services to smallholder famers. For sectors that provide critical goods and services, such as healthcare, water and sanitation, education and financial services, the majority engage the BOP as consumers. This is seemingly because the primary reason of being inclusive is precisely to increase access of basic service to these populations.
Within sectors, inclusive businesses engage the BoP through various models
Figure 20: Primary BOP engagement mode of survey respondents Engagement model by sector N = 120
Agri-business Energy Healthcare Telecom,BPO and IT Retail
23% 38%
33% 19% 69% 46% 15% 25% 50% 60% 50% 75%
17% 25%
27% 19% 31%
30 16 13 13 12 12 10 6 4 3 1
Consumer Supplier Distributor Employee
15%
23% 25% 33% 20%
25%
25% 17%
Water and sanitation

Education Real estate and construction Textiles, garments and handicrafts BFSI Hospitality and tourism
10% 10%
17%
33% 25%
30
Furthermore, individual inclusive businesses often simultaneously engage the BOP in more than one way. As depicted in Figure 3 below, businesses that sell critical goods and services to BOP populations often also employ individuals from similar backgrounds. Using local distributors, for example, is a very effective method of reaching last mile customers.
32
ADB Inclusive Business Market Study for India and Sri Lanka the most Draft Report common secondary mode of engagement Figure 21: Additional BOP modes engagement within each primary Presence of additional modes of of engagement modes of engagement N = 67
42 7% 14% 16 7 14% 50% 29% 2 Consumer Supplier Distributor Employee No additonal modes
40% of IBs are engaging the BoP in more than one way; the Employee model is
13%
13%
75% 50%
86% 50%
Consumer
Supplier
Employee
Distributor
Inclusive businesses often begin serving the BOP in one way, and eventually form additional engagement approaches to meet their other needs. Engaging in complementary inclusive initiatives 31 not only brings additional benefits to the target population, but is often also advantageous to the business. Star Agri, an agricultural production and supply chain company, buys agricultural produce from farmers while also providing them with storage facilities (for a fee) and advice on producing high quality crops.
Below, we outline our views on each of the four observed modes of engaging invested in awareness generat 44% of consumer oriented models the BOP as consumers, distributors, suppliers, or employees. of distributor oriented companies appointed franchisees at the lo
CONSUMER MODEL
For the purposes of this study, consumer-based inclusive businesses are defined as those providing a critical good or service to BOP populations. The key feature of companies adopting this model is ensuring affordability for BOP consumers. Waterhealth International, for example, sells purified drinking water in rural India and East Africa for a very low price to encourage the consumption of purified drinking water and thereby reduce the incidence of water-borne disease. Apollo Hospitals, one of Indias largest healthcare companies, is building its Reach hospitals in Tier II and Tier III cities, to bring tertiary healthcare services to underserved communities.
Figure 22: Consumer model strategies Engagement strategies of consumer models N = 43

Invest in awarenessgeneration/education 44% 26% 24%
E N
Provide Pay-peruse option

Provide consumer financing options
Sell smaller units

Provide no frills service option Provide subscriptionbased service Distribute service via mobile platforms Provide rental/ lease options
22%
22% 18% 13% 13%
A common challenge facing consumer-oriented inclusive businesses is not whether the NOTE: Some companies used strategies which were listed under different engagement models product/service is affordable in the absolute SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka sense, but the limited cash flow of BOP customers. To address this, businesses consider various financing options, such as monthly
33
Other
13%
installment plans, or the possibility of partnering with a microfinance institution (MFI). Edubridge, for example, a skills training organisation for rural youth in India, allows its students to pay class fees in installments. One of the ways in which consumer-oriented inclusive businesses are maximising their reach is through the use of the hub and spoke model. G.V. Meditech, for example, a hospital chain based in Varanasi, India, serves its rural patients through spoke micro-clinics. Patients needing more advanced treatment are referred to its larger, multi-specialty hub, located in the city. As opposed to a larger facility, multiple micro-clinics located in rural areas bring crucial healthcare services closer to rural populations, and their no-frills model reduces operational costs.
DISTRIBUTOR MODEL
Partly due to the high costs associated with using existing distribution channels, some inclusive businesses engage the BOP to reach underserved populations. For example, Greenlight Planet, a company that sells affordable solar-powered lighting products to the BOP, has created an innovative, 1,000-member strong distribution network. Village-level entrepreneurs, called Sun King Saathis, are recruited and trained to sell its solar lighting products in rural villages. These distributors are also responsible for educating consumers on the benefits of using solar lights. Greenlight Planet has found that successful distributors are not involved in any other entrepreneurial activities, which ensures that they are motivated by the sales commission to maximize sales. Further, they should be local, trusted individuals with rd 44% of consumer oriented models invested in awareness generation, while almost 1/3credibility within the local community. of distributor oriented companies appointed franchisees at the local level
Figure 23: Distributor model strategies Engagement strategies of distributor models N = 18
44%
Appoint franchisees at the village level
28%
%
Identify & train micro-entrepreneurs 24%
Partner with NGOs/MFIs to sell through their networks
21%
Decentralize production to be close to distributors
13%
Similarly, Global Easy Water Products (GEWP) engages farmers to distribute its affordable drip irrigation products to small-scale farmers. Whereas GEWPs distributors are not exclusively from BOP backgrounds, they are still local farmers, and therefore very effective. Given the sensitive nature of convincing a farmer to adopt a new technology which could potentially affect his livelihood, GEWP finds that local farmers are the most compelling salesmen. The company therefore invests heavily in training these front-line salesmen with basic marketing skills. Given the logistical challenges involved in reaching rural areas with critical goods and services, distribution is an area with significant potential for partnerships. ITC Ltd, for example, an Indian multi-business conglomerate, shares its distribution platform with other companies for a fee. This reduces the costs of distribution 37 for every stakeholder.
Provide financing to meet costs of up-front investment
12%
Other
10%
SUPPLIER MODEL
Several inclusive businesses, especially those in the agriculture sector, engage BOP populations as suppliers of key inputs.
34
ADB Inclusive Business Market Study for India and Sri Lanka The key strategy of Draft Report
IBs that engage the BoP either as employees or suppliers is to invest in training and skill development
CIC Agri, one of Sri Lankas largest seed to Figure 24: Supplier model supplier models Engagement strategies of strategies shelf agriculture companies, engages over N = 22 20,000 farmers as suppliers of agricultural Invest in training/ produce. Contributing to 6% of Sri Lankas education overall agricultural produce, CIC Agris impact on farmer livelihoods is very significant. It Invest in supply chain provides its vast network of farmers with its infrastructure own seeds and other inputs (such as fertilizer), Engage through and later buys the produce back from these intermediaries farmers at fair prices. To further support its farmers, CIC Agri has also set up a loan scheme Organize suppliers into for them, and provides several forms of cooperatives/associations consultancy services to educate its farmers on farm and soil content management, and Provide financing/credit effective farming and storage techniques.
29%
26%
24%
19%
19%
Other 16% Supplier models are also commonly found in the handicrafts and retail industries. Industree Crafts, a lifestyle retail chain and supplier of NOTE: Some companies used strategies which were listed under different engagement models home dcor products in India, engages 360 SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka suppliers (mostly women) through a network of 18 Self-Help Groups (SHGs). Recognising that networks of rural women are an ideal supplier base for Industree, it proactively organized women into SHGs, and assisted in them in securing loans for working capital against credit notes provided by the company. Furthermore, it provided support with sourcing materials (in this case, natural fibre for weaving) and with training on creating high-quality The keyproducts. of IBs that engage the BoP either as emp finished strategy
EMPLOYEE MODEL
to invest in training and skill development
Employing large numbers of BOP individuals is Figure 25: Employee model strategies Engagement strategies of employee models another way through which inclusive N = 31 businesses are directly increasing BOP incomes. MAS Intimates, a Sri Lankan lingerie manufacturing company, employs over 50,000 employees to produce apparel for global brands such as Victorias Secret, Calvin Klein, Ann Taylor, Speedo and Nike. 80% of these employees are women. Though MAS Intimates costs of production are not as low as that of other developing countries that specialize in apparel production, such as China, the company was insistent from inception on providing its workers with fair wages and creating a working atmosphere that significantly surpassed safety and environmental standards. As a result of its strong social values, it is one of Victoria Secrets preferred suppliers, and has won widespread recognition for its model.
Invest in in-house training and skill-upgradation Simplify & standardize work processes Provide benefits above minimum required by regulations Partner with local schools and institutes Partner with NGOs that provide training 16% 40% 54%
Engagement N = 22
Inve
Invest in in
En in
13%
10%
Organize s cooperatives
Offer financing support for training/education in extern

Other
9%
Provide fin
4%
MAS Intimates has built manufacturing plants in semi-rural areas, bringing crucial jobs to thousands of Sri Lankan youth. In addition to the technical skills required for their jobs, MAS employees are trained in general life skills and are encouraged to think about career advancement.
35
Companies adopt inclusive business models to serve profitable gaps in the market sustainably. Whether companies decide from inception to adopt an inclusive model, or alter their operations to be more inclusive, they experience several benefits of engaging the BOP. Whereas the top reasons cited by our survey respondents of engaging the BOP included lower labour costs, improved relations with the government, and lower transaction costs, the key reasons cited by our interviewees were more nuanced. While some inclusive businesses may have been conceived for Whereas the the benefits to companies of adopting an one reason in particular, others were started due to a combination of top following reasons:
financial, the BoP experience increased access to critica
GOOD FOR BUSINESS / CUSTOMER RETENTION

Aitken Spence, a hotel chain with properties in Sri Lanka and India, engages the BOP in several ways. It sources raw agricultural produce and biofuel from local farmers, and employs villagers as tour guides and hotel staff within its premises. Aitken Spence had more than one reason for deciding to actively engage the BOP, though they were all related to creating productive and mutually beneficial relationships with the local community. For companies located in rural areas, especially large ones, it is imperative for the local community to be supportive. This happens when the community also experiences undeniable benefits from the business.
Figure 26: Benefits to company of being inclusive

1 Not important 2 3 4 Very important
Access to
Lower transaction costs
23
15
45
18
Low labour costs Improved relationship with the government Increase in profits
17
23
25
35
Improved
27
16
33
24
Reduced
15
30
36
19 Improved
Stable supply of inputs
37
26
21
16
Access Improved brand/reputation
30
45
19
As hotel guests often want to experience local Access to new customers 42 37 13 8 ingredients and materials, Aitken Spences hotels depend on locals to lead recreational To contribute 75 16 5 excursions and tours.76 For this reason, the hotel to social change maintains a strong, and mutually beneficial and 4 respectful relationship with the local SOURCE: Results from Dalberg-administered survey of inclusive businesses in India communities surrounding its resport. To further ensure this, Aitken Spence hires local high school graduates, guaranteeing them a job close to home. Furthermore, Aitken Spence chooses to engage local BOP farmers as key suppliers of raw agricultural produce, even though it may be easier to source its food from one large supplier. In order to meet the hotels quality standards, therefore, it trains local farmers and provides them with the necessary equipment, such as crates. Another example, CIC Agri depends on tens of thousands of small holder farmers to supply the company with agricultural produce. In order to guarantee them the best price possible, it trains its farmers on how to maximise the quality of their produce. The company offers complementary extension services (technical assistance trainings), not only because its mission is to improve rural livelihoods, but also because it needs to gain the trust of its farmers to ensure a sustained working partnership. As farmers observe their own productivity and profitability increasing due to support from CIC Agri, they are less likely to see the company as exploitative, and therefore likely to remain loyal suppliers. Though several companies employ large numbers of low-income individuals out of need rather than a social initiative (such as those in mining, agriculture, textiles, etc), they are not inherently inclusive businesses. Those that are inclusive, such as those featured in this study, have gone above and beyond simply employing the BOP. They are either heavily investing in skills training, offering a higher-than-minimum salary, or providing them with significant benefits.
Stab
36
FILLING A PROFITABLE GAP IN THE MARKET

Though some businesses may have been inherently inclusive from inception, they may have primarily started in order to fill a gap in the market. Star Agri, for example, an agricultural production and supply chain company, was started when its co-founders recognized the glaring need to address Indias vast, disorganized agricultural sector. As a result of its operations, Star Agri benefits thousands of farmers as well as the companies that procure its produce. Additionally, Vortex Engineering develops ATMs for rugged, rural areas. As traditional ATMs need to be maintained within a certain temperature range, they are inappropriate for rural areas, where there are often no reliable sources of energy to power an air conditioner. Vortexs ATMs have been designed specifically with this environment in mind, and for use by BOP populations. There are now thousands of Vortex ATMs across India, bringing access to financial services to tens of thousands of rural populations. These BOP individuals are thus able to save and develop financial literacy, and government banks are now able to more effectively reach rural populations. Vortex is now poised to export its model to other countries in Asia and Africa. The mode of engagement affects the benefits of IBs to the BOP; key benefits include improved access to criticaltop benefits to companies of adopting an inclusive model are Whereas the goods and services and improved livelihoods.
financial, the BoP experience businesses Figure 27: Benefits to the BOP of inclusiveincreased
% respondents, N = 68 1 Not important 2 3 4 Very important
access depicted ingoods and services several key As to critical Figure 27, there are
benefits to BOP populations of companies adopting inclusive models, the most important of which is increased access to basic services.
Access to basic services
40
20
27
13
IMPROVED ACCESS TO CRITICAL GOODS AND SERVICES

A key benefit to BOP populations of inclusive businesses is increased access to basic goods and services. In many cases these are services that the national government has failed to deliver adequately. Sarvajal, for example, a Gujaratbased company that builds reverse osmosis plants in rural areas, sells purified water to underserved communities. Due to its very low cost, consumers are able to afford clean water, and the companys for-profit model keeps it sustainable. Vortex is increasing access to financial services for rural populations with its appropriate technology ATMs, designed for energy-poor locations.
35
Access to credit
37
29
20
15
Improved health/hygiene
43
29
20 8
Reduced discrimination
40
36
16 9
Improved education/skills
33
51
12 4
Access to information Stable or increased income
67
18 9 5
72
21
2
SKILLS DEVELOPMENT
By engaging them as employees, distributors or suppliers, inclusive businesses are developing the skills of BOP populations. In addition to a steady source of income that is often the result of this engagement model, these skills empower the BOP and fundamentally alter their economic trajectory. MAS Holdings, an apparel manufacturing company based in Colombo, and one of Victoria Secrets preferred manufacturers, employs thousands of youth from BOP backgrounds. Though their wages are not significantly higher than other employment opportunities available to educated youth in Sri Lanka (due to a shortage of labour), the professional and life skills taught to MAS team
37
members such as critical thinking and problem solving skills are significant non-financial benefits experienced by the employees. 77
INCREASED INCOMES
Inclusive businesses that engage the BOP as suppliers, distributors and employees directly increase the incomes of these individuals. In most cases, these individuals are earning a higher income than they otherwise would without the presence of the inclusive business.
Access to energy Number of farmers engaged No. of cities reached, number of Milk collection per farmer a result of purchasing its Inclusive businesses may also indirectly contribute increased incomes. As No of camps conducted Awareness about commodity prices Number solar lanterns, for example, Greenlight Planets customers are able to continue working during the of jobs created Consumption patterns Reduction in kerosene usage, exp Amount saved by water consumers on events and nights, allowing them to be productive for longer hours each day. Aspirational goods purchased health Co2 reduction 75% of inclusive businesses in India are either Figure 28: Level of social impact measurement - Rise in students trained
The agriculture companies included in our survey, such as Star Agri, CIC Agri and Nestle, all guarantee the highest possible price to the farmers that supply them with agricultural produce. Star Measuring plague the Indian Agri is able to do this by removing the multiple middle men whosocial impact agricultural sector, impeding farmers from getting higher prices for their crop. CIC Agri and Nestle both train Indirect their farmers on how to improve the quality of their crop, to ensure that their produce is bought at a Direct Number of treated Increase in salary fair price. As a result, famers are earning higher incomes, benefitting from trainings that -are very of patients trained Number persons Increase in cultivated land Number of users, drink water use relevant to their livelihood generation, and are protected from exploitative middlemen. Increase in productivity/yields
directly or indirectly measuring their social impact. Almost half of the IBs in our survey measure their social impact indirectly. This is mostly done by measuring output indicators, such as number of individuals trained, treated, employed, or with improved access to a critical good or service. IBs that are improving livelihoods tend to measure changes in income, number of jobs created, or changes in the expenditure of aspirational goods.
% of respondents, N = 64 Directly measure 30%
Indirectly measure
45%
Do not measure
25%
Direct measures of social impact, would include metrics such as an increase in awareness about commodity prices and differences in expenditure on healthcare services (to treat water-borne disease). Inclusive businesses choose geographies similar to other businesses presence of a strong market and local availability of human and material resources. Across sectors, inclusive businesses have operations throughout India. This holds true for the Sri Lankan respondents as well. The majority of inclusive businesses have operations in at least one of Indias lowest income states. For some sectors, such as textiles and handicrafts, it is more advantageous for production to take place in the lower-income states, given the large availability of labour. A few companies, however, lament the fact that logistical challenges and poor infrastructure make it very difficult to operate in these states. Some consumer-oriented IBs are fearful of the populations poor credit record and subsequent reluctance of financial institutions to serve this region. This would hamper on their ability to partner with a financial institution to facilitate sales. Furthermore, some companies view local experience as a key criterion for operating in this region.
38
ADB Inclusive Business Market Study for India and Sri Lanka Respondents covered a variety of sectors, Draft Report
with nearly every sector having a
pan-India presence
N=68
Figure 29: Geographical spread of IB operations
LIS only Agri-business 8%
Including LIS 62% 70% 44% 57% 57% 33% 14% 7 29% 57% 20% 5 7 7 20% 9
Non LIS 31% 10 13
Telecom,BPO and IT 10% Healthcare Education Energy Water and sanitation Retail 22% 29% 14% 43% 80%
Real estate / construction 33%

Textiles, garments and handicrafts Hospitality and tourism 67%
67%
33% 3 67% 3
BFSI 33%
1
37
STRONG MARKET
When choosing where to operate, consumer-oriented inclusive businesses first determine whether or not there is a market for its good/service in a prospective region. Attractive geographies would be ones in which there is a lack of access to this good/service. Some consumer-oriented companies also need to ensure that the BOP population has a minimum level of purchasing power. Other IBs focus more on where the need for their service is the strongest, and which areas have the largest BOP populations. One way that geographic expansion is achieved at a low-cost is franchising. AISECT, for example, has expanded to 27 states and 3 union territories because of its franchise network. In addition to being a low-cost model (the company does not have to bear the cost of building new facilities), local entrepreneurs who start each new AISECT centre have crucial local knowledge to leverage.
AVAILABILITY OF KEY INPUTS

Many inclusive businesses choose their geographic location based on key inputs. Desicrew, for example, which runs rural Business Process Outsourcing (BPO) centers in Karnataka, chooses the location of its centers based on the availability of infrastructure, universities, and proximity to a major railway stop. This would ensure a steady supply of young, educated graduates to employ. Further, some IBs choose to locate where there is a strong presence of a complementary sector. SELCO, for example, a company that sells solar lighting products to off-grid and underserved rural populations, chooses to operate in areas with a strong and mature banking sector. Financing partners are needed to provide its consumers with financing options. Waterhealth International, which sells purified drinking water to rural populations, chooses areas with a good supply of groundwater when identifying where to expand its centres. Edubridge, a training centre for rural youth, chooses to locate its activities where there is a presence of on-the-ground partners. Star Agri, an agricultural production company, assesses for the total
39
population of farmers, the presence of potential substitutes to Star Agris services, and the relative ease of doing business in particular states.
PERCEPTIONS OF OPERATING IN INDIAS LOWEST INCOME STATES

