Scott Anderson

Five Years Since Launching, Opportunities for the Majority Sees Buy-In for BoP

Earlier this year we announced a new group of Content Partners who are sharing knowledge and action-oriented best practices with the NextBillion community. Each of these organizations is focused on business development and poverty alleviation from a slightly different angle. Today, we’re spotlighting Opportunities for the Majority (OMJ), created by the Inter-American Development Bank. In less than five years since its launch, OMJ has taken a multi-sector approach to financial inclusion by providing loans, grants, and financing 33 projects and corporate deals valued at more than $200 million. OMJ often acts as the glue by forming partnerships between private sector companies, local governments and communities in Latin America and the Caribbean.

I recently spoke with Elizabeth Boggs Davidsen, principal specialist at the Inter-American Development Bank, on what OMJ has accomplished so far and where it’s headed for the future.

SA: In the five years since OMJ’s creation, how have you best used private sector ideas to serve the base of the pyramid and reduce poverty?

EBD (pictured left): Since we were created in the middle of 2007, OMJ has done a lot of work to prove the premise that there is a vital role for the private sector to play in solving problems of poverty. OMJ incubates good and profitable private sector ideas that meet the needs of millions of people at the base of the socio-economic pyramid in Latin America and the Caribbean.

Our initiative is based within IDB’s private sector group. We structure and finance business models with private companies and financial institutions so they can make connections and do business in hard to penetrate markets while providing basic goods and services for low-income communities across the region. The more than 350 million people who make less than $300 a month in Latin America and the Caribbean represent a $500 billion market.

Our projects have brought affordable homeownership, banking, early and higher education within reach of people who are otherwise shut out of these markets, or are forced to pay higher prices because they lack credit and ways to build credit histories. We have helped micro-entrepreneurs obtain loans to improve their businesses and enter sustainable distribution chains.

OMJ gives loans and guarantees to share the risk of entering base of the pyramid markets with the private sector. In instances where business models need an extra boost to become market-ready, we give non-reimbursable technical assistance. In the last five years OMJ has designed 33 credit operations, and 34 grant projects.

In a short span of time with a small and nimble team, we have built up a portfolio of 33 projects and corporate deals totaling over $200 million. We have leveraged $1 billion from our partners and other investors. Interest in our work is generating excitement from businesses across the continent.

SA: In terms of execution and approach, how has OMJ distinguished itself from, say, banks or venture capital financing?

EBD: IDB is the first development finance institution to establish an operational office like OMJ. Using ordinary IDB capital, we dedicate ourselves exclusively to originating, structuring, and implementing business models that serve the base of the pyramid. While many organizations work in the field of impact investing, we at OMJ are unique in our focus on designing models with very intentional double bottom lines—profit for companies and improved access to goods and services for people with limited means who need them.

Private companies and financial institutions know how to innovate when it comes to developing a new product or service for base of the pyramid markets. The challenge is to identify ways to target and distribute the goods and services to low income markets. At OMJ, we have found ways to crack the distribution code by developing models in partnership with utility companies, financial institutions, corner stores and distributors. Through innovative platforms, we bring projects to scale more quickly and make them easier to replicate.

For example, a million families can fix and expand their homes or build new ones by obtaining micro-loans for construction materials through CEMEX, a large private cement and building supplies company. OMJ’s $10 million partial credit guarantee will enable CEMEX to greatly expand this program beyond Mexico to four other countries. Another smart use of a platform to extend services is in Colombia. Utilities company Empresas Públicas de Medellin (EPM) analyzed how promptly its 1.7 million customers paid utility bills, and through a project with OMJ, is now offering those with good records credit, the opportunity to buy appliances and other household goods.

Another way we’ve distinguished ourselves is through our design of risk sharing facilities with companies and banks that guarantee pools of micro-borrowers. Only if the pool’s repayment dips below a certain percentage, is our guarantee triggered. That allows OMJ to partner with large companies interested in sharing the credit risk of unbanked customers. And it means low-income individuals without bank accounts or credit histories can buy a company’s good or service through installment payments.

OMJ has the know-how and networks necessary to help companies identify business opportunities and find the right local partners. Our team works closely with companies throughout the implementation process to make sure they monitor projects and collect baseline data to tell the story of their impact.

(Right: A recently paved street in the municipality of Andador Miguel Obregón in Mexico. Image courtesy of CEMEX.)

SA: OMJ is involved in a wide range of enterprises, from agriculture supply chains to housing, health and much more. Given your diverse portfolio, how do you stay focused on impact?

EBD: OMJ’s goal is to work with firms to identify and finance models that have the potential to reach scale and be replicated; we do not limit ourselves to any sector. As a result, our projects make a difference in many fields: education, health, infrastructure, housing, financial inclusion, retail, digital literacy and use of technology, and agriculture supply chains. We work with medium and large enterprises and leverage the participation of many impact investors in our projects.

To measure the impact of our investment and grant portfolio, OMJ adopted the Impact Reporting and Investment Standards (IRIS) in 2010. Formulated by the Global Impact Investment Network, IRIS provides organizations with an independent set of metrics and a basis for social performance reporting.

Thanks to IRIS, we have harmonized our social metrics’ reporting and we are carefully quantifying the ways in which our projects are affecting for the better the lives of millions of low-income individuals.

As part of their contractual obligation with us, firms must commit to collecting metrics information on their projects. OMJ teams work with clients to incorporate a baseline of indicators that will be measured over the life of the project. Clients report metrics to OMJ, and we verify them through a web-based software system, PULSE, used for the portfolio.

