1. business and industrial

fund this,
not that
IDEAS FOR IMPROVING INVESTMENTS IN GLOBAL DEVELOPMENT
A DALBERG COMPENDIUM | APRIL 2012
fund this,
not that
IDEAS FOR IMPROVING INVESTMENTS IN GLOBAL DEVELOPMENT
A DALBERG COMPENDIUM | APRIL 2012
preface
This year marks the tenth anniversary of Dalberg’s launch as a consulting firm
dedicated to applying the tools of the private sector to the world’s most pressing
challenges. After starting out in a small office in New York, Dalberg now has teams
based in 11 offices on five continents. They advise decision-makers in governments,
international institutions, foundations, non-profits, and for-profit companies on questions ranging from internal structure to investment strategy, from market entry to
evaluation of development impact.
Most of our work focuses on the parts of the world variously referred to as developing countries, frontier markets or emerging economies. These nations have made
exciting improvements in social and economic development in the past decade, but
the change needs to be broader-based and more sustainable. Maintaining momentum while addressing shortcomings and ensuring that no one is left behind is a difficult but crucial task.
To that end, we present the latest of our continuing efforts to draw novel and useful
insights from our work. The chapters that follow have emerged from debates within
our team on the approaches to development that offer the greatest potential to support growth, sustainability, and social justice. These varied perspectives don’t always
fit into a single narrative of what works in development, mainly because our biggest
lesson has been that many things work in some contexts and fail in others. Instead,
we hope that this anthology will stimulate reflection and debate about how the world
might do things differently and better.
Let me conclude by thanking the many members of our team who dedicated nights
and weekends outside their usual work to make this publication a reality. Special
thanks go to our thought leadership and communications teams. Together we hope
that you will find it both practical and provocative.
James Mwangi, Global Managing Partner
Dalberg Global Development Advisors
Johannesburg
April 2012
Contents
Preface
Why fund this, not that?
2
6
Laying the Groundwork
Investing with Discipline: Ex Ante Accountability
Knowing Your Customer: Segmentation for Agriculture
10
18
Deploying Capital
Leveraging Scarce Resources: Blended Structures
Maximizing Social Investments: The Long-Term View
Catalyzing a Market: Energy for the Base of the Pyramid
26
34
42
Ensuring Results
New Mechanisms for Monitoring: The Global Health Institutions
A New Compliance System for Human Rights: Certification
Evaluating Impact: Balancing the Three Emphases
54
62
72
4
5
Why fund this, not that?
Daniel Altman
In global development, good intentions are no longer enough. The idea that aid for
poor people in foreign countries is simply altruism or charity has all but vanished.
Today we understand that every program, every initiative, every partnership is an
investment in a shared future. And we expect results.
This new attitude has spread quickly in the past several years, in part because of
the changing conditions facing development organizations. Funding is limited, and
a greater interplay with the private sector has ushered in expectations of measurable performance. But the attitude has also spread because of the recognition that
development investments can pay enormous returns, raising the living standards of
people who will someday become consumers, employees, and partners in the global
economy.
The question is, how do you do it? How do you change processes and mechanisms
that have evolved over decades, in order to make organizations more accountable
and maximize the impact of every dollar? In some cases, it only takes a willingness
to adapt to new thinking or methods – a better way of doing things. In others, it involves difficult tradeoffs in the deployment of time and resources.
There is plenty of room for innovation here, and Dalberg is convinced of the value of
trying new approaches. In this spirit, we asked some of our staff to offer their insights about the future of development: what to think about before taking on a new
challenge, how to target and structure a new investment, and how to foster accountability for measurable results. Contributors from seven of our practice areas answered these questions in a variety of contexts, emphasizing the choices that need
to be made at each stage. Together, they’ve offered a basket of ideas for a new kind
of global development. We hope you’ll join us as we try to turn them into reality.
6
laying the
ground
work
9
Investing With Discipline :
Ex Ante Accountability
Daniella Ballou-Aares, Oren Ahoobim, Lorenzo Bernasconi, James Mwangi
The most forward-looking organizations see development initiatives as investments
with clearly defined term, risk, and return. Yet true investing also means having
the discipline to pull out of failed projects and hold counterparties accountable for
their obligations. Development investments are contracts, not gifts or open-ended
projects. Only with discipline and accountability can investors minimize waste and
unintended consequences.