Interestingly, perceptions of operating in Indias low-income states is more or less similar between those IBs that already have operations in these geographies compared to those that do not. The Concerns with operating in low income states are related to poor biggest concern is the lack of infrastructure in these states. Other risks are perceived to be the difficulty of finding skilled manpower, security concerns are higher among IBs goods or infrastructure and manpower; and a low willingness of consumers to pay for services. presence in LIS with no
Figure 30: Perceptions of operating in low-income states
% of companies operating in that geography, N=59 Poor infrastructure Lack of skilled manpower Regulatory risk Low willingness to pay Security concerns or poor law enforcement Lack of relevant physical conditions
63 69 19 41 38 41 31 32 29 31 6 10 13
LIS presence No LIS presence
49
50
Cultural barriers
No challenges experienced/perceived
22
Scarcity of talent and company innovation are critical to the growth of IBs, though specific success factors vary across sectors SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sri Lanka
Of note is the observationWhich of the following have a potential that 50% of our respondents that do not have operations inthelow incomeIB ? to hamper growth of your states % of companies which markedstates to be perceive the security concerns in low income the factor, N=60 a significant challenge, whereas only about a third of IBs working in this area agree with this view.
Scarcity of quality talent 72%
Which of the following have a potential to 43 Figure 31: Criticalthe growth of your IB? enable growth factors

Company innovation Access to technology Rise in domestic consumption Government incentives Increasing export opportunities Lower cost of physical inputs Lower cost of human resources M&A opportunities 32% 27% 22% 19% 14% 51% 51% 71%
Another interesting observation is companies without Finance income states operations in lowfor capital investments do not perceive60% lack the of talent to be as acute a challenge as it apparently is, Regulatory complexity 57% according to those that have experienced this. Furthermore, IBs unfamiliarcapital low income states do Access to working with 48% not think cultural barriers would be an issue, whereas Poor infrastructure 45% one fifth of IBs in low income states believe this to be an issue. Consumer reluctance
to change behaviour High cost of non-labour inputs High labour costs 38% 28% 25%
48
40
Technology and cost management will remain the critical success factors for inclusive businesses.
TECHNOLOGY HAS THE POTENTIAL TO SIGNIFICANTLY INCREASE THE IMPACT OF INCLUSIVE BUSINESSES
The majority of inclusive businesses, not unlike any business, would benefit greatly with access to technological products. Across all sectors, technology was identified as a key factor to the success of IBs. Greenlight Planet, for example, is currently piloting the use of mobile technology to track the sales of its 1,000 distributors. This would result in real-time data that would allow optimal inventory management and sales trends. They are also experimenting with remote product monitoring technology that will help them develop new, affordable leasing models. Technology is also seen as the key to keeping a large network of decentralized stakeholders engaged. AISECT, which has set up thousands of centers throughout India that offer educational and skills training services to rural youth, sees technology as the way to improve processes and its management information systems. Star Agri, an agricultural production company, would use technology to keep its network of thousands of farmers quickly and effectively informed of the services available to them, which many farmers are not even aware of. Companies like Shree Kamdhenu Electronics are allowing dairy farmer collectives to gain from the growing demand for dairy products by supplying them with technology with which to improve the quality of their milk. Electronic measurement and quality testing products allow these collectives to assess for themselves the quality of their milk, making the milk collection process transparent and efficient. The role of technology will be particularly important for businesses in the agricultural sector. As agricultural companies strive to capture more value, they will focus on producing more value-added products, such as and company innovation are critical to the growth this will Scarcity of talentcheese and yoghurt. Unlike traditional farming practices, of IBs, require more machinery. In the Sri Lankan market, this development though specific success factors vary across sectors will happen with a growth in its GDP per Which of the following have potential capita, which is expected to increase from its current level of $2,800 to $4,000 aby 2016. Demand for to dairy and processed food products will increase as incomes and tourism rises.
Which of the following have a potential Figure 32: Key riskto hamper the growth of your IB ? factors enable the growth of your IB?
% of companies which marked the factor, N=59 Furthermore, whereas more than half of

Scarcity of quality talent Finance for capital investments Regulatory complexity 72% 60% 57%
Access to working capital

Poor infrastructure Consumer reluctance to change behaviour High cost of non-labour inputs High labour costs
48%
45% 38% 28% 25%
Indias BOP population is rural and subsistent on agriculture, Sri Company innovation 71% Lankas labour market is tight, and as incomes rise, labourAccessexpected to move out51% agriculture. As is to technology of machinery will be needed to replace farmers, Rise in domestic technology consumption a greater 51% in the future will play role growth of agricultural companies. The use of Government incentives 32% technology would not only increase productivity, a key priority for Sri Lankas agriculture sector, but it would Increasing export 27% opportunities contribute to improved farmer livelihoods. CIC Agri, a Lower cost company, believes its farmers big agribusiness of 22% physical inputs incomes could be doubled with technology.
COST MANAGEMENT
Lower cost of human resources
19%
M&A opportunities 14% Another key success factor for inclusive businesses is the ability to keep costs as low as possible. Apollos Reach Hospitals, for example, need to keep operating costs at a minimum to ensure its services stay affordable for its target rural patients. It 48 not only is
41
consumer-oriented IBs that feel the pressure to maintain costs, however. Desicrew, which builds rural BPOs in India, has targets for its centres to have standardized costs, so that the company can remain competitive. Lack of access to affordable working capital, complexity in the regulatory environment, and shortage in qualified manpower are key challenges to the growth of inclusive businesses.
LACK OF ACCESS TO AFFORDABLE WORKING CAPITAL

In both India and Sri Lanka, inclusive businesses are facing a significant challenge of not having access to affordable working capital. Ideally, working capital could be raised in the form of debt from a local bank. However, in India, banks traditionally do not give debt to young companies, especially those without assets/collateral. Banks regard businesses that have been operational for several years to be safe investees. However, consumer-focused inclusive businesses often adopt an assetlight model, to keep costs down and thereby stay affordable for BOP consumers, reducing their ability to provide collateral. As local banks tend to regard young companies as too risky, working capital needs are often most pressing during the early stages in a business growth trajectory. Greenlight Planet, for example, has stated that its only major bottleneck to growth is a lack of working capital. They are able to fund all their operations with existing capital reserves, but the unavailability of affordable working capital is the only reason why it is not already operating in more states across India. As expressed by several companies, access to debt would help ease the pressure on working capital, and would enable them to grow faster. Global Easy Water Products (GEWP), that sells affordable drip irrigation technology to small-holder farmers in India, finds it challenging to keep inventory in time for its busiest season due to its tight cash flow. Water Health International, which sells purified drinking water to rural populations, and Apollo, a leading hospital in India that is launching tertiary healthcare centres in Tier II and III cities, have both received debt funding from the IFC at cheaper rates than those offered by Indian banks such as ICICI. In Sri Lanka, debt is similarly expensive; however this problem has not disproportionately affected inclusive businesses, as in India. Whereas in India, interest rates on debt for early-stage inclusive businesses are a reflection of their perceived risk level, in Sri Lanka government policy has dictated much higher interest rates, aimed at correcting the countrys severe balance of payments situation. Since January 2012, Sri Lanka has hiked interest rates by 75 basis points, or approx 11%. Sri Lankan companies are therefore not growing as fast as they could be with additional funding. Kelani Valley Plantations, for example, a company that produces high quality tea and rubber in its estates, has found that the return on an investment to replant ageing tea bushes would not be high enough to cover current interest rates. As a result, the only investments made are funded by a small percentage of its annual profits. The Sri Lankan inclusive businesses included in this study, however, are quite big. For them, a lack of financing is impeding fast expansion of an already large and established business. Smaller inclusive businesses in India that are either approaching profitability or recently achieved profitability do not have the options that some Sri Lankan companies have. CIC Agri and MAS Intimates, for example, has grown using its own capital and MAS Holdings has grown through joint ventures with other companies.
COMPLEXITY IN REGULATORY ENVIRONMENT

Though some inclusive businesses were started to provide an alternative, market-based approach to the traditional government-provided basic services, others are large corporations with a large impact on the local economy and their operations could be significantly improved with the right
42
government policy. Lack of adequate support from government on problems that need to be solved at an industry-wide or nation-wide level is an issue for companies in both India and Sri Lanka. Agricultural companies across Sri Lanka, for instance, are facing the challenge of low productivity. Nestle Lanka, for example, suffers from low productivity of its dairy farmers. Sri Lankas production per cow is 3 litres, compared to Indias 9-10 litres, Pakistans 20 litres and New Zealands 30 litres.78 The government has increased the purchase price of milk, which has increased the supply of milk, but the productivity has not changed. This productivity issue is not one that can be solely solved with financing; ideally the Sri Lankan government would be involved in attempts to systematically increase the countrys milk production capacity as it would require working with technical experts from other countries and making use of artificial insemination on a national scale. Tourism is another sector whose growth is currently stifled due to a lack of government support, as is the case in Sri Lanka, where tourism is likely to grow exponentially and contribute significantly to GDP growth over the next several years. There is currently a gap, however, between the countrys current capacity and what is needed to accommodate the 1.5 million tourists per year expected by 2016. Though extensive infrastructure development is required, the private sector is reluctant to make the necessary investments without active government support to promote tourism (especially to promote Sri Lanka as a high-end destination). In India, GEWP experiences negative impacts on its businesses when local politicians promise the distribution of free drip irrigation systems for farmers during election season. Government subsidies are furthermore allowing inefficient competitors to stay in business. Removing these subsidies would force manufacturers of drip irrigation products to stay innovative. When companies supply these products to the government (as opposed to GEWPs model of selling directly to farmers), they are not forced to optimize the effectiveness of their products. Waterhealth International also disagrees with government subsidies on water, stating that the distorted price of water does not incentivize people to understand the true scarcity, and therefore value, of purified water. On the other hand, several inclusive businesses have benefitted significantly from support from the government. Vortex, for example, has received government support to set up ATMs in rural areas. AISECT and Edubridge, two education and skills training organizations, have received a credit line from the National Skills Development Corporation at a concessionary rate, which proved critical to their scale. In the case of AISECT, these funds are financing expansion into new states, the cost of manpower, as well as content development and process improvement throughout the company. Government policy can therefore either support or restrict the growth of inclusive businesses. By partnering with businesses, governments can provide crucial support to inclusive initiatives, if not financially then by supporting their image/credibility.
LACK OF TALENT
A common issue for IBs in India and Sri Lanka is the shortage of technical and managerial talent. Apollo, a leading hospital chain in India, is experiencing a problem faced by the healthcare sector as a whole in India; the lack of skilled manpower. This is a bottleneck faced by other sectors too; Star Agri, an agricultural production company, finds it hard to find talented business managers.
43
Funding to 5.3 FUNDING NEEDS OF INCLUSIVE BUSINESSES date of IBs equity and debt
SOURCES OF FUNDING TO DATE
To date, the inclusive business initiatives in our study had been funded from a variety of sources. Businesses that were recently incorporated to serve the BOP specifically have mostly been funded with a combination of equity and debt from early stage impactoriented investors and/or angel funders. Some companies received financial support from social incubators or from government bodies, such as the National Skills Development Corporation.79 Equity The majority of equity funds have been raised by venture capital funds, including impact investors and other funds with a social focus. Specific funds that have invested in our survey Sources of equity funding: respondents include Aavishkar, Aavishkar IndoUS SIDBI, Venture Partners, and BOMA LLC. BOMA LLC One third of the equity acquaintances.
Figure 34: Debt received to date
SIDBI VC IndoUS funding Venture these Partners
Sources of equity fundin Aavishkar BOMA LLC SIDBI VC IndoUS Venture Partners
Figure 33: Equity received to date

Equity VC
42%
< $1 mm
41%
Promoters and friends Private Equity Angel Investors Other*
33%
$1-5 mm $5-10 mm >$10 mm
31% 14% 14% Equity received
13% 4% 9%
Sources of equity
*Other = 1 National Bank
ng to date of IBs equity and debt
IB
Axis Bank NABARD1 Hub Ventures initiatives was IDBI Bank NSDC Union Bank of India Debt SBI Intellecash
Internal profits, Government Banks for Agricultural and Rural Development SOURCE: Results from Dalberg-administered survey of inclusive businesses in India and Sources of debt Sri Lanka funding:
from promoters themselves, or
The majority of debt raised by IBs has been from commercial banks, such as Axis Bank, Hub Ventures, IDBI Bank and Intellecash. Almost 15% was also raised by government financial institutions, such as the National Bank for Agriculture and Rural Development (NABARD), the National Skills Development Corporation, the State Bank of India and Union Bank of India. Credit Guarantee Though only a very small minority of businesses in our study had received a credit guarantee, they came from a combination of commercial banks, such as Rabobank and BOMA LLC,49 and private sector companies, such as Fab India.
Commercial banks Government banks Microfinance Institutions Private funds
67%
< $1 million
65%
14% 10% 10%
$1-5 million $5-10 million > $10 million
18% 18% Debt received
Sources of debt
*Other =
and
1 National Bank
FINANCING REQUIREMENTS
As depicted in the figures below, inclusive businesses across all sectors represented in our survey require an investment amount that matches ADBs proposed deal size, but especially those in the Telecom, Education and Energy sectors.
44
Funding to date of IBs equity and debt

Figure 35: Credit guarantees raised to date
100% = number of respondents 5 Commercial banks 3
40% < $1 mm 67%
Private sector company
60%
$1-5 mm $5-10 mm
>$10 mm 33%
Sources of credit guarantees

*Other =
Credit guarantees received
1 National Bank
Sources of equity funding: Aavishkar BOMA LLC SIDBI VC IndoUS Venture Partners
51
Figure 36: Required investmentInformation sectors, especially size, by sector

N = 56
Telecom, BPO and IT 57%
Our proposed deal size meets the requirements of companies across multiple Technology, Education and Energy
29%
14% 7 17% 6 29%

7 5 11 4 8 3 3 1
< $1 million $1 - 5 million $5 - 10 million > $10 million
Education
Energy Retail Agri-business Water and sanitation Healthcare Telecom and IT Textiles, garments and handicrafts BFSI Real estate / construction 36% 29%
67%
43% 60% 18%
17%
40% 45% 50%
50%
13% 13% 33% 33%
25% 33% 33%
50% 33% 33%
50%
50%
45
45
It is also compatible across geographies and modes of engagement

Figure 37: Investment size by geography and mode of engagement
Requirement of deal size by geography 100% = number of respondents, N = 56
9 17
29% 42%
Requirement of deal size by mode of engagement 100% = number of respondents, N = 107

42 5% 33% 30% 20 5% 20% 28% 44% 29
10%
31
16 > $10 million $5 - 10 million $1 - 5 million < $1 million
33%
11% 41% 33% 35% 19% 24%
28%
25%
24%
22% 6%
38%
45%
34%
31%
3% Including LIS Consumer Supplier Employee Distributor
LIS only
Non LIS
Though the required investment amount does not seem to vary significantly according to BOP engagement model, several inclusive businesses mentioned the need for longer investment timelines than traditional commercial investments. Tourism, for example, is a sector for46 which large investment sizes are required, and returns on investment take time to generate. For example, Aitken Spence, the owner of a hotel chain in Sri Lanka, estimated an approximate cost of $40 million to build a 500-room hotel, and a rangeuse grant fundingreturns could be made by investors. Inclusive businesses would of 8-10 years before to increase training, R&D
Figure 38: Ideal grant-funded investments
and their use of technology
% respondents who identified reason as significant1, N = 68 Training R&D IT systems and processes Hiring people Market research Plant and machinery Other HR systems and processes Finance and accounting systems New office space 22% 18% 18% 16% 15% 40% 37% 32% 51% 59%
Technical Assistance financing would be an ideal source of funds to address various inclusive business needs.
EMPLOYEE TRAINING
Were inclusive businesses from our survey to be eligible for grant funding, or to qualify for potential technical assistance, across all sectors, the top need for inclusive businesses would be the training for their employees, suppliers and distributors. Nestle Lanka, for example, would use TA support to train its 15,000 dairy farmers that provide it with milk, to improve their productivity. Nestle cannot incur this cost from its own reserves, as it would be too high and distract from the business core activities.
Another agricultural company, Star Agri, 47 has pointed to the herculean task of educating its wide network of farmers in concepts that are crucial to their livelihoods, such as the importance of following weather reports, forecasted crop prices, managing and storing harvested produce, and managing their finances. Though Star Agri is
1 Respondents chose more than one option SOURCE: Results from Dalberg-administered survey of inclusive businesses in India
46
taking on the cost of this training itself, further training is an area into which it would benefit from TA funding. Jaipur Rugs, a Rajasthan-based manufacturer of high quality hand-knotted carpets would benefit from further developing the skills of its 40,000 carpet weavers, and developing business literacy to improve upward communication from the weavers to managers. All these companies are currently taking on the cost of such trainings themselves, as they have no choice and doing so is crucial to their business. Since every business is constrained by its own funding capacity and manpower, and there is an obvious trade-off with other areas which could be supported with these resources (especially activities that are core business priorities). They are inevitably growing more slowly than would be the case if this investment could be made with grant funding. A few IBs, such as Aitken Spence, Industree Crafts and AISECT, have set up foundations to absorb grant funds from government and other sources to be deployed towards training.
RESEARCH AND DEVELOPMENT

The second key area IBs would like to strengthen is Research and Development (R&D). Given that R&D projects are usually relatively riskier initiatives and are regarded as an investment rather than revenue-generating activity for the business, most IBs would use grant funding for this cost. Greenlight Planet, for example, would use TA funding to work on developing new models of solar lamps.
DEVELOPING IT SYSTEMS
The third area that IBs would like to strengthen is the use of IT systems and processes to improve their operational efficiency. IBs across sectors referred to the desire to improve their processes through the use of technology. Waterhealth International (WHI), for example, recognized the need to build an online enterprise resource planning system to streamline its operations. The costs involved in procuring a custom-made system were too prohibitive for the company, however, so WHI created the system itself. Unfortunately, due to the significant financial and non-financial resources that were devoted to developing this system, WHI is now reluctant to share its platform with other businesses. As technological investments are often costly, but generate multiple benefits, this is an investment that inclusive businesses would make with grant funding.
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5.4 IMPLICATIONS FOR ADB