Thanks to the adoption of IRIS and our new software, OMJ tracks impact, compiles information about the portfolio, and generates knowledge products like case studies and economic data.

SA: What have you discovered that does not work? And how has OMJ found solutions to these roadblocks?

EBD: Placing triple A credit is not easy. More than a third of the firms that approach OMJ for financing or business modeling assistance do not have enough security or track record to absorb debt from the IDB. The Bank’s credit rules make working with start-ups challenging, and that is why we also finance several impact investing funds that extend equity and working capital to base of the pyramid ventures.

To work within our tough financial covenants, we often structure projects in phases to limit the Bank’s exposure and to allow a model to pilot on a small scale before we extend additional credit to scale it. This allows us to work with firms with less security than is typically allowed and to gradually phase in our financial covenants. It also allows testing and monitoring of pre-commercial models while limiting the credit exposure for the client or the IDB until the model is more robust.

SA: OMJ works with governments throughout Latin America and the Caribbean on enterprise development. How can public/private partnerships be most effective?

EBD: Partnerships and alliances are key to OMJ’s work. None of the business models we support would have succeeded in the market if it weren’t for partnerships between the private sector, funds, impact investors, local governments and non-governmental organizations (NGOs) with roots in the community.

We often incorporate NGOs and social investors into the design and financing of business models. And we bring our partners and stakeholders together so senior executives from corporate, financial, philanthropic, and academic worlds can discuss and debate what works and why when developing market based solutions for the base of the pyramid.

OMJ held the BASE Forum in Brazil in 2011. It was the first base of the pyramid forum organized in Latin America and the Caribbean. This year, OMJ is hosting Base of the Pyramid Week in Washington D.C. from May 29-31 where many different stakeholders will discuss impact investing, how policy innovations can unleash private solutions, and how to scale up base of the pyramid models.

SA: Let’s talk bit about replication of models. Can you please explain the potential of your early childhood development project?

EBD: Countries in Latin America and the Caribbean face many of the same development challenges.

One is early childhood development education, which is in scarce supply particularly for low income communities or is of poor quality.

There is a direct relationship between poverty and inadequate early childhood education. And in Latin America and the Caribbean there are 32 million children under the age of six who are not enrolled in any kind of preschool. Investing in early childhood development can have life-long positive effects on education, health and employment.

Providing private solutions for early childhood education is an unexplored market. It’s an opportunity for the private sector to develop and offer good, affordable materials and services to both children and caregivers. One company in Brazil is blazing a trail into this important domain with OMJ support.

OMJ is lending $3 million to PUPA, the first private sector provider of early childhood education in Brazil. The company exclusively targets low-income children, their parents and caregivers. PUPA will provide easy-to-follow educational play kits comprised of colorful magazines, LEGO toys, and audio-visual aids. The company will also provide training for parents and caregivers in the use of the early childhood development kits so they will have the tools and know-how to stimulate pre-school aged children.

PUPA’s products will be sold through micro-loans in increments over 24 months to parents and caregivers. A network of partner NGOs and micro-franchisees—mostly self-employed women- will be the main outlets. Micro-franchisees will sign up customers, help them select the right PUPA package and check in regularly with customers to ensure that the program is being implemented well. They will also perform basic tracking of social performance indicators.

Regardless of income, almost all parents are willing and eager to invest in their children’s development. A business design like PUPA’s has the potential to be replicated and to become a role model for the region. It benefits children, their parents, and informal caregivers. And it is also a holistic approach that intends to measure its impact on children’s socio-emotional and cognitive development.

(Pictured left: A child plays with one of PUPA’s play kits. Image courtesy of PUPA).

SA: Developing small and medium enterprises (SMEs) is key for OMJ. What methods are the most effective in helping SMEs grow their workforce and reach larger markets?

EBD: OMJ’s experience in cracking the code of traditional distribution platforms is crucial to developing SMEs. Distribution is the main challenge in scaling up and replicating business at the base of the pyramid. It’s also the main opportunity.

We have reached many SMEs through our distribution platforms. And we’ve made many of them stronger with a combination of access to credit, training and solid positions within value chains. In Bolivia, our project IDEPRO, gives small agricultural producers access to credit while anchoring them to companies that need their product. That allows small enterprises to grow and become sustainable, long term links in a production chain.

In 2011, with Endeavor Brazil and Banco Itaú-Unibanco, we launched a capacity building program for SMEs serving the base of the pyramid. It works to create an environment, or “ecosystem,” for fostering growth, development, and entrepreneurship of these SMEs. By fostering and funding SMEs focused on serving low-income markets, we generate new solutions to poverty and attract new impact investors interested in financing social enterprises.

SA: Looking ahead to 2012 and beyond, what are the top initiatives on OMJ’s radar?

EBD: In a short amount of time, OMJ has become a thought leader within IDB. Our work influences and encourages the Bank’s new partnerships with social entrepreneurs and impact investors. We share the lessons we’ve learned about how to build successful partnerships, pick the right distribution channels and fund solid business models. Our successes benefit all of the private sector. As we surpass the $200 million benchmark, OMJs portfolio continues to grow. In 2012 our focus is on developing more projects with corporations that have the potential to reach scale. We are also working to design grant programs so that pioneering social investments are able to make the leap from interesting pilot to commercial, replicable and scalable business models.

financial inclusion