DEFINING THE CONTRACT
Accountability in development investments is impossible without a contract that
specifies the obligations of all the counterparties. In other words, you can’t hold
someone accountable for something that they never promised to do, or for something that’s not easily verifiable. This is as true for development investments as it
is for commercial investments. Only by acting as reliable counterparties can implementers of development investments be treated as equals and maximize their
funding.
When evaluating a typical commercial investment, portfolio investors look at three
attributes: what return they may hope to receive, what risk is associated with that
return, and over what period – or term – the return will be delivered. Sometimes one
or more of these attributes is neglected, though, and this is where trouble starts.
10
For example, return can be poorly specified if it is unclear who has a right to it, as
in a patent dispute. Risk can be assessed incorrectly by investors and service providers, as it was for subprime mortgage securities in the United States during the
recent financial crisis. And even term can be ill-defined; construction of the eastern
span of San Francisco’s Bay Bridge was supposed to end in 2007 but is now scheduled to finish in 2013. How the counterparties would be affected by delays resulting
from factors as varied as California’s fiscal crisis and the involvement of the United
States Navy was incompletely specified in the underlying contracts, so some of them
had to be renegotiated.
Development investments have analogs to all of these attributes and their potential
problems. For example, specifying who receives returns is essential, since claims can
sometimes conflict or be considered illegitimate. Consider an investment in the supply chain for staple foods in East Africa by a multinational company, a United Nations
agency, and a national aid agency. Who can claim the reputational benefits generated
by the investment? How much of the cost savings should be passed on to local consumers in the form of lower prices? Who receives any profit that might result? When
assessing the investment, the potential investors should consider the risks, too. How
reliable are the implementing organizations? Could events like changes in the weather affect the investment’s success? How do these risks compare to those carried by
comparable programs or other investments in the investors’ portfolios?
Investments in development should also deliver their returns within a specified period
of time in order to align the expectations of investors and those seeking funds. An investor who is not perfectly patient – and most are not – will prefer an investment that
promises to save 100,000 lives in five years to one that promises to save 100,000
lives in eight years, all other things equal. Moreover, the absence of a term makes
defining returns in a comparable way almost impossible. Returns such as 300,000
children treated for malnutrition, 50% penetration of anti-malaria bednets, and carbon emissions reduced by 20,000 metric tons are not meaningful without deadlines.
FOSTERING ACCOUNTABILITY
Accountability has often been missing in the development community. People who
work in development usually have good intentions, and these have sometimes
excused poor performance. The policies of some development organizations can
make discipline difficult, too. For instance, it is not easy to fire the employees of
multilateral and government agencies, or even to implement performance-based
pay. In addition, complex rules for procurement discourage these agencies from
switching to a new contractor if an established provider of products or services
comes up short. Political priorities can also get in the way of investment decisions
11
guided by measurable results. It is up to leaders, citizens, and civil society groups
to police the development investors, making them accountable for discipline in
their own decision-making as well.
Another persistent problem is unwillingness to recognize failure. Admitting failure is
hard for anyone, but it is practically impossible for a development investment when
return, risk, or term has not been clearly specified. Even when they have, an investor must make the choice to recognize failure and to learn from the experience, as
should the implementer of the investment.
Financial markets are filled with failures – hedge funds that go bust, companies
that go bankrupt, and new ventures that can’t get financing. All of these are usually
(though not always, as we have seen in recent times) signs of healthy risk-taking
and creative destruction. Failures are recognized contractually among investors and
their counterparties, as well as publicly in the markets. Groups seeking funds after
a failure know they will have to offer less risk or higher returns to regain investors'
interest.
This has not always been the case in the development community. Part of the reason is that failure and its consequences are rarely well defined at the beginning of
a development investment. For instance, beginning in the 1930s the French government relocated more than 30,000 people in an attempt to develop almost 2.5
million acres of desert in Mali. The results were abysmal, yet the government continued to pour money into the project until, by the time Mali became independent,
the French had spent $175 million of taxpayers’ money. The benchmarks for the
project were so poorly defined and so easily influenced by politics that discipline and
accountability were virtually non-existent. Despite causing hardships for thousands
of families and throwing good money after bad for decades, the project continues to
operate today.
In commercial markets, such failures usually have consequences. Corporate bankruptcies end in reorganizations or liquidation. Government defaults lead to negotiations and selloffs of assets. When failure happens in development investments,
investors’ recourse should also be determined in advance – an option to withdraw
financing, close down operations, dispose of assets, etc. If funds can be recovered
from a failed investment, then they can be applied to another investment.