INDIA
Small and medium companies, across modes of engaging the BOP, need ADBs support in the early growth stage more than larger firms. Inclusive businesses in the early growth stage where funding requirements are in the range of $1$10 million are not likely to receive affordable debt from local banks, regardless of strong growth potential, social impact, and mode of engaging the BOP. Their equity requirements also remain unmet due to the low limit on funds available with existing seed fund providers and impact investors in the country. Larger companies are able to attract commercial funding more easily. Star Agri, for example, has recently raised $30 million from IDFC, Indias leading infrastructure finance company. ADB could fill a big gap in this sector and provide crucial funding (equity and debt) to inclusive businesses that dont yet have a brand to support it. Given that the key challenge facing firms in accessing debt is the lack of collateral, ADB should consider setting up a credit guarantee scheme that enhances the ability of these IBs to access bank loans at reasonable rates.
SRI LANKA
Investments in consumer models are likely to be less impactful in the long term. Unlike India, Sri Lankas BOP population has a relatively higher quality of life, especially with regards to access to water, energy, education and healthcare. The presence of trade unions also ensures that workers in organized sectors, such as tea harvesting, have the ability to negotiate for certain benefits and working standards. Tea plantation workers, for example, who are considered to be among the most deprived segment of the population, tend to earn a minimum of $4 per day, excluding other benefits such as social security and housing. Furthermore, as Sri Lankas population is declining and labour shortages are increasing wages, Sri Lankas BOP is likely to experience increases in income in the future, which would propel them out of the BOP classification. Businesses that focus on providing basic services at affordable prices to consumers therefore will likely not be as successful, as this population will start preferring aspirational goods. Investments that maximize job creation would lead to greater social impact. Considering Sri Lankas weak job market, investing in SMEs, would generate much needed jobs. Furthermore, setting up business operations in rural areas, where there are few employment opportunities, creates a ripple effect as complementary businesses start mushrooming to service key industries. Companies operating in the Northeast of the country would have an especially large impact on the local communities, which have the countrys worse socioeconomic indicators due to the recently ended war.
48
6. PE MARKETS ASSESSMENT
The following private equity market assessment for India and Sri Lanka adopts a two pronged methodology for data collection: 1) primary data collection from direct interviews with a broad range of fund managers, and 2) synthesis of secondary information from a literature review. Our team interviewed 21 fund managers, representing both impact investors and commercial investors. The profiles of these 21 fund managersselected sample of 21 below. managers 6. Composition of Dalbergs are represented in the figure fund
Figure 39: Composition of Dalberg's sample of 21 fund managers
21 No IB-focus No IB, but SME-focus 6 4 Other Agriculture 21 3 2 Sri Lanka India (LIS) 2 2 EM1 21 5 Early 21 8
Agnostic
IB-focus 11
16
India 12
Growth
13
By portfolio focus
1.
By sector focus
By geographic focus
By target stage of investment2
EM refers to emerging markets; our sample consists of 5 funds that have a footprint in both India and Sri Lanka, here termed as having an EM focus; SOURCE: Dalberg analysis across interviewed fund managers
While selecting fund managers to be part of the study, Dalbergs team focused on 4 key parameters: inclusive business-focus; sector-focus; geographic-focus; and target stage of investment.
30
Of the 21 funds interviewed, 11 have a direct focus on inclusive businesses. Additionally, 16 are sector-agnostic, but often select sectors carefully to maximize financial and/or social return, while the remaining funds are focused on more developed sectors such as agriculture, healthcare, energy, and information technology/IT-enabled services. While Dalbergs team found several relevant fund managers to interview in India from a reasonably large pool of private equity players, Sri Lankas PE market on the whole is very nascent. As a result, the sample includes only 2 funds from Sri Lanka (LR Global and Aureos), compared to 14 from India, and another 3 that focus on emerging markets globally and have a footprint in both India and Sri Lanka. Two of the India-based funds have an exclusive focus on Indias low-income states. Further, the sample includes adequate representation from early-stage (9 out of 20) and growth-stage (11 out of 20) investors. Secondary information sources such as Bain & Cos India Private Equity Report and Grant Thorntons Private Equity in the Indian Corporate Landscape, both published in 2011 in partnership with the Indian Venture Capital Association, were also used to provide an understanding of the overall PE market and trends.
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KEY FEATURES OF THE INDIAN PRIVATE EQUITY MARKET
India has seen PE growth across multiple sectors; fund managers in India and Sri Lanka are optimistic about prospects for PE in the long-term. The performance of Indias public markets has been strong Figure 40: Market capitalization of compared to other countries in the region. The total value of countries in South and Southeast Asia Indias market capitalization was 93.6%80 of the countrys GDP Market capitalization Country in 2010, the highest among low and low-middle income as % of GDP (2010) countries in South and Southeast Asia. Similarly, Indias private India 93.6 equity market has seen significant deal activity in the past 5 Philippines 78.8 years. Grant Thornton has recorded nearly 1,400 private equity Indonesia 51.0 deals (excluding real estate) in India from 2005-10, amounting Sri Lanka 40.2 to $36 billion in value. Deal activity has additionally not been Nepal 30.8 limited to just a few sectors. IT & IT-enabled services, real Pakistan 21.6 estate, banking, financial services, and insurance (BFSI), and pharmaceutical industries had all seen more than 100 deals Vietnam 19.2 during this period81. In 2010, India saw the largest increase in Bangladesh 15.6 deal activity among the big Asia-Pacific markets, when private equity deal value more than doubled from that of 2009, to $9.5 SOURCE: World Bank data billion (including venture capital, private equity, and real estate investments). Although there are conflicting statistics on the number of funds in the market, private equity experts estimate 300-400 active funds in India today.
Figure 41: Number and volume of PE (non real estate) investments in India
Number of deals Avg. deal size, $ millions
6. Number and volume of PE (ex-VC) investments (2007-12)
28
27.8 22.2
600
24
20 16 12 8 4 0 2007
Value of deals, $ billions
22.4
22.2
400
14.5
Below: Value of deals, $ billions Above: Average deal size, $ millions
13.7
200
0 2008 10.7 2009 4.05 2010 8.2 2011 10.2 2012E 7.8
13.9
SOURCE: Venture Intelligence, MINT, Grant Thornton, Dalberg analysis
Fund managers that Dalberg spoke with (both impact and commercial investors) said32they were positive about the Indian economy in the long-term (more than 5 years from now), the period most relevant for PE funds. Key reasons for their positive outlook were the presence of a large and growing market across sectors (N = 8), favourable demographics (N = 6), quality of human capital (N = 4), and potential for social impact (N = 4).
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These factors were also cited as favourable to the growth of certain sectors, such as healthcare. The Responses to the question: "What largely recession-proof healthcare market in India, already valued at approximately $65 billion82, isis your gener 83 expected to double within the next 5 years . Further,economy?" features benefit the private the markets sector, which accounts for 80% of healthcare services in the country. The potential to increase access to healthcare in India, where women are 10 Figure 42: Responses to the question: "What is your times as likely to die during pregnancy and childbirth general outlook for India's economy?" as in the US, is also a strong incentive for impact investors to invest in the sector.
7% At the same time, fund managers express certain 29% Negative 14% concerns around the current stifling business environment, including non-supportive regulation (N = 8) and lack of infrastructure (N = 5). The recent cancellation of 2G licenses in the telecom industry, 43% Neutral for example, has significantly eroded investor confidence in the sector and to a large extent, in the 79% Indian market in general. Indian businesses are increasingly hungry for infrastructure such as power Positive 29% and logistical infrastructure, and the government has lagged behind in increasing supply to match this demand, especially in low-income regions. Over next 12 months Over next 5 years Consequently, the lack of basic services, such as SOURCE: Dalberg interviews with fund managers electricity, provides opportunities for impact investors to fund inclusive businesses that increase access to such infrastructure for base of pyramid populations.
The PE market in Sri Lanka, in contrast, is relatively nascent. Few PE funds started fundraising immediately after the war ended in 2009, but failed to attract significant investor confidence, especially since the end of the war coincided with the global recession, and did not reach first close. Aureos and IFC have survived these turning points in the market, but even with the lack of competitors face limited deal flow. However, with the macroeconomic condition improving and an increasing number of investors building their presence in the country, new funds are being set up, suggesting a clear opportunity for PE in the near-medium term. Few funds currently focus on early-stage and early growth financing in India, pointing to an opportunity for the ADB; Sri Lankan fund managers believe in the growth potential of SMEs. While there are 300 funds focusing on investments of over $20 million in size 84, the number of private investors for smaller deals in India remains relatively insufficient a trend reflected across other BRIC nations. In particular, early-stage and early-growth financing remain key gaps in the market. The nascence of the early-stage investment space, including angel investment and venture capital, is evidenced by the fact that nearly 70% of all sources of deal flow in BRIC countries are family/private businesses, as compared to 46% globally.85 In addition, the limited venture capital funding in India to date has largely been directed towards breakthrough or disruptive technologies and business models. The existence of a gap in the early-growth financing space, typically termed the missing middle, is noted by fund managers across investment sizes. Growth equity funds (typically investing over $20 million per deal) are set up such that smaller deals would be inefficient and expensive to manage. On the other end of the spectrum, impact investors (typically investing less than $2 5 million per deal) have limited resources to deploy. Further, impact investors have expressed difficulty in finding Series B investors to provide follow-on financing to their investees. Growth equity investors
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providing larger ticket-size investments, show limited interest in these exits due to their inability to provide the more hands-on assistance that early-stage businesses require. There is therefore a clear need for impact-oriented, mid-sized equity. In Sri Lanka, fund managers believe attractive investment opportunities will be in the SME space. Larger companies often do not offer strong valuations, and the PE market is too nascent and illiquid for high-risk venture capital investments. Exits have remained a challenge, and investments in SMEs would provide a diversified set of exit options. Most funds are dependent on foreign sources of capital and fund raising from Indian institutions is seen as a challenge; Sri Lanka is expecting large investment from DFIs. It is estimated that 80% of funds raised in 2011 by private equity fund managers were sourced from a combination of foreign institutional investment, foreign direct investment, and foreign venture capital investment86. Sources include Development Finance Institutions (DFIs), High Net-Worth Individuals (HNIs), university endowments, foundations, and other private investors. Of the 11 funds that shared details with Dalberg on their Limited Partnership (LP), 8 have been invested in by DFIs. Both impact investors and commercial fund managers with inclusive businesses in their portfolios have claimed that raising funds from domestic sources has been a challenge, suggesting that foreign capital will likely remain an important source of capital for Indias private equity market in the years to come. Due to recent regulatory restrictions in the telecom sector and Indias poor short-term economic outlook, however, foreign investment in India has recently declined significantly. Successful fund managers in Sri Lanka have traditionally attracted investment from DFIs. While IFC is wholly funded by the World Bank, Aureos has enlisted a number of other DFIs to invest in their South Asia Fund, which has set aside a portion of funds for investment in Sri Lankan businesses.
INVESTMENT STRATEGIES AND RELEVANCE TO ADBS INCLUSIVE BUSINESS AGENDA

A. Multiple funds in India, both impact and commercial investors, are already investing in inclusive businesses; Sri Lankan PE funds do not narrow focus from SMEs. Though the definition of inclusive business, as per ADB, is relatively unknown among fund managers, the majority of funds interviewed for this study (11 out of 21) were found to have significant exposure to such businesses at times the majority of their portfolios consist of inclusive businesses. Through a specific investment philosophy or focus within their investment strategy, the portfolios of these fund managers often include a subset of inclusive businesses. The majority of companies funded by investors such as Aavishkaar and Lok Capital, for example, would qualify as inclusive businesses, as a result of their targeted investment philosophy. According to Aavishkaar, [our] fund provides risk capital to businesses that have the potential to make a difference to the base of the pyramid and scale up profitably. Lok Capitals goal is to promote inclusive growth by supporting the development of social enterprises to deliver basic services to serve the BOP segment in a scalable, affordable and commercially viable manner. As is evident, these investment philosophies at times favour particular models of engaging the poor, e.g., Lok Capital would primarily consider investing in businesses that engage low-income populations as consumers. On the other hand, Pragati Fund and SIDBI-VCs Samridh Fund target small-and-medium-enterprises (SMEs) in low-income states in India, and have therefore shaped their investment strategy to target what would most likely be inclusive businesses. According to these funds, the very presence of SMEs in traditionally deprived regions will have significant development impact. At a minimum, fund managers expect that such businesses will hire locally, develop their employees skills and invest in local supply chains.
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Additionally, other funds were found to invest in sectors that are inherently inclusive. Rabo Equitys India Agribusiness Fund, for example, is one such example. By virtue of investing in agribusinesses, all of the funds investments have either a direct or indirect impact on those individuals dependent on agriculture for their livelihoods, representing approximately 52% of Indias population87, and over 80% of who may be considered members of the BOP. These findings point to the existence of multiple experienced funds and fund managers through whom the ADB could route its investments into inclusive businesses. B. Sri Lankas PE market is nascent, with a small number of fund managers currently active, and DFIs are likely to remain chief source of investment. Sri Lankas PE market, on the other hand, is shallow with few fund managers currently active, and hence stands in sharp contrast to that of India. The markets journey in Sri Lankas early years post the war has been challenging. 2 fund managers Calamander and Leopard Capital attempted to set up PE funds exclusively focused on Sri Lanka, but failed to generate sufficient interest among investors. Not only has this stunted the development of the PE market, it has also somewhat eroded promoters confidence in private equity as a source of financing. However, there are signs that the market is picking up. Other than the few funds that are currently active, including IFC and Aureos, a few more funds are currently being set up. These funds are all targeting the SME space, in the investment size range of $5 10 million, encouraged by the growth opportunity in Sri Lanka, where 6%+ growth is expected to sustain over the short-medium term. However, given the nature of the market, which has seen very little PE activity in the past, getting traction early will be a challenge. As a result, Sri Lankan funds adopt a sector and geography agnostic investment approach, and recommend the same for any potential ADB intervention in the country. As a result, there are no funds that focus on inclusive business exclusively, and finding fund managers in Sri Lanka that fit ADBs investment thesis will likely generate limited interest. Our view is that it is likely to find investments within the portfolio of current fund managers that could match ADBs investment criteria of inclusive businesses, but at this stage of maturity of Sri Lankas PE market, it will be a challenge to truly adhere to it. At the same time, there is a large opportunity to strengthen the capital markets in Sri Lanka if ADB takes on the role of first-mover, other investors may follow suit soon, backed by Sri Lankas promising economic outlook. This is because raising funds has been a significant challenge for Sri Lankan fund managers difficulty in fundraising has led to the failure of PE funds in the recent past. As a result, two approaches have emerged. The first type of fund managers is looking to raise funds domestically, since they have found attracting foreign investment without a significant investment track record difficult. The second is relying on DFIs as the primary source of investment. Bar none, fund managers in Sri Lanka would welcome any engagement from ADB, for which any investment in Sri Lanka presents a high risk-return profile. C. Most funds are sector and geography-agnostic; the few that are focused pose limits on only one of the two parameters, given the challenge of finding adequate deals. Within the sample of fund managers interviewed in India, most funds were sector and geography agnostic. Funds that were sector-focused did not restrict opportunities further by focusing on a specific region, and funds exclusively focused on low-income states did not restrict themselves to investing in only a few sectors. Only a few sectors such as agribusiness, healthcare, and energy offer sufficient number of opportunities for sector-focused funds. Opportunities in these sectors have started to make sense for commercial investors as well.
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The Sri Lankan capital market, following from the previous discussion does not offer sufficient depth across sectors, or geographies within the country. Even the few successful fund managers that focus on SMEs as a whole face significant challenges in deal flow. As a result, fund managers typically do not narrow down their focus to a few select sectors. In terms of developing a pipeline of opportunities for the short-medium term, fund managers are focusing in asset-light industries within the value chains of fast growing sectors. For instance, while tourism and hospitality will be fast growing sectors, fund managers would focus on businesses that provide tourism-related education or skills. Other fast growing sectors include shipping, logistics, infrastructure, agribusinesses, retail, and construction. On the other hand, geographic focus within Sri Lanka will severely restrict deal flow in an already small market.
FEEDBACK ON ADBS PROPOSED INVESTMENT APPROACH

For this study, fund managers were asked to provide feedback on ADBs proposed investment approach and requested to comment on sectors, geographies, instruments and deal sizes that should feature in ADBs investment strategy. The findings are presented below: A. Sectors: ADB should adopt a sector-agnostic approach, but should prioritize service oriented businesses and check for level of regulation. STRATEGY Key decision parameters used by fund managers suggest
education, healthcare, water, Figure 43: Sector prioritization analysis

Sector Fund managers score 1 Education Healthcare Financial services Agri. and agribusiness Water and sanitation Energy IT/ITES Hosp. and tourism Food and beverage Transp. and logistics Manufacturing Retail Pharmaceutical Textiles Forestry Real estate 2 3 3.1 3.1 2.7 2.7 2.6 2.4 2.3 2.3 2.3 2.2 2.0 2.0 2.0 1.9 1.8 1.6 4
and tourism should be priority sectors

Inherent ESG risk1 Potential for social impact2 Avg. deal size $ million (2005-10) 9.9 31.5 15.3 48.4 13.4 18.9 26.9 20.2 15.2 15.1 64.3 Total deal volume $ million (2005-10) 286 5,850 366 3,772 3,708 661 1,185 988 471 2,124 13,043
Regulatory risk score
Medium Medium Medium High Low Low Low Low Low Low Medium High High High Low Medium
Low Low Low High Medium Medium Low Medium Medium Medium Medium Low Medium Medium High Medium
1. Rating based on CDCs ESG toolkit for fund managers; 2. Composite index based on (a) level of employment of BOP by sector, and (b) share of wallet of BOP households. 20 SOURCE: Dalberg research and analysis; feedback from fund managers; India Private Equity Report, Grant Thornton, 2011
Fund managers use the following key parameters to prioritize and select sectors to invest in: (1) Level of regulation. In highly regulated environments such as India and Sri Lanka, there is often limited opportunity to escape regulatory risk. However, certain sectors are inherently more prone to regulatory risk. For example, education is covered under the concurrent list of subjects, and regulation often differs drastically from state to state. Other sectors are likely to benefit from the governments mandate to promote them. For instance, Indias Electricity Act of 2003, and its subsequent amendments have made it easier for foreign investors to invest in power generation.
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(2) Inherent ESG risk. Businesses in certain sectors such as mining and heavy manufacturing are more likely to cause greater adverse environmental and social impact. As a result, inherent Environmental, Social, Governance (ESG) risk as defined by several ESG measurement frameworks that DFIs such as the International Finance Corporation and DFIDs CDC Group have created is a parameter that is used to minimize risk. DFIs often impose adherence to ESG standards as a condition for their General Partners (GPs) (3) Capital intensive nature. At the level of ADBs proposed investment size (sub $10 million), funds typically do not invest in asset-heavy sectors, such as real estate, retail, power generation, and other large infrastructure. Sectors such as education and healthcare often described as soft infrastructure form the key focus of investors in this deal size range. Even within such sectors, though, funds typically pick service-oriented businesses that are less capital intensive, and can therefore utilize the equity investment to drive scale and growth. For instance, smaller fund managers would prefer opportunities in asset-light mobile health as opposed to large hospital chains. Once sectors have been selected using the above criteria, funds typically consider potential for impact as an investment criterion on a case-by-case basis. The table above aggregates methodology adopted by fund managers and other parameters to act as proxies for gaps in financing. The table includes fund managers ratings of investment attractiveness and the level of enabling regulatory environment, across sectors. It also highlights the inherent ESG risk across sectors as per CDCs ESG toolkit for fund managers. Finally, it lists average deal sizes and total deal volume over the last 5 years to indicate the capital intensive nature (the higher the average deal size, the more the number of capital intensive opportunities in the sector) and total deal volume (the higher the funds deployed by sector, the higher the likelihood of the gap being filled by the market already) respectively. From this analysis, key sectors to highlight are education, healthcare, and agriculture and agribusiness. Fund managers find opportunities in these sectors financially attractive and relatively low on ESG risk. Additionally, average deal sizes suggest that there could be several investment opportunities in ADBs prescribed deal size ($0.5-10 million), and there appears to still be room for significant additional funding. B. Geographies: Exposure to low-income states in India will likely increase impact, but should not be the sole focus of ADBs fund. Two fund managers in our sample Pragati Fund and SIDBI-VC have an exclusive focus on lowincome states in India, such as Bihar, Jharkhand, Uttar Pradesh, Madhya Pradesh, Chhattisgarh and Orissa. These states perform poorly across most socioeconomic parameters such as life expectancy, literacy, and of course, per capita income. Both Pragati and SIDBI claim that by virtue of their investees having significant operations in these regions, their portfolios will naturally have an impact on local livelihoods. For example, a BPO established in a low-income state would naturally increase otherwise restricted employment opportunities in the region. Alternatively, low-cost hospitals in rural areas are more likely to reach severely underserved populations than hospitals in urban areas. Further, Pragati finds entrepreneurs that are committed to developing its employees skills. As a result, the opportunity to improve livelihoods and quality of life through investments in businesses operating in such regions is large. Both Pragati and SIDBI-VC are relatively new funds that are exploring the market for deals. Whether there will be sufficient deal flow remains an open question. Businesses in low-income states are typically new to private equity investments, and often lack the corporate governance structures needed to absorb this type and quantity of capital. However, funds remain confident that finding the
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right opportunities will depend on employing a deal-sourcing team that is close to the ground, maintaining a sector agnostic approach and investing in fewer, but larger deals. As a result, funds operating in low income states will have higher management overheads. Given these challenges, all of the fund managers interviewed had recommended that ADB avoid following an investment strategy that exclusively focuses on low-income stats, given the risk of low deal flow. In Dalbergs view, the ADBs fund should have some focus on low-income regions, but not exclusively. The Bank may choose to achieve this focus by channelling investments through existing funds that focus on these regions. Beyond Pragati and SIDBI, several other fund managers have a strong footprint in these states, including Aavishkaar, which has approximately 55% of its capital deployed in the poorest states of India. This approach increases the flow of capital to regions where it is most required, without increasing competition for already scarce deals. C. Instruments and investment size: Beyond the missing middle in equity, the need for debt across the board is large; credit guarantees could help leverage ADBs funds to provide debt. Equity: 20 of the 21 funds interviewed have deployed 100% of their investments as equity. SIDBI-VC, a government run investment firm, is the only fund manager to also have an attached Non-Banking Financial Company (NBFC) that provides debt. As discussed earlier (see discussion on key insights on the PE market in India), fund managers have expressed the need for early growth equity, typically in the range of $2-10 million investments for small and growing businesses. Additionally, venture capital (sub $2 million) typically focuses on technology-based businesses, if not disruptive or breakthrough technology alone. There is room for additional players that finance early-stage inclusive businesses, products or services of which are not technology based. Such businesses often find securing debt a major challenge, and typically treat their equity investments as debt. In Sri Lanka, the $5-10 million investment size range offers fewer opportunities than the $1-5 million range. However, smaller deals are more difficult to manage given the limited exposure of early stage investment to PE investment. The focus on SMEs drives fund managers in Sri Lanka, therefore, to focus on the $5-10 million investment size range. Debt: 70% of the fund managers interviewed for this study claim that their investees find it difficult to access affordable debt primarily to finance working capital requirements. Though the need for cheaper debt is relevant to businesses of all sizes, Indias commercial banking infrastructure is particularly unsupportive of small businesses with limited assets or collateral to offer as security. This situation is exacerbated in markets like India and Sri Lanka, which have traditionally been high interest rate markets. The Indian government has set up a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) that offers loans of up to approximately $0.2 million without collateral or third party guarantee. However, the extent to which this facility has been utilized to date is unclear. Credit guarantees are important instruments to leverage the investors capital manifold and offer cheaper debt with limited collateral requirements. The availability of cheaper debt is likely to create a more enabling environment for private equity investors, who could then ensure that equity capital is utilized for the growth of the business. Technical assistance: Of the 8 fund managers operating in the SME space, 7 expressed a clear need for technical assistance on behalf of their investees, particularly for training and the purchase of equipment to mitigate environmental or social risk, within the broader ESG framework. Further, shared needs of investees such as a market primer for Africa, a market that several SME investees of
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these fund managers are strongly considering entry in, could increase opportunities for inclusive businesses. However, fund managers have also offered a caveat that promoters are often wary of technical assistance, in particular of its demands on management bandwidth. D. Investment decisions: Financial discipline is vital to equity investments, and expectations of lower returns should be used as an opportunity to leverage other financial instruments. 18 of the 21 fund managers interviewed by Dalberg claim they do not compromise on returns to achieve investment goals. For these funds, financial discipline is typically practiced by identifying the most financially attractive opportunities after defining an investment strategy. Given that the major source of funds for private equity fund managers is foreign commercial investors, funds with target Internal Rates of Return (IRR) that are lower than market returns often find fundraising a greater challenge that those targeting market returns and above. This trend of defining a focused investment strategy, and following it with financial discipline expecting market returns forms an emerging trend in investing in inclusive businesses in India. Of the 10 funds that shared their expected market returns with Dalberg, 8 target IRRs of 18% and above. The two funds that have lower targets are SIDBI-VC (marginally lower, at 14-16% gross), which is funded by DFID and is a government-run institution, and Acumen Fund, a non-profit entity. Fund managers cited the following as key factors when making an investment decision: a) b) c) d) e) potential for financial returns potential for scale and financial sustainability quality of management team potential for social impact availability of exit opportunities
In our view, an expectation of 10-12% net IRR, as prescribed by ADB, could open opportunities to leverage other financial instruments that deliver lower returns. The need for such instruments, especially debt or credit guarantees, is large. ADBs inclusive business fund could therefore target rates of 10-12% net IRR for the fund by deploying a mix of equity and debt, and thereby achieve both financial return and development outcomes.
FUND MANAGERS INTEREST IN MANAGING ADBS FUND

Fund managers recommend leveraging existing channels to reach inclusive businesses, as opposed to increasing competition in a space with limited deal flow. While it may be convenient for fund managers to recommend that ADB play the role of an additional LP as opposed to a competitor fund, the reasons for the same are compelling: (1) Lack of available talent. All fund managers interviewed reported that available talent is limited, and that finding the right fund manager is a critical step, in which most unsuccessful funds have failed. As existing fund managers are unlikely to forego relationships with, and commitments to, their current LPs, the market is further devoid of available talent to manage an ADB fund. (2) Need for strong management team on the ground. Deal sourcing is a common challenge quoted by fund managers. If ADBs inclusive business fund is focused on a particular geography, low-income states for instance, the fund would need a highly capable sourcing team that typically spends over 50% of their time in the field. (3) Expectations of limited deal flow and increased valuations. As mentioned above, in a market with limited deal flow, GPs follow similar if not largely the same deals in their
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pipelines. More competition by way of another General Partner would increase competition and likely drive up valuations. This would take away from ADBs intended catalytic effect. (4) Challenge of remaining sector-agnostic. It would be difficult to establish a narrow sector focus, e.g., healthcare or education, for the fund without a team with significant deal-making experience in the sector and a ready pipeline. To mitigate this risk, the fund should adopt a sector agnostic strategy, as mentioned in the previous section. However, remaining sector agnostic would delay the uptake of a new fund and makes managing technical assistance across investments a major challenge. Fund managers often provide their LPs with an option of co-investment in some deals, which could be an opportunity for ADB to gradually build up their presence in the direct investment route, should it choose that path. While some funds do provide the option to non-LPs as well, LPs have priority coinvestment rights. As a result, while only 4 of the 10 fund managers with inclusive businesses in their portfolios expressed an interest in managing ADBs fund, all of them expressed a strong interest in engaging ADB as an LP. Additionally, 4 fund managers claimed that they are already in talks with ADB, or that ADB has been an investor in one of their funds previously. Additionally, fund managers believe raising additional funds from foreign investors will not be a challenge, but Indian investors are likely to remain a small source of capital.
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7. DONOR MAPPING
The term donor can be ambiguous it could mean an agency primarily giving grants to non-profit organisations, or an impact investor looking for social and financial return. While the intended outcome of generating social impact is consistent across all definitions, for the purposes of this study, we use the term investor to refer to any impact-oriented investor who deploys funds through equity or debt (potentially in conjunction with technical assistance) instruments to for-profit businesses to generate social impact. The investors we have engaged in this study could be classified into three types: (1) Bilateral aid agencies. As part of their overseas development assistance (ODA) programs, several countries have set up offices within their embassies in India and Sri Lanka to primarily deploy grants and concessionary loans. Primary focus of these agencies is often two-fold, given that they operate under the close watch and direction of the government of the host country: (a) to build infrastructure in the foreign country to catalyze growth, and (b) to further bilateral cooperation between the countries through business linkages and technical assistance. Examples: KfW, USAID, DFID, JICA. (2) DFI-funded investors. Since bilateral and multilateral agencies are often not permitted to take equity positions in businesses in host countries, they route their equity investments through globally structured investment funds. 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. A few may also be able to make equity investments directly in businesses. Examples: IFC, CDC (DFID funded), Swedfund (SIDA funded), Norfund (NORAD funded). (3) Independent private funds. Domestic and foreign HNIs can also route their investments for social impact through funds and foundations. Foundations are typically grant-making agencies. Domestic HNIs typically operate through single-investor private equity funds or family offices. Examples: Gates Foundation, Premji Invest, Catamaran Ventures. The views contained in this section reflect the results of interviews with of 9 such investors, and findings from research on activities of various kinds of investors. The investors our team interviewed includes 3 bilateral aid agencies (KfW, DFID, SIDA), 3 DFI-funded investors (IFC Sri Lanka, CDC, Swedfund), and 3 independent private funds (Catamaran, SD Tata Trust, Omidyar Network).
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LANDSCAPE OF KEY INVESTORS IN INCLUSIVE BUSINESSES
Few bilateral aid agencies, DFI-funded investors, and independent private foundations supply debt or equity financing for inclusive businesses. Bilateral and multilateral aid agencies are not legally permitted to invest in businesses in India. Some bilateral agencies such as DFID, however, with guidance of the Government of India, have been allowed to deploy equity through government channels. An example of this is DFIDs recent participation in SIDBI-VCs new fund, Samriddh, which focuses exclusively on low-income states in India, in close alignment with DFIDs country strategy. Despite these efforts, the share of equity capital among bilateral donors portfolio of investments remains small. The majority of their investments are in the form of large-scale concessionary debt to the host government to help achieve its primary development goals. Often, these goals are large-scale infrastructure projects. For example, JICA has financed the Delhi Mass Rapid Transport System Project and KfW has financed the construction of new power plants, channelling its loans through government agencies such as Power Finance Corp., Indian Renewable Energy Development Agency (IREDA), Rural Electrification Co-operation (REC) and India Infrastructure Finance Company (IIFCL). DFI-funded investors, in contrast, route their investments through a number of private sector channels. They employ a combination of direct equity investments, direct loans, and investment in PE funds to support inclusive businesses. For example, Swedfund has taken both equity and debt positions in Artheon Battery Company, and invested in Baring Indias Fund II. Another example is that of the IFC in Sri Lanka, which, in addition to providing debt and equity directly to local firms, has also invested $20 million in LR Global, a SME-focused PE fund, in order to rapidly expand its dealmaking capacity in the post-conflict economy.
Figure 44: Illustrative approaches of major investors deploying equity/debt to IBs in India 7. Instruments and size of investment

Investment in funds Bilateral aid agency KfW JICA IFC DFI funded investor FMO Direct equity Direct debt
Target size of investment1 Medium-Large Large Medium Small, Large
DFID
CDC Premji Invest
Small, Large
Small, Large Medium Small-Medium Small
Independent family fund
Catamaran Omidyar BMGF
N/A
1. Small represents sub $10 million investment in end-beneficiary; Medium represents $10-50 million, and Large, $50 million+ SOURCE: Dalberg analysis
59 Finally, independent private foundations typically build up years of expertise in niche sectors by deploying primarily grants or returnable instruments. For instance, the SD Tata Trust has decades of
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experience in organizing agricultural communities, and the Gates Foundation in agricultural extension and healthcare. Private equity funds with significant investment from HNIs, such as Omidyar Network and Catamaran Ventures, typically operate with a dual objective to achieve both social and financial return. Such investors primarily deploy equity capital. Majority of bilateral funds are directed through government channels to mainly large-scale infrastructure projects, while more independent investors follow a sector agnostic approach. As mentioned earlier, bilateral aid agencies work closely with host governments and aim to help them achieve their primary development objectives, which often revolve around developing new infrastructure. As a result, such organisations are by default restricted to operate in a narrow space of sectors constituting heavy infrastructure such as power generation. Entities more detached from government operations, such as DFI-funded investors and private funds and foundations can invest smaller amounts through other financial instruments. Among the listed organisations in the figure below, the level of dependence on the host government largely decreases from top to down. Not surprisingly, this correlates with the number of sectors the organization has exposure to. The more independent investors such as DFI-funded investors and independent private investors typically adopt a sector-agnostic approach.
Figure 45: ExposureConcentration & Gaps 7. Sectors of major investors deploying equity/debt to priority sectors in South Asia

Agriculture KfW Bilateral aid agency JICA FMO DFID IFC DFI funded investor1 CDC Swedfund Norfund Premji Invest Independent family fund Catamaran BFSI Energy & Envt Education Healthcare Water & Sanitation
Infra.
Omidyar
BMGF
1. CDC operates an offshore fund of funds, several GPs of which have large exposure to India/Sri Lanka ; FMO has recently invested in an offshore fund focused on inclusive businesses; IFC is an independent onshore investor; DFID has recently invested in a domestic onshore fund SOURCE: Dalberg analysis
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BFSI and energy have attracted significant financing from various investors; agriculture, healthcare, water and sanitation are likely to receive increasing funding, especially from private foundations. A deeper look into sectors other than large-scale infrastructure reveals that some sectors have received interest from all types of investors. Banking and financial services, owing to the widespread interest in microfinance, and renewable energy / energy efficiency have seen investments from various types of investors.
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Typically, bilateral aid that is not directed towards heavy infrastructure goes towards sectors that do not attract significant private investment, e.g., water and sanitation. In contrast, independent private investors weigh financial returns higher, and focus on sectors that offer attractive investment opportunities from the perspective of both financial and social returns. Beyond energy and microfinance, education has seen significant interest from private investors. Some sectors have traditionally been recipients of grants and concessional debt from bilateral aid agencies, i.e., agriculture, healthcare, and water and sanitation. These sectors are gathering increasing interest and funding from private donors. This could imply that these sectors present increasingly attractive opportunities from a financial return perspective in the medium term.
FEEDBACK ON ADBS PROPOSED INVESTMENT STRATEGY

A. Sectors: Investors believe that a sector agnostic approach should mitigate deal flow risk. Most investors deploying equity directly to inclusive businesses have expressed that deal flow is a significant risk, much in line with impact investors perception. Investors believe that ecosystems catalyzing growth in some sectors are more conducive to inclusive business growth than those in others. For example, government agencies such as NSDC increase the supply of credit for the skills development sector, while water and sanitation doesnt benefit from similar enabling institutions. Investors believe that a sector agnostic approach, with balanced exposure to both types of sectors, would mitigate both deal flow and overexposure risk. In line with criteria used by fund managers for sector prioritization, smaller investors prioritize exposure to sectors based on the level of capital intensity. This effectively rules out investments in sectors such as microfinance. According to one private investor, it takes a $20 million investment at minimum, on average, to stabilize a microfinance business. Similarly, asset-heavy businesses like hospital chains and power generation are left open for commercial investors to promote. Given the variance in types of investors that we have spoken to, it is difficult to identify trends that would inform sector exposure across the sample. However, tourism, post-harvest agro-processing, education and healthcare are priority sectors for a number of investors. B. Geographies: Most impact investors are increasingly focusing on low-income states in India; ADB could increase capacity of new funds, which have gathered strong investor interest. An increasing number of investors such as IFC and DFID (and, as a result, CDC) are focusing exclusively on low-income states in India. This is primarily driven by direction (and at times backlash on amount of returns generated) from their shareholders taxpayers in their home countries to make investments beyond the purview of commercial investors. As a result, DFID is redirecting its equity capital to funds such as Samriddh, an LIS-focused SME PE fund managed by SIDBI Venture Capital IFC and CDC are LPs in Pragati, another LIS-focused SME PE fund. C. Instrument and investment size: Indian and foreign equity investors have identified gaps in the early-stage and early growth-stage financing markets; supply of debt is restricted on account of regulation, and ADB could fill the gap through credit guarantee schemes. Investors reiterate that the real gaps in the equity market are in early to early-growth stages of financing for small and medium inclusive businesses. For example, KfW has taken an LP position in Aavishkaar, which is deploying money in early stage businesses. Investors do not perceive there to be any major gaps in equity or debt financing for large-scale IBs or IB initiatives of large firms. Feedback from sample investors on the large need for debt for SMEs resonates with that from fund managers. Currently, few working solutions exist for investors to deploy debt to SMEs. Notably, JICA
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and KfW have engaged SIDBI (as per Government of India direction) to deploy debt to SMEs in the renewable energy and energy efficiency sector. One potential solution, suggested by several investors could be in the form of credit guarantees. NABARD and SIDBI are currently engaging several investors to set up focused credit guarantees to businesses that can offer limited collateral to secure debt. Credit guarantee schemes offer significant opportunity to leverage an investors funds the ratio of invested capital to disbursed debt in typical credit guarantee scheme is 1:10, which could be further improved with co-investment from other donors. Further, the economics of credit guarantees look promising. Typical administration of fees of 1-2% of disbursed debt has been known to largely cover the cost of guaranteeing full recovery of non-performing loans. A successful credit guarantee scheme would help catalyze the banking system and create a new asset class.
INTEREST IN COLLABORATING WITH ADB ON PROPOSED FUND

Investors have expressed strong early interest in collaborating with ADB, but encourage ADB to complement existing efforts of investors. At this early stage of development of the fund, with several critical decisions around investment strategy and operationalisation approach pending, investors are hesitant in committing to a partnership, or discussing terms of a potential partnership in detail. However, since ADBs overall investment philosophy of return-oriented investment in inclusive businesses is largely aligned with strategies of other DFIs, all bilateral aid agencies and DFI-funded investors have expressed a strong interest in collaborating with ADB. Beyond adding to the overall resource pool of the fund, some specific areas where collaboration could be fruitful are technical assistance and sharing lessons learned. Fund managers expectation of limited interest from domestic investors was reinforced from our conversations. Domestic investors who are largely grant-oriented are more interested in lending their expertise to ADB in specific areas of common interest, e.g., SD Tata Trust has decades of experience dealing with producer companies and cooperatives, and could help ADB in generating an initial deal pipeline, or in providing technical assistance to ADBs agribusiness investments. Strong interest in collaboration from HNI-owned private funds, in particular Omidyar Network and Catamaran Ventures was particularly noted.
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BIBLIOGRAPHY
Ahluwalia, M. Economic Reforms in India since 1991: Has Gradualism Worked?, 2011. Bain & Company. India Private Equity Report, 2011. Central Bank of Sri Lanka. Annual Report, 2011. Central Bank of Sri Lanka. Economic and social statistics of Sri Lanka, 2011. Central Statistical Organization, Government of India. Millennium development goals India country report 2011, 2011. Chaudhuri, S., Gupta, N. Levels of living and poverty patterns: a district-wise analysis for India, Februrary 2009. Department of Census and Statistics, Sri Lanka. National Accounts Annual Report, 2011. DISE. State elementary education report card 2010-11, 2011. Economic Advisory Council to the Prime Minister of India. Economic Outlook for 2010-11, July 2010. Export Import Bank of India. Annual report 2011 2012, March 2012. Foundation for MSME Clusters (FMC), clusters in India, 2010. Goldman Sachs. DreamingWith BRICs: The Path to 2050, October 2003. Grant Thornton. A Force for Growth: Global Private Equity Report, 2011. Grant Thornton. The Fourth Wheel: Private Equity in the Indian Corporate Landscape, 2011. Grant Thornton. India PE Report 2011, 2011. Groh, A., Liechtenstein, H., Lieser, K. "The Global Venture Capital and Private Equity Attractiveness Index, 2011. IFAD. Republic of India: Country strategic opportunities programme, 2011. IFC. Doing Business Economy profile: India, 2012. IFC. Doing Business Economy profile: Sri Lanka, 2012. ILO. General employment trends 2012. IMF. The Demographic Dividend: Evidence from the Indian States, 2011. India Human Development Survey. Human development in India January 2010. J.P. Morgan. Impact Investments: An emerging asset class, November 2010. KPMG. Private equity investing in India, 2007. McKinsey Global Institute, The Bird of Gold: The Rise of Indias Consumer Market, May 2007. Ministry of Finance and Planning. Annual Report 2011, 2011 Ministry of Labour & Employment, Government of India. Report on Employment & Unemployment Survey, 2010.
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Ministry of Micro, Small & Medium Enterprises, Government of India. Fourth all India census of Micro, small & medium enterprises. Monitor Group. Emerging Markets, Emerging Models, march 2009. Nilekani, N. Indias Demographic Moment, 2009. NSSO. Key Indicators of Household Consumer Expenditure in India - 2009-2010, October 2011. Planning Commission, Government of India. Faster, sustainable and more inclusive growth: An approach to twelfth five year plan, October 2011. PricewaterhouseCoopers. The World in 2050, 2011. Reserve Bank of India. Macroeconomic Indicators 2011, 2011. Sri Lanka Tourism Development Authority. Annual Report, 2011. Steering Committee on Urbanization, Planning Commission. Report of the working group on urban poverty, slums, and service delivery system, October 2011. The World Bank. Perspectives on poverty in India, 2011. World Economic Forum. The Global Competitiveness Report, 2011. WRI and IFC. The Next 4 Billion, 2005. UNICEF & WHO. Progress on Drinking Water & Sanitation 2012 update, 2012. UNIDO. Cluster development and BDS promotion: UNIDOs experience in india, March 2000. UNDP. Human development report 2011, 2011.
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ENDNOTES
As defined by ADB, the Base of the Pyramid (BOP) is defined as individuals earning $3-$4 per day, per capita, or less. Inclusive businesses are enterprises that engage the BOP in their core business operations as either: consumers, distributors, suppliers or employees 2 th Indias 2011 HDI rank was 134th of187 countries and MPI for the same year stood at 0.283 putting it at 76 of 209 countries in 2011 3 Grant Thornton India PE Report 2011 4 Environmental, social and governance 5 CDC and IFC have invested in Pragati, a low-income-states focused SME fund; IFC has invested in LR Global, an SME-focused fund in Sri Lanka 6 Factsheet on Foreign Direct Investment, Department of Industrial Policy and Promotion, Ministry of Commerce & industry, Government of India 7 Ernst & Youngs 2012 Attractiveness Survey 8 IMF, World Economic Outlook, April 2012 9 World Bank, PWC Report and Dalberg analysis 10 CIA World Factbook, Planning Commission of India 11 Planning Commission, 2011 12 Exim Bank of India report 13 IMF, World Economic Outlook, April 2012 14 India Human Development Survey 2010 15 World Bank database 2012 16 OECD Factbook, 2011-12 17 The Demographic Dividend: Evidence from Indian States, IMF, 2011 18 Report on Employment and Unemployment, Labour Bureau of India, 2010 19 The Financial Times 20 Indias Demographic Moment, Nandan Nilekani, 2009 21 The nine states include Uttar Pradesh, Rajasthan, Madhya Pradesh, Chhattisgarh, Orissa, Jharkhand, Bihar, Assam & West Bengal 22 Report on Employment & Unemployment Survey (2009-2010); Labour Bureau, Ministry of Labour and Employment, Government of India 23 The remaining percentage is classified as not reported 24 Planning Commission - 2011, Government of India 25 Census of India 26 Government of India, Committee on Slum Statistics/ Census 2011 27 Key Indicators of Household Consumer Expenditure in India - 2009-2010, NSSO October 2011 28 McKinsey Global Institute report, The Bird of Gold: The Rise of Indias Consumer Market 29 The Next 4 Billion, WRI and IFC, 2005 30 Asian Development Bank 31 The Global Competitiveness Report, World Economic Forum, 2011-12 32 United Nations Population Divisions 33 PFCE at current prices (2011-2012); Central Statistics Office, May, 2012 34 Planning Commission of India, April, 2012 35 Indias financial year runs from April to March 36 IT industry backs Murthy, Premji on policy paralysis article in the Times of India, 14 June, 2012; Business Standard, 13 June, 2012; Govt. can policy paralysis with more reforms experts article in The Mint & The Wall Street Journal, 27 Nov, 2011
1
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IMF Press Release, June, 2012 Ministry of Finance and Planning, Annual Report 2011 39 Lanka Business Online, July, 2010 40 World Economic Outlook Database 41 Department of Census and Statistics, National Accounts Annual Report 2011 42 IMF, June, 2012 43 Department of Census and Statistics, National Accounts Annual Report 2011 44 Asian Development Bank Outlook for Sri Lanka Forecast 2012 45 Textiles also includes wearing apparel and leather 46 Department of Census and Statistics, Sri Lanka, National Accounts Annual report, 2011 47 Central Bank of Sri Lanka, Annual Report, 2011 48 UNCTAD Data, 2012 49 Central Bank of Sri Lanka, Press Release, June, 2012 50 Central Bank of Sri Lanka, Annual Reports, multiple years 51 Ministry of Finance and Planning, Annual Report 2011 52 Human Development Report 2011, country statistics 53 UNDP Data Explorer 54 OPHI Country briefing, December 2011 55 World Bank Data 56 Classification as per World Bank 57 Statistics Branch of the Ministry of Education and Higher Education, School Census 2006 58 WHO & UNICEF Joint Monitoring Programme (JMP) for Water Supply and Sanitation 59 United Nations, Department of Economic and Social Affairs. 60 Working age refers to ages between 15 - 64 61 UN data 62 Asian Times Online 63 Demographic and Health Survey, 2006 64 Department of Census and Statistics, Labour Force Survey Annual Report 2010 65 UNESCAP Data Explorer 66 Sri Lanka Tourism Development Authority, Annual Report 2011 67 Central Bank of Sri Lanka, Press Release: External Sector Performance April 2012 68 Central Bank of Sri Lanka , Annual Report 2011 69 Dalberg estimates based on Household Income Expenditure Survey 2009-10, Department of Census and Statistics, Sri Lanka 70 Ministry of Finance and Planning, Annual Report 2011 71 Lanka Business Online, March, 2011 72 Asian Tribune, November, 2010 73 IMF Press Release, June, 2012 74 These survey results are only from Indian companies, due to limited responses from Sri Lankan companies 75 Indias lowest income states are Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, and Rajasthan 76 Direct quotation from Dalberg interview with Aitken Spences Hotel Division, July 9 2012 77 Team members is the official name of MAS factory workers 78 Direct quotation from Dalberg interview with Nestle Lanka, July 11 2012 79 Such as the Rural Technology and Business Incubator, associated with the Indian Institute of Technology in Madras 80 World Bank data 81 The Fourth Wheel: Private Equity in the Indian Corporate Landscape, Grant Thornton, 2011
38
37
67
82 83
Dalberg estimate based on per capita expenditure on health in 2010, $54, from World Bank data Feedback from investors in the sector 84 As reported by fund managers Dalberg has interacted with 85 A Force for Growth: Global Private Equity Report, Grant Thornton, 2011 86 Bain India Private Equity Report, 2011 87 CIA Factbook, 2009 estimate
68