A useful way of dealing with this problem is to have a succession plan built into the
investment. With clear conditions under which the investment can be transferred,
reorganized, or liquidated, it is more likely that failure will be recognized and acted
12
upon. Recognizing failure earlier and acting upon it more efficiently will improve the
allocation of financing for development and, eventually, reduce the stigma of failure
as well.
Some accountability will be supplied by the market. Investors will not continue to
finance groups that consistently disappoint expectations; at the very least, they
will demand higher returns or lower risks. The British Department for International
Development has done all three, with its Multilateral Aid Review, which identified
underperforming agencies whose funding would be stopped. When this approach is
the norm, internal accountability will result as well. Implementers of development
investments that fail to attract financing because of poor performance will be forced
to either dissolve, or to change their staff and practices.
DFID is not alone. The European Bank for Reconstruction and Development and
Plan International, for example, have been distinguished by the One World Trust for
having some of the best internal and external accountability mechanisms in their
respective fields.
This shift among funders can complement the growing demand among beneficiaries in developing countries for greater discipline in how funds targeted at them are
spent. Poorly designed and managed development investments are not only a waste
of investors’ or taxpayers’ money but can also harm the communities they purport to
help. Collecting input from beneficiaries themselves is another critical ingredient for
ensuring accountability among implementers and investors. This volume’s chapter
on global health institutions illustrates how new technologies and communications
infrastructure can facilitate this process.
THE FUTURE OF DEVELOPMENT INVESTMENTS
Impact investors, social enterprises, and even some commercial funders are already
bringing the language of portfolio investing to the development world. Soon, angel
investors, venture capitalists, private equity investors, commercial lenders, public
shareholders, and fixed-income investors will be distinguishable just as they are in
the commercial markets, with financial services provided by experienced intermediaries, as shown in the graphic on the next page.
This is a logical progression, since a lot of “impact investments” in emerging economies would simply be called “investments” in a mature economy.
DFID and other leaders in this field are demanding measurable results and using
financial tools to leverage their impact. As funds become tighter, other actors in the
13
Creating
investment
vehicles
Raising early
financing
Local
researchers
Social
entrepreneurs
Social venture
funds
Bilateral
agencies
Commercial
markets
Development
professionals
in the field
Nongovernmental
organizations
Local banks
Development
finance
institutions
Exit
Commercial analogs
Development actors
Identifying
opportunites
Philanthropists
Think tanks
Market
research
Applied
scientists
Consumer
groups
Expanding and
reinvesting
Maturity
and/or
sustainability
Corporates
Entrepreneurs
Angel investors
Incubators
Venture
capitalists
Personal
finance
Private equity
firms
Commercial
markets
Commercial
banks
Exit
development community will have to follow their example. But this shift will make
spending on development more efficient and effective: sustainable models will be
favored over aid-dependent programs; backers of development institutions will be
able to respond to skeptics with numbers; and good intentions won’t be enough to
justify new funding or to excuse poor performance. Here are some steps that each
set of actors can take:
Investors in development. For each investment, insist on a contract specifying
claims to returns, term, and a succession plan for each investment. Do due diligence
to estimate risks. Track progress in line with accountability mechanisms set forth in
the contract. Recognize and terminate failed investments. Avoid implementers that
do not learn from their failures.
Implementers of development investments. Estimate returns and risks in a transparent way before seeking financing. Report data on progress according to a preset
schedule. Adhere to the terms of the contract, especially in case of failure.
Development investment service providers. Adapt and design services for all stages
of development investments. Provide information that helps investors to assess
implementers and investment opportunities. Help investors and implementers to
add rigor to investment decisions.
14
Of course, these are not the only actors affected by development investments. The
people whom these investments affect most directly can also take advantage of the
investment approach to make development more efficient:
Recipients of development interventions. Accountability and discipline should start
with the people whose lives development investments are supposed to improve. By
collecting and reacting to their feedback, investors in development can better perceive risks before making an investment and judge returns more precisely once an
investment is underway.
Individual funders of development investments. Taxpayers in democratic countries
and people who make voluntary gifts to charity can insist on verifiable results and
accountability when these results fail to live up to expectations.
The investment approach is a tool that helps investors to get the most for their
money. On the scale of the market, it also separates success from failure. Doing
both of these should always be among the top priorities in the development community, even though they may run counter to entrenched organizational norms such as
rubber-stamping evaluations, transferring rather than firing incompetent staff, and
otherwise sweeping failures under the rug. Yet in the current funding environment,
discipline and accountability are especially urgent. If culture has to change to institute them, so be it.