DRAFT REPORT: ANNEXES
JULY 31, 2012
STUDY
Contents
1 2 3 4 5 6 7 8 Inclusive businesses surveyed.......................................................................................................... 2 List of fund managers interviewed .................................................................................................. 6 List of donors interviewed ............................................................................................................... 7 Case studies of inclusive businesses ................................................................................................ 8 Deep dives on potential fund manager partners for ADB ............................................................. 24 Economic factsheet on low-income states .................................................................................... 27 Deep dives on priority sectors ....................................................................................................... 32 Government schemes relevant to ADBs fund............................................................................. 344
1 INCLUSIVE BUSINESSES SURVEYED

Company name
Apollo Hospitals (Reach division) 3S Shramik - Div. Saraplast Aarusha Homes Pvt. Ltd. Artisans Micro Finance Babajob.com Bodhicrew Services Pvt. Ltd. Carzcare Champion Agro Limited d.light Design Inc. Desicrew Solutions P Ltd., Desta Drishtee Development and Communication Ltd Edubridge Learning Pvt. Ltd. Ekgaon Eko India Financial Services Eram Scientific Solutions Excellent Renewable Pvt. Ltd. Does not wish to disclose Forus Health Pvt. Ltd. G. V. Meditech Ltd.
Sector
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Healthcare Water & Sanitation Real estate Retail Telecom, BPO & IT Education Retail Agri-business and agriculture Energy (incl. renewable) Telecom, BPO & IT Retail Retail Education Telecom, BPO & IT Telecom, BPO & IT Water and sanitation Renewable Energy BFSI Healthcare (nonpharma) Healthcare (nonpharma) Agri-business and agriculture (incl. seeds)
2
21
Global Easy Water Products
Company name
Sector


22 23 24 25 26 27 28
Glocal Healthcare Systems Gram Tarang Employability Training Services Pvt. Ltd. Greenlight Planet Healthpoint Services India Hippocampus Learning Centres Hotel Saravana Bhavan Industree Crafts Pvt Ltd
Healthcare (nonpharma) Education Energy (incl. renewable) Healthcare (nonpharma) Education Hospitality and leisure/tourism Textiles, garments and handicrafts Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Textiles, garments and handicrafts Healthcare (nonpharma) Agri-business and agriculture (incl. seeds) Agri-business and agriculture (incl. seeds) Real estate and construction (incl. housing) Telecom, BPO & IT Healthcare (nonpharma) Agri-business and agriculture (incl.
3
29
InI Farms Pvt. Ltd.
31
ITC Limited, Agri Business Division
32
Jain Irrigation Systems
33 34
Jaipur Rugs Company Pvt. Jayashree Industries Jk Paper Ltd, Plantation activities, Farm Forestry
35
36
Kanan Devan Hills Plantations
37
Lafarge India
38 39 40
Logistimo India Medplus Health Milk Mantra Dairy Pvt Ltd
Company name
Sector
seeds) 41 Mobile Works Telecom, BPO & IT Telecom, BPO & IT Water and sanitation Education Education Energy (incl. renewable) Textiles, garments and handicrafts Energy (incl. renewable) Telecom, BPO & IT Agri-business and agriculture (incl. seeds) Energy (incl. renewable) Banking & financial services (incl. insurance and microfinance) Agri-business and agriculture (incl. seeds) Banking & financial services (incl. insurance and microfinance) Energy (incl. renewable) Telecom, BPO & IT
42
Multi Commodity Exchange of India, Gramin Suvidha Kendra Piramal Water Pvt. Ltd. (brand name: Sarvajal) Projects and skill development department Prolific Systems & Technologies Pvt Ltd Promethean Power Systems Rangsutra Rural Off-grid market RuralShores Business Services Pvt. Ltd. SAVE - Saline Area Vitalization Enterprise Limited SELCO Solar Light Private Limited
43 44 45 46 47 48 49
50
51
52
Share
53
Shree kamdhenu electronics
54
Shriram transport finance company limited
55 56
Simpa Networks Source for Change, Piramal Foundation
Company name
Sector
57
Star Agri Swabhimaan Distribution Services Pvt Ltd Tata Swach
Agri-business and agriculture (incl. seeds) Retail Water and sanitation Agri-business and agriculture (incl. seeds) Healthcare (nonpharma) Telecom, BPO & IT Education Water and sanitation Water and sanitation Water and sanitation Real estate and construction (incl. housing) Agri-business and agriculture (incl. seeds) Healthcare (nonpharma)
58 59
60
Under the mango tree
61 62 63 64 65 66
Vaatsalya Healthcare Vortex Engineering V-Shesh Access Services Private Limited WaterHealth India WaterHealth International Inc. Waterlife India Pvt Ltd
67
Wonder Grass initiative
68
Zameen Organic
69
Ziqitza Health Care Limited
SOURCE: Results of survey conducted by Dalberg
2 LIST OF FUND MANAGERS INTERVIEWED

Fund manager 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Aavishkaar Actis Acumen Fund Aureos Capital Interviewee Vineet Rai Ritu Kumar (Has now left) Nissanka Weerasekara, Balaji Srinivas Focus on 1 IB? Yes No Yes No (SME) Yes Yes Yes Yes
2
Sector focus Agnostic Agnostic Agnostic Agnostic Agnostic Agnostic Agnostic Healthcare Agnostic IT/ITES Agnostic Agnostic Agnostic Energy Agnostic Agri. Agnostic Agri. Agnostic Agnostic Agnostic
Geographic focus India EM EM EM India India EM India EM India India Sri Lanka India India LIS India LIS India India India Sri Lanka
Stage of investment Early Growth Early Growth Early Growth Early Growth Growth Early Early Growth Growth Growth Growth Growth Early Growth Early Growth Growth
Bamboo Finance Eric Berkowitz Elevar Equity Gray Ghost IIP Imprint Capital Indo-US Lok Capital LR Global NEA Nereus Capital Pragati Rabo Equity Samriddh Fund SEAF Song Advisors Zephyr To be named Sandeep Farias Marc Clayton Hand Varun Sahni Laura Spiekermann Rajesh Raju Vishal Mehta Chanaka Wickramasuriya Vamesh Chovatia Jonathan Winer Narayan Shadagopan Rajesh Srivastava Ananta P. Sarma Hemendra Mathur Has now left Mukul Gulati Indika Hettiarachchi
Yes No Yes No No No No (SME) Yes No (SME) Yes Yes No (SME) No
SOURCE: Results of interviews conducted by Dalberg
Dalbergs assessment of overlap between fund managers current portfolio and ADBs target definition of inclusive businesses, i.e., any business that engages the poor as consumer, supplier, distributor, or employee; All fund managers mentioned in the list have some exposure to inclusive businesses, but ones marked No have a more indirect approach to targeting IBs. 2 Interview confirmed, to be conducted
6
3 LIST OF DONORS INTERVIEWED

Donor 1 2 3 4 5 6 7 8 9 KfW Omidyar Network DFID Catamaran Ventures SIDA SD Tata Trust Swedfund IFC Sri Lanka CDC Group NABARD SIDBI Contact point Rukmini Parthasarathy, Marcus Baer, Florian Arneth Ashu Sikri Bala Balasubramanian Arjun Narayan Christina Wedekull Sanjiv Phansalkar A. K. Nehru Ehsanul Azim Guy Alexander V. Tagat K. G. Alai
4 CASE STUDIES OF INCLUSIVE BUSINESSES

Our team has interviewed 15 businesses that would naturally fit with ADBs mandate of investing in inclusive businesses. These businesses have delivered or are in a strong position to deliver both financial and social return. These case studies present an overview of the business and some key data points around its finances (when disclosed) and impact achieved till date. More importantly, each case study highlights the salient features of a companys model of engaging the poor, assesses its potential to create sustainable impact, and outlines its key challenges to scaling. The case study also reflects on the companys need for financing, and its preference for a particular financial instrument, if any. Our sample of case studies covers a breadth of sectors, geographies, and modes of engagement, and should present a collection of insights that could serve as a head start to developing a pipeline of potential inclusive business investments in India and Sri Lanka.
Inclusive Business Case Study Aarusha Homes

Affordable housing for migrants and low-income populations Sector: Housing Location of operations: Urban centers in South India Year of establishment: 2007 Turnover: $650,000 Extent of BOP engagement: 700 BOP consumers; 95 BOP employees Background on Business Aarusha Homes was started to address the lack of affordable housing options in Indias urban areas. Each year, this problem affects millions of low-income migrants into the countrys major cities, often forcing them to live in unsafe and unsanitary conditions. Aarusha provides low-cost accommodation housing to these migrants and low-income individuals in Hyderabad and Bangalore. Aarusha charges rents starting at INR 2,000 ($40) per person per month. Mode of BOP Engagement BOP as Consumers Aarushas primary mode of engagement with the BOP is as consumers of its affordable housing services. The majority of Aarushas consumers are employees of entry point jobs, such as security guards and facilities management staff. On average, a typical security guard earns around Rs 30 ($0.60) per hour. BOP as Employees Aarusha Homes employs over 90 BOP individuals to work in its housing facilities. A portion of these employees also live in Aarushas facilities, so they are consumers of this service as well. Impact to date and future growth plans Aarusha has served over 700 consumers to date, and employs over 90 BOP individuals. With operations in two cities currently, Aarusha plans to begin operations in a third city (Chennai) this year. In addition to providing rooms, the company also plans to add low-cost apartments to its portfolio of products. This would capture some of the more upmarket value found in housing for newlywed couples or young families. Challenges A key challenge of working in the housing sector in India is the occurrence of corruption. Property developers often prefer for negotiations to happen off the books and for transactions to be made in cash. As Aarusha has refused from inception to work under these circumstances, there is a limited pool of professional developers with whom it could potentially partner. Aarusha has also faced similar problems with state governments. The company had initially partnered with the government, to provide housing to low-income public workers. They had to eventually stop the partnership when the government failed to pay them for this service. Aarusha is still communicating with state officials to receive its due payment, but as they refuse to pay a bribe, this process is consuming much of the teams efforts. Source of financing to date and future needs Aarusha was started with equity from its promoters, and later received $40,000 in equity financing from Elevar Equity. To finance its working capital needs, however, Aarusha is looking to raise debt, preferably at concessionary rates.
Inclusive Business Case Study AISECT

Pan-India network of skills training centers for rural youth Sector: Education (IT and vocational skills training) Location of operations: Pan-India Year of establishment: 19853 Turnover: Not disclosed Extent of BOP engagement: 10,000 BOP micro-entrepreneurs; 1,000,000 BOP students Background on Business AISECT is primarily engaged in the areas of skill development and training. Having developed the course content, AISECT operates a franchise model and leverages partnerships with universities, such as the Indira Gandhi National Open University (IGNOU), as well as central and state government skill-building organizations, such as the National Skill Development Corporation (NSDC). AISECT trains its trainers and presents degrees and certificates to students upon completion of their course. Mode of BOP Engagement BOP as Consumers ASIECTs primary consumers are BOP students from semi-rural and rural areas. In fact, 6,000 of its 10,000 centers are located in villages. Interestingly, despite its franchise model, AISECT has adopted a flexible fee structure that takes agriculture seasons into account. Students may take a course at one of AISECTs centers and pay the fee when their family has earned money from selling their harvested crop. BOP as Distributors AISECT has franchised its model and standardized processes. In addition to training its vast network of trainers, an internal team of 60-70 people conducts regular quality checks. The franchisee is responsible for marketing efforts, and retains 70-80% of the revenue generated. Impact to date and future growth plans AISECT currently has 10,000 centers across 27 states and 3 union territories. The National Skill Development Corporation (NSDC) is aiming to reach 500 million individuals by 2022. As their largest partner, AISECT plans to grow rapidly through this partnership. Furthermore, the company plans to enter the higher education rural BPO sectors. Challenges Key challenges faced by AISECT include the lack of infrastructure in the states in which it operates, and an overall shortage of adequately skilled trainers. Source of financing to date and future needs AISECTs major partner to date has been the NSDC, which has supported the company with soft loans (6-8% interest rates) to expand into other states, to meet staffing needs, and to develop content and improve processes. AISECT would consider accepting equity investments, however its current priorities are obtaining new partners and expanding to new geographies.
AISECT started as an NGO in 1985.

10
Inclusive Business Case Study Aitken Spence Hotels

Chain of inclusive hotels in India and Sri Lanka Sector: Tourism, Hospitality Location of operations: Pan-Asia Year of establishment: 2004 Turnover: $2 million Extent of BOP engagement: 7.2 million BOP consumers Background on Business A subsidiary of the Sri Lankan-based Aitken Spence conglomerate, Aitken Spence Hotels currently operates a chain of 24 hotels and resorts in Sri Lanka, the Maldives, India and Oman. Mode of BOP Engagement BOP as Suppliers Though it may be easier to supply inputs from larger suppliers, Aitken Spence purposefully partners with local farmers to supply its resorts with agricultural produce. In order to ensure certain quality standards of its inputs, Aitken Spence trains local farmers on optimal management and preservation of their produce. In addition, it provides them with the tools they may require, such as seeds, fertilizer and crates. BOP as Employees Aitken Spence directly employs more than 2,000 local BOP individuals to work in its resorts as facilities management staff, kitchen staff, and tour guides. The company absorbs local high school graduates into its hotels, guaranteeing them a career path and steady income. Impact to date and future growth plans Though it may be easier to engage with more established and standardized suppliers of agricultural produce, energy and other inputs that are crucial to the operation of hotels, Aitken Spence has purposefully chosen to engage the BOP communities in its areas of operation, thereby giving them the opportunity to benefit as much as possible from the resorts presence. Challenges Like many other businesses in Sri Lanka, Aiken Spence is currently challenged with the high costs of capital, preventing it from growing faster. Though foreign investors have expressed an interest in the company, they prefer investment timelines that are not long enough to allow for returns (5 years as opposed to the 8-10 years required to experience returns on investment). Furthermore, the Sri Lankan government has not been investing adequately in the infrastructure needed to accommodate the growing tourism industry. Source of financing to date and future needs As it is a subsidiary of one of Sri Lankas largest conglomerates, Aitken Spence has benefited from substantial internal reserves, and the ability to leverage its reputation to form joint ventures with international partners. The current cost of capital, however, is hindering Aitken Spences expansion plans, for which it would seek loans at concessionary rates (6-8%). Given that a typical 500-room hotel costs approximately $40 million to construct, Aitken Spence would look to receive investments between $10 to $20 million.
11
Inclusive Business Case Study Apollo REACH

Chain of super-specialty hospitals in rural and semi-urban areas Sector: Healthcare Location of operations: Pan-India Year of establishment: 2008 Turnover: $2.4 million Extent of BOP engagement: 5,000+ BOP customers
Company logo
Background on Business Apollo Hospitals Group has owned and managed a network of hospitals and medical facilities in India since 1979. In 2008, the Group launched a network of smaller satellite facilities, called Apollo REACH Hospitals. Operating in underserved regions and offering super-specialty medical care at affordable rates to people living at the BOP, Apollo REACH now manages 3 hospitals in rural and semi-urban areas. Mode of BOP Engagement BOP as Consumers Apollo REACH, like most healthcare organisations, serves the BOP as consumers, increasing their access to healthcare services. These consumers currently have to travel to cities for specialty healthcare. Due to this additional step in the value chain, many patients remain untreated in the villages. Apollo REACH attempts to bridge this gap. Each hospital houses 150-200 beds, 40 intensive care unit beds, and 5 operation theatres. Each hospital also offers super-specialty medical services (e.g., cardiology, orthopedics, neurosurgery, etc). Impact to date and future growth plans Apollo REACH has developed a model for establishing hospitals in rural or semi-urban areas that is significantly more cost efficient than traditional urban hospitals. As a result, REACH hospitals can charge 20-30% less than other major hospitals. One of the biggest drivers of Apollo REACHs geographic expansion is additionality, since they would not enter areas where there are other similar hospitals, or would offer services that other hospitals do not. Apollo REACH plans to expand to 25 facilities in the next 2-3 years. Apollo REACH plans to grow its revenues by over 20% annually. By leveraging a hub-and-spoke model, Apollo REACH has effectively countered the challenge of limited talent in rural areas. Apollos plans for geographic expansion will be centered around their established hospitals in major cities, to build in the flexibility of temporarily shifting doctors from the cities to the villages on a needs basis. Challenges Scalability is Apollo REACHs major challenge. At the facility level, after reaching the saturation point in terms of revenues, an increase infrastructure is required, i.e., increasing the number of beds. At the chain or network level, the challenges are similar to those of other businesses lack of skilled personnel, high CAPEX, and heavy burden of expensive debt. Source of financing to date and future needs Till date, Apollo REACH has been funded by equity from Apollo Hospitals and IFC. Each hospital costs approximately $5 million to establish, implying that the initiative will need close to $75 million in investment in the next 3 years. Of the total pool of investments coming in, Apollo REACH would prefer 60% as debt, 25% as grants, and the remainder as soft loans with a 15 year tenor.
12
Inclusive Business Case Study CIC Agri

Seed-to-shelf agricultural production company Sector: Agriculture Location of operations: Pan-Sri Lanka Year of establishment: 1993 Turnover: $67 million Extent of BOP engagement: Over 20,000 BOP farmers Background on Business A subsidiary of one of Sri Lankas largest conglomerates, CIC Holdings, CIC Agri is a large agricultural production company. It contributes to 6% of Sri Lankas overall agriculture-related GDP. Mode of BOP Engagement BOP as Suppliers CIC Agri engages over 20,000 BOP farmers as suppliers of several agricultural products. These are smallholder farmers, with less than 1 hectare of land. CIC Agri provides these suppliers with agricultural inputs (including seeds and fertilizer), and then buys the harvested product back from the farmers at fair prices. BOP as Employees CIC Agri directly employs approximately 2,500 BOP individuals in its factories, processing units and farms. Furthermore, it indirectly employs over 2,000 contracted employees. BOP as Consumers CIC Agris farmers are also consumers of its consultancy services, through which it advises its farmers on how to optimize their yields and productivity. Impact to date and future growth plans CIC Agri directly impacts the lives of over 20,000 farmers, by guaranteeing them the highest possible income for their crop. Farmers benefit from a guaranteed, fair income, and extension services on how to improve the quality of their crop. Currently contributing to 6% of Sri Lankas total agricultural production, CIC Agris impact on its supplier farmers is very significant and sustainable. It plans to grow by 20% every year. Challenges Like many other businesses in Sri Lanka, CIC Agri is currently facing difficulties in obtaining affordable financing. Furthermore, Sri Lankan agriculture faces a productivity problem. The productivity of individual farmers is not optimal, and improving this requires a significant resources, to both educate farmers in optimal farm management, and to invest in the necessary technology (such as machinery, fertilizer, seeds, etc). Source of financing to date and future needs As a private subsidiary of a public holding company, CIC Agri has grown to date with its parent companys internal reserves, loans from local banks and an equity investment by an Indian company Due to its relationship with its parent company, CIC Agri would consider an equity investment with caution. It would consider, however, commercial private equity investments from foreign investors.
13
Inclusive Business Case Study DesiCrew Solutions

Rural Business Process Outsourcing (BPOs) Sector: Business Process Outsourcing (BPO), IT Location of operations: Pan-India Year of establishment: 2007 Turnover: $700,000 Extent of BOP engagement: 200 BOP employees Background on Business DesiCrew Solutions was started to bring white collar jobs to rural youth in India. As a Business Process Outsourcing (BPO) company with 4 centers across Karnataka and Tamil Nadu, DesiCrew creates attractive rural employment opportunities, thereby reducing the migration of educated youth to urban areas. DesiCrews headquarter office receives orders from its corporate clients, which are then assigned to one its 4 rural BPO centers, where the service is delivered. Desicrews clients include domestic and international clients. Their early supporters include Infosys and HDFC Life Insurance. Mode of BOP Engagement BOP as Employees DesiCrews primary mode of engaging the BOP is as employees in its BPO centers. These employees are originally from the surrounding rural areas, and are university-educated. They would previously have had little choice but to migrate to nearby urban centers for skilled jobs offering a certain salary. With the presence of Desicrew, however, they are able to stay closer to home and support their families. Once hired, employees are trained in specific processes and IT skills. Impact to date and future growth plans Desicrew currently operates 4 BPO centers in Karnataka and Tamil Nadu, which altogether employ approximately 200 people. Given DesiCrews transparent career path, employees can stay close to home without having to sacrifice a fulfilling career. DesiCrew also has a positive impact on its employees sense of personal satisfaction. When asked what they enjoy about their job, employees point to the opportunity to manage small teams and directly engage with international clients. At the community level, DesiCrews centers reduce the migration of educated and talented youth away from rural areas and into large cities. Challenges A key challenge faced by DesiCrew is the need to keep costs low and standardized across its 4 centers. This would not only lead to greater profitability, but it would allow any order to be assigned to any of its BPO centers. Keeping its costs low is critical for DesiCrew to remain competitive in the BPO market. Source of financing to date and future needs DesiCrew was incubated at the Rural Technology and Business Incubator (RTBI), associated with the Indian Institute of Technology in Madras (IITM). As a result, it received seed funding of $10,000, and then secured an interest-free loan from Villgro (another social incubator based in South India). DesiCrew has since raised equity funding from an Indian venture capital fund. Though it is currently able to receive raise debt against receivables to finance its working capital needs, DesiCrew would look to raise equity in the future, to further scale its business.
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Inclusive Business Case Study Global Easy Water Products

Affordable drip-irrigation technology for smallholder farmers Sector: Agriculture Location of operations: Pan-India Year of establishment: 2004 Turnover: $3.5 million Extent of BOP engagement: 41,000 BOP consumers Background on Business Started as a for-profit subsidiary of International Development Enterprises India (IDEI), Global Easy Water Products (GEWP), sells affordable drip irrigation technology to smallholder farmers across India. Mode of BOP Engagement BOP as Suppliers Though it may be easier to supply inputs from larger suppliers, Aitken Spence purposefully partners with local farmers to supply its resorts with agricultural produce. In order to ensure certain quality standards of its inputs, Aitken Spence trains local farmers on optimal management and preservation of their produce. In addition, it provides them with the tools they may require, such as seeds, fertilizer and crates. BOP as Employees Aitken Spence directly employs more than 2,000 local BOP individuals to work in its resorts as facilities management staff, kitchen staff, and tour guides. The company absorbs local high school graduates into its hotels, guaranteeing them a career path and steady income. Impact to date and future growth plans Though it may be easier to engage with more established and standardized suppliers of agricultural produce, energy and other inputs that are crucial to the operation of hotels, Aitken Spence has purposefully chosen to engage the BOP communities in its areas of operation, thereby giving them the opportunity to benefit as much as possible from the resorts presence. Challenges Like many other businesses in Sri Lanka, Aiken Spence is currently challenged with the high costs of capital, preventing it from growing faster. Though foreign investors have expressed an interest in the company, they prefer investment timelines that are not long enough to allow for returns (5 years as opposed to the 8-10 years required to experience returns on investment). Furthermore, the Sri Lankan government has not been investing adequately in the infrastructure needed to accommodate the growing tourism industry. Source of financing to date and future needs As it is a subsidiary of one of Sri Lankas largest conglomerates, Aitken Spence has benefited from substantial internal reserves, and the ability to leverage its reputation to form joint ventures with international partners. The current cost of capital, however, is hindering Aitken Spences expansion plans, for which it would seek loans at concessionary rates (6-8%). Given that a typical 500-room hotel costs approximately $40 million to construct, Aitken Spence would look to receive investments between $10 to $20 million.
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Inclusive Business Case Study Greenlight Planet

Off-grid solar lighting products for rural consumers Sector: Energy (renewable) Location of operations: Pan-India Year of establishment: 2008 Turnover: Not disclosed Extent of BOP engagement: 230 employees; 1,000 distributors; 1,000,000 consumers Background on Business Greenlight Planet sells affordable off-grid solar lighting products to BOP consumers in India and East Africa. Their products include an award-winning Sun King lamp, priced at $17 (Rs. 850), and a Sun King Pro for $32 (Rs. 1,600), the latter of which includes a mobile phone charger. Greenlight currently has operations in 4 states in India (Bihar, Maharashtra, Odisha, Uttar Pradesh) and in Kenya. Mode of BOP Engagement BOP as Distributors Partly due to the high costs associated with using existing distribution channels, Greenlight Planet has created an innovative, decentralized distribution network that directly serves BOP populations. Village-level entrepreneurs, Sun King Saathis, are recruited and trained by Greenlight district managers and team leaders. Distributors are responsible for educating consumers on the benefits of using solar lights. Greenlight has found that successful distributors are not involved in any other entrepreneurial activities, which ensures that they are motivated by the sales commission to maximize sales. Further, they should be local, trusted and credit within the local community. BOP as Employees Greenlights team leaders and district managers are village-based, and also belong to the BOP. BOP as Consumers Greenlights target consumers are BOP, rural populations with no or limited access to grid electricity. Impact to date and future growth plans Greenlight Planet generates impact on multiple levels. Customers have access to a reliable source of clean energy, allowing them to be more productive during hours when there is no sunlight, and reducing the environmental, health and safety risks of being dependent on kerosene lamps. For its distributors and employees, Greenlight is generating increased income levels, and training them in very relevant and useful entrepreneurial skills. Greenlight plans to reach 10 million customers through 10,000 distributors by 2015. Challenges Greenlight Planet has been unable to access affordable, local working capital to finance its inventory. Source of financing to date and future needs Greenlights primary source of funding has been a $4 million Series A equity investment from its angel funder and Bamboo Finance, a venture capital fund. In addition, it has received $250,000 in debt funding from Deutsche Bank, the Lemelson Foundation and Ashoka. Greenlight Planet would need $5-10 million in future financing, the ideal composition of which would be 20% equity, 70% debt and 10% grant funding.
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Inclusive Business Case Study Industree Crafts Pvt. Ltd.

Retailing handicrafts produced by rural artisans Sector: Manufacture and retail Location of operations: Pan-India, Asia Year of establishment: 1996 Turnover: $3 million Extent of BOP engagement: 3,360 suppliers Background on Business Industree Crafts works with rural artisans and self-help groups (SHGs) to produce textiles, garments and other handicrafts, which it retails under the Mother Earth brand across India. Based in a desire to enable rural entrepreneurs, Industree creates new supply chains and retail channels, connecting rural artisans to urban consumers. Though this model is not as efficient or lucrative as sourcing products from factories, Industree prioritizes an improvement in livelihood opportunities for the rural BOP. Mode of BOP Engagement BOP as Suppliers Industree engages BOP suppliers as part of its core business operations. It assists in the formation of SHGs and organizes rural artisans into cooperatives and associations. Industree then provides collateral to these SHGs and acts as a guarantor for bank loans. Almost 100% of the fabric used in Industrees products and 40% of all products made come from SHGs. As Industree expands, it also invests in supply chain infrastructure to facilitate collection of its products from remote areas. Through its Foundation, the company identifies and creates new "handicraft clusters, and invests heavily in training for quality and consistency. The company supports the Foundation in financial and non-financial ways. Impact to date and future growth plans Industree currently works with 18 SHGs and 300 handicraft clusters across 9 states in India, representing over 3,300 rural suppliers in total. By turning traditional art into aspirational lifestyle products, Industree has improved the livelihood opportunities of thousands of rural individuals, and has promoted entrepreneurship among its BOP suppliers. Over the next three years, the company intends to work with 10,000 suppliers across the country. Industree has aggressive growth plans and has recently started exporting to European markets. Challenges Primary challenges faced by Industree include poor infrastructure in the states in which it operates, the low availability of adequately skilled labour, and an unsupportive regulatory framework for early stage companies in India. Source of financing to date and future needs In 2011, Industree received a $1 million equity investment from Grassroots Business Fund. The company has also received a $200,000 technical assistance grant to be used towards customer care training and brand building. For their next round of fundraising, Industree will look to raise a further $6-7 million, largely in the form of equity.
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Inclusive Business Case Study Jaipur Rugs

Hand-knotted carpets made by rural artisan women Sector: Handicrafts Location of operations: Pan-India Year of establishment: 1999 Turnover: $16.8 million Extent of BOP engagement: 40,000 suppliers (weavers), 200 employees Background on Business Based in Rajasthan, India, Jaipur Rugs is a manufacturer of hand-knotted carpets. Jaipur Rugs directly engages with a network of over 40,000 rural artisan weavers to make its carpets, which are then exported to countries around the world. Mode of BOP Engagement BOP as Suppliers Jaipur Rugs main mode of engaging the BOP is as suppliers. The company indirectly employs more than 40,000 rural artisans to make its hand-woven carpets, which are then exported to over 30 countries around the world. Raw materials to make the carpets are provided directly to the carpet weavers, along with design patterns and specifications. Carpet weavers make the carpets in their homes, where they have looms, and the finished product is delivered back to the companys headquarters. Each weaver is paid per square foot of carpet made. BOP as Employees In addition, Jaipur Rugs employs more than 200 full-time employees, most of whom are also from low-income backgrounds. Though educated, these employees have been trained extensively to work with advanced technological tools and to develop a valuable design-related skillset. At Jaipur Rugs, these employees have been encouraged to take on more responsibility and to develop their professional skills much more than they would have experienced in a more traditional company. Impact to date and future growth plans Jaipur Rugs has reached a network of more than 40,000 rural artisans across 6 states. It expects this number to grow to 50,000 artisans within 3 years time. Its full-time employees will also grow, by 50% to a total of 300. In addition to providing these weavers with employment and a steady source of income, working with Jaipur Rugs gives women greater autonomy within the household. Challenges With its very extensive network of rural artisans, Jaipur Rugs model requires significant logistical organization to work efficiently. A continuous question asked by the companys management is how to further increase its operations and efficiency. Furthermore, as significant resources are dedicated to skills training for the companys weavers, a challenge has been to find the right partners that could develop literacy and entrepreneurial skills among its weavers. Source of financing to date and future needs Started with internal reserves, Jaipur Rugs received a $1 million investment from the Grassroots Business Fund. When considering future investors, Jaipur Rugs is conscious of partnering with investors who have similar social priorities.
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Inclusive Business Case Study MAS Intimates

Innovative manufacturer of intimate apparel and sportswear Sector: Apparel, Textiles Location of operations: Pan-Asia Year of establishment: 1986 Turnover: Not disclosed Extent of BOP engagement: 40,000 employees Background on Business Located in Sri Lanka, MAS Intimates is the regions leading manufacturer of intimate wear and sportswear. It is the preferred supplier of apparel to global brands, such as Victorias Secret, Nike, Calvin Klein, Ann Taylor, Speedo and Gap. A subsidiary of MAS Holdings, MAS Intimates employs more than 50,000 youth from BOP backgrounds across Sri Lanka. Mode of BOP Engagement BOP as Employees MAS Intimates employs more than 50,000 individuals from BOP backgrounds, 80% of whom are women. The majority of employees are from rural and semi-urban areas. They are often recruited to work at MAS with minimal previous work experience and are trained in the skills required for their position. Impact to date and future growth plans MAS Holdings currently operates 34 facilities in Sri Lanka, and 1 in India. When the company started, it solely focused on manufacturing apparel for its clients. Since then, however, MAS has captured increasing value along the entire production chain. The company now also produces accessories, such as elastics, and lace, and manufactures textiles. Furthermore, it has also started its own lingerie brand, called Amante, whose products are currently sold exclusively in India. MAS impact on its employees is multifold. In addition to the technical skills and steady source of income gained by employees at MAS, the company strongly encourages the development of general professional and life skills. Employees are encouraged to proactively think about their career paths within the organization, and to pursue their interests, whether or not they are related to MAS. To promote ownership and critical thinking among employees, small teams of workers have weekly meetings to discuss how any challenges faced along the production line can be mitigated. Challenges A continuous yet relatively trivial challenge faced by MAS Intimates is the attrition of its employees. Given Sri Lankas tight labour market and the presence of equally lucrative alternative job opportunities, MAS workers are sometimes attracted to a more traditional office job. Attrition is an issue for the apparel sector as a whole, however, and given MAS very strong reputation as a preferred employer, this problem is not very acute. Another challenge is related to continuously maximizing efficiency. The pressure to minimize costs of production as much as possible has become especially acute, as Western economies contract. Source of financing to date and future needs From its start in 1986 with just a few sewing machines, MAS has grown into one of Sri Lankas largest conglomerates. It has grown with a combination of internal capital reserves, and several joint ventures with American and European companies.
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Inclusive Business Case Study Shree Kamdhenu Electronics Pvt. Ltd.

Technological products and solutions for dairy collectives Sector: Information Technology Location of operations: Pan-India, Asia Year of establishment: 1996 Turnover: $1.3 million Extent of BOP engagement: 40 BOP employees; 1.05 million BOP consumers Background on Business Started in Gujarat in 1996, Shree Kamdhenus product, Akashganga, addresses two core issues faced by rural dairy farmers: accurately measuring the quantity of milk supplied by farmers to dairy collectives; and determining the quality of milk supplied. Mode of BOP Engagement BOP as Consumers Shree Kamdhenu Electronics sells its microprocessor-based electronic measurement and quality testing products to dairy farmer collectives. These innovative tools allow each farmers milk to be measured for quantity and quality individually, making the entire process of milk collection transparent and efficient. Earlier, milk from all the farmers was first collected into one container, and then tested for quality. Farmers were therefore receiving a price for the quality of the collectives milk, which offered no incentive for individual farmers to improve their own quality. BOP as Employees Over 50% of all people employed by Shree Kamdhenu Electronics belong to the BOP population. Impact to date and future growth plans With over 3,500 installations in 12 states across India, Akashganga has directly impacted over 1 million farmers and indirectly impacted over 4 million individuals to date. This product directly impacts the lives of dairy farmers by ensuring that they are paid accurately for the quantity and quality of milk they individually supply. Due to this and reduced wastage at the collection point, farmers are getting a higher price for their produce, and have an incentive to supply better quality of milk. The company plans to reach 1.2 million farmers and 100 BOP employees by 2015. Challenges A key challenge for Shree Kamdhenu Electronics has been raising debt, given the difficulties faced by small businesses in India in securing affordable bank loans. At an operational level, the company also faces the challenges of operating in states with poor infrastructure, the lack of an enabling business environment for early-stage companies, and at times, a low willingness from customers to pay for their product. Source of financing to date and future needs Shree Kamdhenu Electronics has raised $190,000 as an equity investment from Aavishkar and Grassroots Business Fund, $113,000 as debt, $95,000 in credit guarantees, and $10,000 as promoters equity. Ideal future financing would take the form of soft loans and would be utilized for launching new products for the dairy sector, building a factory and expanding sales across India.
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Inclusive Business Case Study StarAgri

Integrated post-harvest management solutions for smallholder farmers Sector: Agri-business Location of operations: Pan-India Year of establishment: 2006 Turnover: 300 Million INR ($5.7 Million) Extent of BOP engagement: 500 BOP employees; 50,000 BOP farmers Background on Business StarAgri was started to address Indias vast, unorganized agricultural supply chain. It offers a host of integrated post-harvest management services, allowing BOP farmers to derive more value from their harvests. StarAgri directly engages with BOP farmers as well as corporates and processing companies. Mode of BOP Engagement BOP as Consumers StarAgri provides several services to BOP farmers, including warehousing, quality testing, and collateral management services. The company also partners with several banks, enabling smallholder farmers to receive low-cost loans. Upon storing their produce in StarAgri warehouses, farmers are provided with a receipt, which is recognized by a wide range of banks (established partners of StarAgri) as collateral. BOP as Suppliers Upon receiving orders for farm produce from Indian corporates, StarAgri procures this produce directly from thousands of rural farmers. By removing middlemen from the process, StarAgris farmers receive a higher price for their produce. Futhermore, StarAgris quality-based procurement allows farmers to receive higher prices for high-quality produce (as opposed to traditional auction systems, where all farmers receive the same price per crop, regardless of quality). Impact to date and future growth plans With 750 warehouses spread across 10 states, Staragri has served more than 50,000 farmers to date, and currently employs more than 500 people. It plans to reach 2.5 million farmers in the next 5 years. StarAgris range of integrated services allows farmers to exercise greater ownership over value they earn from their produce. Previously, farmers had little choice but to accept the nontransparent prices offered to them by supply chain middlemen. With StarAgri, farmers are able to verify the quality of, and receive fair prices for, their produce. Furthermore, with its warehousing facilities, farmers can store and better manage their produce and sell it when the market is offering an optimal price. Challenges Initially, StarAgri had faced resistance from banks to recognise the warehouse receipts it would issue to farmers, in return for affordable loans. As the number of its farmers grew into the thousands, however, banks became interested. Another challenge is the need to educate farmers on the advantages of engaging with StartAgri to manage their produce, which requires significant company resources. Source of financing to date and future needs StarAgris launch was financed by its promoters equity totaling $2 million, and it has recently received an investment of $30 million from IDFC, one of Indias leading infrastructure financing companies. In terms of working capital, however, it would look to raise $10-20 million in debt.
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Inclusive Business Case Study Vortex Engineering

Low-power and solar-powered ATMs for rural populations Sector: Manufacturing, Financial Services Location of operations: Pan-India, Asia, Africa Year of establishment: 2004 Turnover: $2 million Extent of BOP engagement: 7.2 million BOP consumers Background on Business Vortex has designed a rugged ATM specifically for rural areas, which are characterized by intermittent power supplies. Vortexs innovative ATMs consume 90% less power than traditional ATMs, and can therefore be solar-powered. Due to the subsequent lower costs of operation, these ATMs can be financially viable with fewer transactions, and therefore are very suitable for deployment in rural areas. Vortex sells its ATMs directly to banks, which can then extend their financial services to rural populations. Its clients include both public and private banks. Mode of BOP Engagement BOP as Consumers Though Vortexs direct consumers are banks, the end beneficiaries of its ATMs are rural BOP populations, who gain increased access to formal financial services. The majority of rural populations in India live several kilometers away from the nearest bank branch, often requiring half a day of travel to conduct financial transactions. Impact to date and future growth plans To date, Vortexs ATMs have increased access to financial services for approximately 7.2 million rural consumers across India, including its lowest income states. The presence of ATM machines in rural areas has a very significant impact on BOP consumers, including reduced time and money spent travelling to the nearest banking center. Furthermore, more accessible ATMs lead to an increase in rural savings. In addition to India, Vortexs ATMs have been exported to other countries, including Nepal, Bangladesh and the United Arab Emirates. Over the next 3 years, the company aims to reach 50 million consumers. Challenges The key challenge faced by Vortex is the initial reluctance by banks to adopt this innovative ATM. Despite its design being very suitable for Indian rural areas, some banks view the product as too risky and continue purchasing the more expensive but less appropriate ATMs from larger manufacturers. Source of financing to date and future needs Vortex was incubated at the Rural Technology and Business Incubator (RTBI), associated with the Indian Institute of Technology, in Madras (IITM), where it received seed funding. Since then, Vortex has successfully raised more than $12 million from various investors, including the IFC, Bamboo Finance, Aavishkaar, Ventureast, and Tata Capital. To fund the expansion of its business, Vortex would look to raise an additional $5 to $10 million. If made available, it would devote technical assistance funds towards further research and development.
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Inclusive Business Case Study WaterHealth

Affordable housing for migrants and low-income populations Sector: Water Location of operations: Andhra Pradesh Year of establishment: 2005 Turnover: Not disclosed Extent of BOP engagement: 5 million BOP consumers, 10 distributors, 600 employees Background on Business WaterHealth combines the use of decentralized purification centers in partnership with local communities to create a scalable and sustainable solution for processing healthy drinking water. Through its solution, WaterHealth provides each person with up to 20 litres of safe drinking water per person per day, at an investment of approximately $10 per person. Mode of BOP Engagement BOP as Consumers WaterHealths primary mode of engagement with the BOP is as consumers of its affordable safe drinking water solution. Beneficiaries of WaterHealths services would otherwise only boil water, which doesnt remove any inorganic impurities. BOP as distributors WaterHealth engages village level entrepreneurs in a build-operate-transfer model, working closely with the community. In the operate phase, the company engages locals who are often a part of the BOP themselves to run the plant on a daily basis. BOP as Employees WaterHealth builds plants sustainably, by engaging the local population as construction workers. Impact to date and future growth plans WaterHealth is currently focused on building its presence in Africa, with the intention of building 2530 plants this year. Similarly, the company plans to expand to 300-400 plants in India. Within India, WaterHealths corridor of interest extends from Rajasthan, Gujarat, Chhattisgarh, Andhra Pradesh and Karnataka. WaterHealths expansion plans will remain in concentric circles, seen to be the most effective model of geographic expansion. Challenges A key challenge for WaterHealth is competition from subsidized sources of water, and resulting challenges with pricing. Government has adopted the approach of subsidizing water utilities. As a result, these utilities lose money and their quality progressively deteriorates. Generating awareness among consumers that have been spoiled by traditional water utilities in case they exist has also been a major challenge. Source of financing to date and future needs Tata capital, IFC, and other strategic investors have taken equity positions in WaterHealth. The company has a long line of credit from IFC at low rates of interest. Given WaterHealths ambitious expansion plans, it will need a large amount of investment. It would prefer most of its investments as grants, but is open to equity investment as well.
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5 DEEP DIVES ON POTENTIAL FUND MANAGER PARTNERS FOR ADB

Figure 1: Fund manager snapshot Pragati India Fund
Fund name Investors
Fund details
Pragati India Fund I CDC, IFC
Sample investment
Strategy
Jash Engineering
Mfg. of equipment used in waste water treatment
Vintage Total AUM

Avg. size of investment
2011 $ 60 million
$ 6 10 million
Target IRR Geographic focus

Sector focus Social impact metrics employed
25% + Low-income states in India

Sector agnostic
Pragati believes the market for financing small-medium sized enterprises in low-income states in India presents attractive financial opportunities for private equity. Pragati underwrites companies for being SMEs and not inclusive businesses, but it indirectly engages the poor by investing in businesses that exist in deprived regions, employ local populations, and invest in workforce development thus having the potential for significant livelihood creation. Although finding such fundable opportunities remains a challenge in these geographies, Pragati believes being close to the ground will generate strong deal flow. To further address the risk of limited deal flow, Pragati chooses to remain sector agnostic. The fund expects their investees to be family run businesses, and look for strong corporate governance.
Pragati is a relatively recent financial-first, commercial fund and does not have explicit impact measurement systems. Since DFIs such as CDC and IFC are LPs of the fund, Pragati follows strong ESG-oriented metrics. Key contact
N. Shadagopan
Figure 2: Fund manager snapshot Aavishkaar

Several DFIs such as IFC, CDC, FMO, and KfW have invested in Aavishkaar; they expect regular reporting on ESG issues and private sector development impact across its investments. However, Aavishkaars impact measurement systems are not based on GIIRS. Key contact
Aavishkaar India Micro Venture Capital Fund CDC, IFC, FMO, KfW, NABARD, Rockefeller, others
Vortex Engineering
Developer and mfg. of low-cost ATMs
2005 $ 120 million $ 0.1 1 million 20-22% Pan-India Sector agnostic
Aavishkaar was one of the first funds set up to provide equity finance to early-stage inclusive businesses. The fund diversifies its exposure across education, healthcare, agriculture, ICT, and energy. Although Aavishkaar does not focus exclusively on low-income states, its strategy of investing in rural areas where few other fund managers are willing to go, ensures that over 50% of its invested capital has a footprint on low-income states. Aavishkaar takes a venture-capital style approach to develop sectors and industries in nascent geographies. Aavishkaar has so far made 33 investments in prerevenue companies, underwriting risks of limited experience of entrepreneurs and lack of local enabling institutions, and has still delivered strong financial returns.
Vineet Rai
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ADB Inclusive Business Market Study for India and Sri Lanka Draft Report: Annexes Figure 3: Fund manager snapshot Aureos
Aureos has a proprietary impact measurements framework, the Aureos Sustainability Index. Beyond this, Aureos also follows IFC perfor mance standards and is a signatory of UNPRI. Key contact
Aureos South Asia Fund CDC, ADB, Norfund, FMO
Asiri Hospitals
Chain of low-cost hospitals in Sri Lanka
2004 $ 100 million (70% for India) $ 5 10 million ~25% India, Sri Lanka, Bangladesh Sector agnostic
Aureos is a global investment firm with a portfolio of emerging markets focused private equity funds. Aureos qualifies itself as a financial-first fund manager, and focuses on SMEs across sectors. It is one of the few fund managers currently focusing on Sri Lanka, and has a strong track record of investing across South Asia. Although sector agnostic, the fund plans to target infrastructure oriented sectors such as manufacturing, transportation / logistics, pharmaceutical, and healthcare in the short-medium term. Aureos follows ESG criteria closely, and often uses such parameters as screening criteria, in conjunction with capital intensity and level of regulation. Globally, Aureos has completed over 270 transactions to date, and its exits have realized IRRs of 30%.
Balaji Srinivas (India), Nissanka Weerasekara (Sri Lanka)

Figure 4: Fund manager snapshot LR Global

ESG is an important part of LR Globals investment strategy, especially given that they are targeting DFIs as their primary LPs. The fund manager does not currently employ any other impact metrics. Key contact
LR Global CDC, ADB, Norfund, FMO
N/A
2012 $ 30 million + $ 0.5 4 million 20-25% Sri Lanka Sector agnostic
LR Global, the first formal institutional PE fund to be set up in Sri Lanka in the current post-conflict environment, was spun out of the Rockefeller office by former Aureos investment professionals, when IFC provided an anchor investment of $10 million. LR Global plans to invest in SMEs, where they believe exit strategies will be easier to place, and will source deals in-house, as opposed to secondary transactions. The focus on SMEs is not narrowed by an exclusive focus on IB. However, many opportunities in LRs deal pipeline could qualify as IBs by ADBs definition. Agriculture, tourism, and infrastructure are priority sectors for LR Global, while they remain sector agnostic. Further, LR Global will focus on investing in value chains of sectors where larger players operate.
Chanaka Wickramasuriya
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ADB Inclusive Business Market Study for India and Sri Lanka Draft Report: Annexes Figure 5: Fund manager snapshot SEAF
SEAF tracks IRIS compatible metrics such as employment, wages, benefits, training, suppliers, customers, taxes, community development, formalization and corporate governance. SEAFs development impact reports are available online. Key contact
India Agribusiness Fund LIC, Omidyar, SIDBI, UBI
Abhay Cotex
Cotton seed processing company
2010 $ 33 million + $ 2 7 million 20-25% Pan-India Agribusiness value chain
To create the India Agribusiness Fund (IAF), SEAF brought its global expertise of investing in agribusinesses (40% of global portfolio in the sector) and experience of investing in India through professionals with 6 years of investment experience at Kotak. IAF is one of the countrys few IB-focused sector-specific funds, and invests in SMEs that operate in the Agribusiness value chain, except upstream players. Typical opportunities that the fund considers are B2B businesses in sub-sectors such as agricultural processing, implements, logistics, and other post-harvest industries. SEAFs investment professionals recognize the nascence of PE to this sector, and hence spend more than 50% of their time on the ground, sourcing and monitoring deals. Given a chance, SEAF would deploy TA for public or shared goods.
Hemendra Mathur
Figure 6: Fund manager snapshot SIDBI-VC

Fund name Investors Fund details Vintage Total AUM Avg. size of investment Target IRR Geographic focus Sector focus Social impact metrics employed DFID is currently training SIDBI-VC investment professionals on impact measurement, while the fund currently tracks employment. Given already high transaction and deal management costs, SIDBI prefers simple metrics that investees can easily track. Key contact Ananta P. Sarma
Samriddh Fund DFID
Sample investment Strategy 2012 $ 60 million + $ 1 5 million 15-16% Low-income states in India Sector agnostic
FabIndia
Retailer of products handmade by rural craftspeople
SIDBI is a government owned financial institution providing debt and equity to micro, small, and medium-scale enterprises in India. SIDBI VC is a wholly owned subsidiary, which has set up the Samriddh Fund with DFID. The funds sector agnostic investment strategy focuses on SMEs in low-income states in India with potential to increase incomes of low-income populations. SIDBI believes that an exclusive LIS focus ensures that their SME investees are also IBs. The fund does not focus on Northeastern states, however, due to a lack of enabling infrastructure in those regions currently. SIDBI intends to encourage its investees to enter LIS markets, and further help them by leveraging its network within the government, if needed. Any returns over 14% that the fund generates are returned to their current investor, DFID.
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6 ECONOMIC FACTSHEET ON LOW-INCOME STATES

GDP growth rates of low-income states Figure 7: Summary of key statistics on low-income states in Indiain
GDP growth rate % Bihar Chhattisgarh Jharkhand 6.6% 13.1% 10.8% 1,824
India
Number of clusters
Per capita income $ (PPP) 1,272 2,673
194 48 67 251
2,717 2,377
Madhya Pradesh
Odisha Rajasthan Uttar Pradesh 7.2% 5.4% 6.3%
12.0%
1,804
340 198
504
1,707
West Bengal Arunachal Pradesh Assam Manipur

Meghalaya Mizoram Nagaland Tripura 3.9%
7.1% 3.7% 8.4% 6.2%

9.5% 14.7% 8.9% India average = 6.5%
3,033 3,408 1,865 1,885

2,967 2,797 3,068 2,708 India average = 3,694
66
862
38 82 84 19 7 39 82
SOURCE: Dalberg Analysis, UNDP, India Competitiveness Report-2011, IBEF, UNIDO
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Summary of key facts on low-income states in India:

State, competitiveness ranking Bihar 17 / 29 5 / 15 in LIS/NES Key facts Major industries Major clusters
Bihar recorded the second highest GDP growth among all the states DFIs like IFC, DFID, Kfw, CDC & SIDBI have Bihar as one of their focus states Bihar government is proactively giving policy incentives for Industries & Investors
Chhatisgarh 12 / 29 1 / 15 in LIS/NES
Jharkhand 21 / 29 9 / 15 in LIS/NES
Chhattisgarh accounts for about 16 per cent of the nations coal reserves and is rich in other mineral resources such as Limestone, Iron-ore, Copper, Bauxite., Chhattisgarh is presently one of the few states that has surplus power The state offers a wide range of fiscal and policy incentives for businesses and stands first among LIS & NES in the competitiveness rankings DFIs like IFC, DFID, Kfw,CDC & SIDBI have Chhatisgarh as one of their focus states Jharkhand has around 40 per cent of the countrys mineral wealth DFIs like IFC, DFID, Kfw,CDC & SIDBI have Chhatisgarh as one of their focus states Location Advantage: Closer to the ports of Kolkata, Haldia and Paradip and has easy access to raw materials.
Agriculture: Tea, Rubber, Sugarcane, Tobacco, Dairy, Paper Industries: Plastics, Transport equipment, Chemicals, Textiles, Mines, Minerals Agriculture: Food processing Industries: Mining, Minerals, Iron & Steel, Cement, Power, IT& ITes, Biotechnology, Gems & Jewellery
Manufacturing Textile sericulture Sugarcane Agro-based industries
Iron & steel ancillary units Castings & metal fabrication Gems & Jewellery Textiles Aluminum
Madhya Pradesh 14 / 29 3 / 15 in LIS/NES
Odisha 15 / 29 4 / 15 in LIS/NES
A large number of consumer goods companies have manufacturing bases in the state because it is centrally located and is equidistant to all major cities of India Madhya Pradesh has rich mineral resources and has the largest reserves of diamond and copper in India State government is actively working with World bank, IFC, DFID and other DFIs on host of developmental projects Leads in iron, steel, ferroalloy & aluminium production. It also has a strong base for coal-based power generation Has a stable political environment and is actively working with IFC, DFID and other development organizations Offers a wide range of fiscal and policy incentives for businesses
Agriculture: Rubber, Food & beverages Industries: Mining, Minerals, Iron & Steel, Engineering, Chemicals, Handloom, Plastics, Printing & Packaging, Tourism Agriculture: Agri processing, forest based industries Industries: Mining, Minerals, Auto & Auto components, Textiles, Cement, Pharmaceuticals, Minerals, Manufacturing, IT & ITes, Tourism Agriculture: Agriprocessing, Food & beverages Industries: Mining, Minerals, Aluminum, Handloom,Tourism , Electronics, Iron, steel & Ferroalloy
Iron & steel ancillary units Engineering & fabrication Auto components Textiles Casting & metal fabrication
Engineering & fabrication Auto components Textiles Food processing
Food processing industries Handloom Handicrafts Textiles Agro & Forest based industries
28
State, competitiveness ranking Rajasthan 15 / 29 4 / 15 in LIS/NES
Key facts It is a natural corridor between the wealthy Northern and the prosperous Western states of the country, which makes it an important trade and commerce centre Rajasthan is one of the most attractive tourist destinations in India Rajasthan offers a variety of unexploited agricultural and mineral resources, which is indicative of scope for value addition and exports Rajasthan s GDP growth rate fell from 11% for the year 2010-11 to 5.4% for the year 2011-12 Newly formed state government in Uttar Pradesh is seen as an industry friendly government Government is actively working with Gates foundation, DFID and others state has witnessed high The infrastructural growth , which is seen as a positive facilitator for industrial growth, in the past few years
Major industries Agriculture: Agriprocessing Industries: Cement, IT & ITes, Ceramics, Mining, Minerals, Steel, Chemicals, Auto & Auto components, Textiles, Gems & Jewellery, Marble
Major clusters
Ceramics Textiles Marble slates Auto & Auto components Food processing Gems & Jewellery
Uttar Pradesh 19 / 29 7 / 15 in LIS/NES
West Bengal 20 / 29 8 / 15 in LIS/NES
One of the most needy Low Income state Under the new government , the erstwhile communist state is actively looking for a larger role by the private sector for its growth It has a good geographical advantage due to its proximity with sea ,North east and other landlocked countries
Arunachal Pradesh 28 / 29 15 / 15 in LIS/NES
Undulating topography and varied agroclimatic conditions offer vast potential for horticulture and growing a variety of fruits, vegetables, spices, aromatic and medicinal plants, flowers and mushroom Central government is taking up many initiatives to improve infrastructure and other amenities in the state
Agriculture: Agro processing, Food processing Industries: IT & ITes, Ceramics, Mineral based industries, Tourism, Sports goods, Leather based industries, Textiles, Handloom & Handicrafts, Auto & Auto components Agriculture: Tea, Jute products, Agri & Agri allied industries Industries: Mining, Minerals, Petroleum & Petrochemicals, Leather, Iron & Steel, IT, Auto & Auto components, Biotechnology Agriculture: Cane & bamboo, Horticulture Industries: Art & crafts, Weaving, Carpet weaving, Wood carving, Ornaments, Tourism, Saw mills & plywood, Power, Mineral based industries
Textiles Handicrafts Handloom Food processing
29
State, competitiveness ranking Assam 22 / 29 10 / 15 in LIS/NES
Key facts Assam is the largest economy of the Northeast region and is the most industrially advanced state in the Northeast India Assam is rich in natural resources such as natural oil and gas, rubber, tea, and minerals such as granite, limestone and kaolin The state is rich in water resources. Other potential areas of investment include power and energy, mineral-based industries, tourism and crude oil refining Manipur has significant potential for growing various horticultural crops because of varied agro-climatic conditions A wide variety of rare and exotic medicinal and aromatic plants grow in Manipur and Entrepreneurs get easy access for processing and marketing such plants With 79.8 per cent literacy rate, Manipur offers a largely educated workforce. Good Knowledge of English is an added advantage of the Manipuri workforce Meghalaya is endowed with abundant natural resources in terms of flora, fauna, medicinal plants, forests, coal, lime stone, feldspar, quartz, sillimanite, granite, industrial clay and uranium Meghalaya has a literacy rate of 75.5 per cent and a majority of local population speaks and understands English The state provides good support through various central and State Government agencies
Major industries Agriculture: Tea, Food processing, Horticulture, Sericulture Industries: Coal, Oil & Gas, Limestone, Cement, Tourism, Traditional cottage industry
Major clusters
Tea Handicraft Handloom Food processing
Manipur 27 / 29 14 / 15 in LIS/NES
Agriculture: Food processing, Sericulture Industries: Tourism, Handlooms, Handicrafts, Bamboo processing
Bamboo Handicraft Handicraft Handloom Food processing
Meghalaya 24 / 29 12 / 15 in LIS/NES
Mizoram 25 / 29 13 / 15 in LIS/NES
Mizoram contributes 14 per cent to the countrys bamboo production; the climate is ideal for setting up agricultural and forestry produce-based industries With a literacy rate of 91.6 per cent, Mizoram offers a highly literate workforce. Knowledge of English is an added advantage With improving connectivity and the establishment of trade routes with neighbouring countries, trade facilitation has improved significantly over the last decade
Agriculture: Agro processing, Food processing, Horticulture, Dairy & Livestock Industries: Tourism, Mining, Cement, Steel processing, Handlooms, Handicrafts, Hydroelectric power Agriculture: Bamboo, Sericulture, Food processing, Medicinal plants, Horticulture Industries: Tourism, Energy, IT, Minerals & Stones, Handlooms & Handicrafts
Foundry Handicraft Handloom Food processing
Handicraft Handloom
30
State, competitiveness ranking Nagaland 23 / 29 11 / 15 in LIS/NES
Key facts Nagaland has a high literacy rate of 80.1 per cent. Majority of the population in the state speaks English, which is the official language of the state The state provides institutional support through various central and State Government agencies viz., North East Council, Ministry of Development of North Eastern Region and Nagaland Industrial Development Council Tripura is rich in natural resources such as natural oil and gas, rubber, tea and medicinal plants Tripura is connected with the rest of Northeast India by National Highway (NH)-44. Improved rail, air connectivity and establishment of trade routes have further facilitated the trade At 87.8 per cent, Tripuras literacy rate is higher than the national average rate
Major industries Agriculture: Bamboo, Sericulture, Horticulture Industries: Tourism, Handlooms, Handicrafts, Minerals, Mining Agriculture: Tea, Rubber, Bamboo, Sericulture, Medicinal Plants, Horticulture Industries: Natural Gas, IT & ITes, Tourism, Handlooms, Handicrafts
Major clusters Handicraft Handloom
Tripura 18/ 29 6/ 15 in LIS/NES
Handicraft Handloom Bamboo Leather
Sources: Dalberg Analysis, UNDP, India Competitiveness Report-2011, IBEF, UNIDO
31
7 DEEP DIVES ON PRIORITY SECTORS

Figure 8: Sector snapshot of water and sanitation
Key indicators across LIS & NES: Access to water and sanitation
% of population with access to improved water sources

The Planning Commission has allocated 4.6 times the amount reserved for improved sanitation in the 12th 5-year plan (2012-17), amounting to $6.8bn
% of population with access to improved sanitation

17 18 15 23 17 25 26 60

Odisha Rajasthan
52
93 82 81 77 83 95 91
Government along with bilateral aid and loans from multilateral development banks loans have created successful PPP models Government of Indias Total Sanitation Campaign (TSC) is operational in 578 rural districts with an outlay of $3.35bn; for each sponsored project, the central govt shares 60% of total cost, while the state and the community contribute 20% each Key policies: JNNURM, National Water Policy & other state policies
Uttar Pradesh West Bengal Arunachal

Assam Manipur 33 75
93
70
89
96
Meghalaya Mizoram Tripura
50 80 60 84 India avg.
66 98 94 51 India avg.
NOTE: Data for Nagaland is N/A

SOURCE: MDG States of India Report 2010; WHO
Figure 9: Sector snapshot of energy access
Key indicators across LIS & NES: Energy access

% of people using solid fuels for cooking

Central government is taking up various key initiatives such as Solar Mission to electrify the off grid locations
% of people using kerosene lamps for lighting

Other lo w-income States (LIS)

Odisha Rajasthan
90 88 87 80 86 76 80 77 44 31 62 32 55 23 53
82
Central government is focusing more on Nuclear Energy & Solar Energy to electrify the un electrified villages and under electrified villages Solar Mission is expected to create more than 100,000 jobs and attract USD 820mn investment Central government has announced taxfree bonds of USD 1.90bn for financing projects related to power sector Key policies: Solar Mission, Electricity Act 2003, Electricity Act During 2006, Revised tariff guidelines, National Biomass Cook stoves Initiatives (NBCI)
Uttar Pradesh West Bengal Arunachal

Assam Manipur
70
80 69
19
62 25
Meghalaya Mizoram Tripura 45
83 14 79 16
37
67 31 India avg. India avg. NOTE: Solid fuels include biomass fuels, such as wood, charcoal, crops or other agricultural waste, dung, shrubs and straw, and coal.
SOURCE: India Census, 2011
32
Figure 10: Sector snapshot of healthcare
Key indicators across LIS & NES: Healthcare

# Doctors per 10,000 population

Healthcare is an increasingly attractive sector for the PE & VC industry
# Nurses per 10,000 population


Odisha Rajasthan
4.0 4.1 3.9 4.9 2.7 4.0 7.5 6.0 7.1
2.8 5.7 6.2 5.8
Total expenditure on healthcare is expected to increase to $81.2 bn by 2015 To meet domestic demand, India needs $143 bn investments in healthcare by 2030
12.8
5.0

Arunachal Assam Manipur 3.2 2.8
14.1
2.8
Government of India has decided to increase expenditure on healthcare to 2.5% of the GDP by 2017, from the current 1.4% Government allots high priority to proposals related to hospitals, life saving drugs and equipment
Key policies: National Rural Health Mission (NHRM), National Urban Health Mission (NUHM)
10.4
17.9 6.2
Meghalaya Mizoram Tripura 2.5
4.5 5.3
12.3 9.2 11.8
6.1 7.4 India avg. India avg. SOURCE: HRH Report I; Public Health Foundation of India; World Bank
Figure 11: Sector snapshot of education
Key indicators across LIS & NES: Education

Gross enrollment ratio

Pupil to teacher ratio
By 2020, India needs 800 more universities and 35,000 colleges to meet the demand
Bihar Chhatisgarh Jharkhand

M. P. Odisha
64 76 76 90 69 87 61 85 30 12 44 26 24 41 35
58
The sector witnesses spends of more than $10.4 bn, which is estimated to grow at 18.0% annually Key policies: Right to Education Act (RTE), and Foreign Educational Institutions Bill (FEIB) RTE makes access to primary education a fundamental right and mandates 25% reservation for underprivileged students in schools FEIB allows FEIs to setup multidisciplinary campuses and award degrees; it mandates FEIs to invest at least 51% of capital expenditure required and regulates the admission process, fee structure, period of operation
Rajasthan Uttar Pradesh West Bengal

Arunachal Assam
91 76
18 21
Manipur Meghalaya Mizoram Tripura
77 89 102 97
72 India avg.
19 16 14 20
30 India avg.
SOURCE: UNESCO; CIA Factbook; State Elementary Education Report Card, DISE (2010-11)
33
8 GOVERNMENT SCHEMES RELEVANT TO ADBS FUND

Below we have highlighted some government programs that ADB should strive to work together with. The resources devoted to these schemes and programs also indicate the level of priority that the Government of India has assigned to the issue in question. Most of these programs are already large, and would benefit greatly from a complementary approach from other actors. The following brief descriptions of each such government program are meant to provide some background and overview.
NATIONAL SKILL DEVELOPMENT CORPORATION (NDSC)

NDSC is a not-for-profit company set-up by the Government of India under the Ministry of Finance. The Government of India holds 49% of the company, with the private sector controlling the remaining 51%.4 It is structured as a Public-Private-Partnership. The National Skill Development Fund that funds the activities of the NSDC is set up as a trust that is owned completely by the government of India and is run by professional fund managers. The trust can receive financial contributions from donors, private entities, governments (both central and state), financial institutions etc. The Prime Minister of India is the chairperson of the National Council on Skill Development. Set up as part of the National Skill Development Mission (NSDM), its primary objective is to promote the development of skills in the country. It does so by catalyzing the creation of large, scalable, forprofit vocational training initiatives. The NDSC provides funding to private sector initiatives and also enables support systems like quality assurance, information systems and training initiatives for the trainers. Its target is to contribute about 30% to the overall target of the NSDM of skilling / upskilling 500 million people in India by 2022. As part of its mission statement, the NSDC focuses on the underprivileged section of the society, backward regions and significantly on the unorganized and informal sector. One of the core operating principles of the NDSC is to target market failure and not compete with private financing. It does that mainly though funding innovations targeting labour market outsiders. The NSDF is the operating arm of the NSDC and was created with a corpus of $188 million (Rs. 995.10 crore).5 Currently, its corpus stands at $472 million (Rs. 2,500 crore) and it has made a commitment of $256 million (Rs. 1356.41 crore) till march 2012.6 Established in October 2009, the NDSC has so far trained 181,691 people and placed 144,238 people. So far, it has funded 32 training institutions and 4 sector skill councils. Skilling of Indias workforce presents a $22 billion opportunity.7
4 5
NDSC website Coordinated Action on Skill Development, Planning Commission 6 Business Standard, May, 2012 7 NSDC, May, 2011
34
NATIONAL INNOVATION FOUNDATION (NIF)

National Innovation Foundation India (NIF) is an autonomous body under the Department of Science and Technology, India.8 It was set up in February 2000 at Ahmadabad to provide institutional support for scouting, spawning, sustaining and scaling up the grassroots innovations. NIF conducts a biennial national competition for grassroots green technologies developed by farmers, mechanics, artisans and others through their own genius without any recourse to professional help. NIF validates these innovations with the help of experts and ascertains the novelty in these innovations. If the innovation is deemed novel, NIF files a patent on behalf of the innovator. NIF also funds value addition initiatives in these innovations to upscale them and make them more useful for a larger segment of people. To determine the feasibility of the commercializing of technology, NIF conducts market research and test marketing. Those technologies which are found to be commercially viable are licensed to willing entrepreneurs. A Micro Venture Innovation Fund (MVIF) of $750,000 (INR 4 Crore), sponsored by Small Industries Development Bank of India (SIDBI) , supports the activities of prototype development, test marketing and pilot production by providing necessary capital in the form of loans. Since 2003, a total of 168 projects have received financial support through this fund.9 NIF is mandated to build a national register of ideas, innovations and traditional knowledge practices related to agriculture, plants, animal health, and human health. With the help of the Honey Bee Network, NIF has been able to document more than 150,000 ideas, innovations and traditional practices.
8 9
NIF website MVIF online database of list of projects supported

35
JAWAHARLAL NEHRU NATIONAL SOLAR MISSION:

The Jawaharlal Nehru National Solar Mission (also known as the National Solar Mission) is a major initiative of the Government of India and state governments to promote ecologically sustainable growth while addressing Indias energy security challenges.10 The Mission has set an ambitious target of deploying 20,000 MW of grid connected solar power by 2022. It is aimed at reducing the cost of solar power generation in the country through (i) long term policy; (ii) large scale deployment goals; (iii) aggressive R&D; and (iv) domestic production of critical raw materials, components and products, to achieve grid tariff parity by 2022. The Mission has adopted a 3-phase approach - 2010-13 as phase 1, 201317 as phase 2 and 201722 as phase 3. An evaluation of progress, review of capacity and targets for subsequent phases, based on emerging cost and technology trends will be done at regular intervals during this period. The missions targets are: To create an enabling policy framework for the deployment of 20,000 MW of solar power by 2022 To ramp up capacity of grid-connected solar power generation to 1,000 MW within three years by 2013; an additional 3,000 MW by 2017 through the mandatory use of the renewable purchase obligation by utilities backed with a preferential tariff To create favorable conditions for solar manufacturing capability, particularly solar thermal for indigenous production and market leadership To promote programs for off grid applications, reaching 1,000 MW by 2017 and 2000 MW by 2022 To reach 15 million sq. meters installed solar thermal collector area by 2017 and 20 million by 2022 To deploy 20 million solar lighting systems for rural areas by 2022 So far, National Solar Mission facilitated a 62% increase in investments in solar energy in India to $12 billion during the year, the fastest investment expansion of any large renewable energy market in the world.11 NVVN, the nodal agency for solar projects, has selected 37 projects accounting for a total of 1,480 MW (32 projects 5MW each; 1 project 20 MW; 3projects 100 MW each).
10 11
MNRE website The Hindu, June, 2012

36
NATIONAL RURAL LIVELIHOOD MISSION (NRLM)

The National Rural Livelihood Mission (NRLM) was launched by the Ministry of Rural Development (MoRD), India in June 201112. Aided in part through investment support by the World Bank, the mission aims at creating efficient and effective institutional platforms of the rural poor enabling them to increase household income through sustainable livelihood enhancements and improved access to financial services. NRLM has set out with an agenda to cover 70 million Below Poverty Line (BPL) households across 600 districts in the country covering 6,000 blocks, 250,000 Gram Panchayats and 600,000 villages through self-managed Self Help Groups (SHGs) and federated institutions. It supports them for livelihoods collectives for a period of 8-10 years. In addition, these BPL households are facilitated to achieve increased access to their rights, entitlements and public services, diversified risk and better social indicators of empowerment. NRLM believes in harnessing the innate capabilities of people and complements them with capacities (information, knowledge, skills, tools, finance and collectivization) to participate in the growing economy of the country. The key features of the NRLM are: (1) Social mobilization: Universal social mobilization through formation of SHGs under NRLM. The related mission is to bring every BPL household under the SHG network. (2) Institution building: Setting up SHG federations at various levels to nurture the SHGs; enable them to become good quality institutions, help SHG members in articulating their demands, enable collective action for getting their entitlements with various government departments, developing backward and forward marketing linkages, maintenance of accounts, conducting audits and documentation. (3) Financial inclusion: Based on the eligibility criteria, NRLM would provide financial support with intent to inject financial resources into the institutions of poor for meeting their credit needs for both, consumption purposes and also for investment in livelihoods promotion (4) Livelihood program: Major focus of the NRLM is to stabilize and promote existing livelihoods portfolio of the poor. The NRLM livelihoods promotion priorities are: a. 'Vulnerability reduction' and 'livelihoods enhancement' through enhancing and expanding existing livelihoods options and tapping new opportunities b. 'Skilled wage employment' - building skills for the job market outside c. 'Enterprises' - nurturing self-employed and entrepreneurs (for micro-enterprises) (5) Convergence & partnerships: a. Ensuring that states agencies (SRLM) develop partnerships with major government programs and build synergies to address different dimensions of poverty and deprivation b. Working in tandem with civil society organizations, industries, educational institutions, banks and other resource organizations who share the similar objectives
12
NRLM Website
37
INDIA INCLUSIVE INNOVATION FUND (IIIF):

India Inclusive Innovation Fund (IIF) is a $1 Billion fund setup in February, 2012 by the National Innovation Council, a division in the Prime Ministers Office.13 This fund is setup as an effort to drive and catalyse the creation of an ecosystem of enterprise, entrepreneurship, and venture capital, targeted at innovative solutions for the bottom of the pyramid. The IIIF is built on the principle that innovative enterprises can profitably, scalably, and competitively engage citizens at the bottom of the economic pyramid and in doing so, provide goods and services that will transform their lives for the better.14 The fund proposes to invest in a new generation of Indian entrepreneurs who will build, and are in the process of building, world-class enterprises that focus on the problems of the poor, without compromising on economic success. In doing so, the fund will help create a new Indian model of innovation, one that bridges growth and equitability. The fund will support investment at different stages of the enterprise development cycle from early stages, through later phases of scaling-up of potentially successful solutions and business models. The fund proposes to seek capital from a range of sources: seed fund contributions from the government and its agencies; contributions from various Indian public sector enterprises, banks, and so forth; and contributions from private investors, corporate organizations and investment firms. Crucially, the fund will also explore the possibility of establishing soft incubation capacity and resources expertise and programs that will support individual investee entrepreneurs and companies, in successful enterprise development and performance. This effort will address social impact objectives, by kick-starting an ecosystem of capacity-building around BOP-focused enterprises and entrepreneurship; and economic return objectives, by providing entrepreneurial teams with the capacities needed to successfully deliver on their ideas. The Government of India has announced an initial investment of $20 million (INR 100 Crores) in the fund.15 The fund is currently in the process of conceptualization, design, and development. It plans to start its operations once it has $100 million. Hence, it is actively scouting for $80 million from private sector and other non government agencies.
13 14
Times of India, Jan, 2012 National Innovational Council Website 15 Indian Express, November, 2011
38
RURAL INNOVATION FUND

The Rural Innovation Fund (RIF) is a fund managed by the National Bank for Agricultural and Rural Development (NABARD) to foster innovation in the rural sector. The RIF supports innovation in farm, non-farm and microfinance sectors that have the potential to promote rural livelihood opportunities and employment. The support the fund offers can be in the form of a loan, grant, incubation fund support or a combination of the three up to a maximum of $56,600 (INR 0.3 Crores). Individuals, NGOs, community based organisations, self help groups, farmers clubs, Panchayati Raj Institutions and private sector companies can all apply for funding to the RIF. The preferred areas that the fund supports relate to agricultural productivity, rainwater harvesting and distribution of water, generation and distribution of energy, rural sanitation and waste disposal, managing common property resources, rural housing and habitat development, financial inclusion, rural tourism and rural health care. Since the inception of the fund in 2005, NABARD, through the RIF, has supported 455 projects till date with disbursements of $8.11 million (INR 43 Crores). In 2011-2012 alone, the RIF has disbursed $1.92 million (Rs. 10.18 crore) supporting 80 projects. 16
16
NABARD website
39

Inclusive Business Market Study For India and Sri Lanka (Draft Report)

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INCLUSIVE BUSINESS MARKET FOR INDIA AND SRI LANKA

List of abbreviations used

Macroeconomic assessment of India ............................................................................................ 11

Macroeconomic assessment of Sri Lanka ...................................................................................... 22

Inclusive business mapping............................................................................................................ 30

PE markets assessment .................................................................................................................. 49

Donor mapping .............................................................................................................................. 59

1. CONTEXT AND METHODOLOGY

Our analysis is presented along 3 topics:

2.3 FUND OPERATIONALISATION

3. MACROECONOMIC ASSESSMENT OF INDIA

3.1 OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

2000F 2010F 2020E 2030E 2040E 2050E

Community, social & personal services

AGRICULTURE AND ALLIED SERVICES

3. Contribution of sectors to GDP and labor force em

$ 1.8 trillion 18%

3. Multi-dimensional poverty index (MPI) mapping of Indian

% share of total population

3.2 KEY TRENDS SHAPING THE ECONOMY

3. Figure 7: Projections for India's working age population

Demographic projection for India

SOURCE: United Nations Population Divisions

SOURCE: Census of India, Dalberg research and analysis

3.3 SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

3. Annual BoP household expenditure by category

Total market size

Energy Healthcare Houshold Transpgoods ortation

3.4 CLIMATE FOR ENTERPRISE AND INVESTMENT

3. Short-term outlook by rating agencies was negative in mid-2012

4. MACROECONOMIC ASSESSMENT OF SRI LANKA

4.1. OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORS

HEALTH AND NUTRITION

WATER AND SANITATION

4.2. KEY TRENDS SHAPING THE ECONOMY

4. Population distribution by age

0-19 20-59 60+

30 15 - 19 20 - 24 25 - 29 30 - 39 40+ 2002 2004 2006 2008 2010

4.3. SIZE OF THE MARKET AT THE BASE OF THE PYRAMID

Figure 18: Segmentation of market at the base of the pyramid

Other Education Personal Care & Health Transport Energy

4.4. CLIMATE FOR ENTERPRISE AND INVESTMENT

5. INCLUSIVE BUSINESS MAPPING

Distributor Employee Supplier

68 Domestic PPP 1% Public sector 7% Foreign-owned 18% private sector

Consumer Non LIS 29%

63% <1 43%

Domestic private sector

5.2 ANALYSIS OF FINDINGS

27% 19% 31%

Consumer Supplier Distributor Employee

23% 25% 33% 20%

Water and sanitation

Figure 22: Consumer model strategies Engagement strategies of consumer models N = 43

Provide Pay-peruse option

Sell smaller units

Partner with NGOs/MFIs to sell through their networks

Decentralize production to be close to distributors

Provide financing to meet costs of up-front investment

to invest in training and skill development

Offer financing support for training/education in extern

financial, the BoP experience increased access to critica

GOOD FOR BUSINESS / CUSTOMER RETENTION