15
16
17
Knowing Your Customer :
Segmentation for Agriculture
Angela Hansen, Thomas Carroll, Adam Bradlow, Naveed Ahmad
Across the world’s emerging economies, an ever-expanding network of roads, cell
phones and computers is suturing up the divide between urban and rural zones. This
change is creating new market relationships, financial challenges, political realities
and technological change. It is being felt in rural communities, too. The countryside is
a mosaic of differing ambitions and trajectories. Some smallholders want to farm, and
they want to do it in the most productive possible way; they are the key to their countries’ food security in the future. Others want to leave the farm, or for their children to
leave the farm, and helping them to do so is the best way we can improve their lives.
We in the development community need to make sure we heed the voice of the rural
poor and offer programs that are appropriate to the diverse groups among them.
Today we need a nimble approach that fine-tunes initiatives to match the ways individual farmers are reacting to shifts in their industry. With a sharp focus, we must address ourselves to those farmers who want to adopt new techniques that will increase
crop yields and enhance local livelihoods. We should ‘sell’ our initiatives to those who
are most apt and able to experiment. They are the most likely to exploit the full benefit of our initiatives and, crucially, to encourage their peers to participate as well.
To that end, agricultural interventions should start by gathering data that can be
used to segment community members – that is, to categorize them according to
18
relevant traits so that initiatives can target the individuals and families that are
most likely to adopt new practices. For example, a survey might ask whether a farmer regularly experiments with new seed varieties or storage techniques, or whether
the farmer hopes to leave agriculture sometime soon. Though gathering data about
rural communities can be time-consuming and costly, catching even a glimpse of a
farmer’s behavior and thought process can make the difference between an effective and welcome intervention and an intervention that may be inappropriate or
wasteful.
Naturally, there are tensions implicit in using farmer-led segmentation. In many
initiatives, geography – not the characteristics of farmers – is used to determine
whether an intervention is appropriate. Either kind of segmentation can imply a cost,
and so using both may be impossible. Whatever money is spent on segmentation
may come from a fixed, budget, too, so segmenting may lower the number of farmers
who receive the intervention. Still, it is important to break with the idea that agricultural development initiatives should try to convince all farmers in a region to adopt
new practices and maximize their productivity. This approach has had its successes,
notably the Green Revolution’s elimination of famine in India, but we no longer live in
a world where all rural people see their families’ futures in working the soil.
HOW FARMER-LED SEGMENTATION WORKS
If this approach sounds familiar, it should. Segmentation is a technique used by
market research firms to identify likely customers for virtually all of the biggest
companies in the world. Implemented in the public sector, segmentation would allow
development partners and governments to identify not just people who will or won’t
take up an intervention, but also people who might encourage or discourage their
peers from doing so.
Farming communities are especially suited to segmentation. Some farmers are passionate about agriculture and want to take advantage of new technologies and the
quick spread of information to improve their productivity. Others may accept farming
as their occupation but hope that their children will have other options. Still others
may themselves want to leave the land as soon as they can. And some, despite the
rapid growth in the developing world, are still farmers by default, with no other options readily available and little wherewithal to adopt the sector’s most cutting-edge
tools and techniques. All of these groups may react in different ways to the same
intervention.
In addition, farming communities typically include leaders, followers, and other
groups with distinct status that all interact with each other. The leaders get high
19
yields from their crops and are adept at choosing the right time to sell; they have the
respect and attention of their peers, and are especially valuable as early adopters
of new interventions. Identifying these leaders and gauging their aptitude for and
attitude towards an intervention can help implementers to structure their program,
targeting and phasing in parts of the population in a way that maximizes uptake.
Ultimately, segments are only as accurate as the data on which they are based. As
such, it is important to involve local community members in any effort to collect
information. This will ensure that the relevant populations are empowered to give
voice to their own ambitions. Beyond either paper, electronic or SMS surveys, program designers need to draw on other sources of data about the community. For example, they can gather information on mobile money services, sales through traders
and local crop yields.
WHEN SEGMENTATION IS HELPFUL
Segmentation is most helpful for agricultural programs that are seeking to achieve
a big impact across a large geographic area – exactly the situation where blanket
programs have usually been used in the past. With limited resources, it is critical to
rapidly identify those individuals or organizations that have the potential to increase
crop yields and overall efficiency on the basis of a broad range of factors. Helping
these farmers to expand will bolster food security in their communities in the short
run. In the long run, some of them may be in a position to buy up land from neighbors who prefer to seek new occupations, keeping ownership in the community and
expanding the share of its land that is farmed efficiently.
Segmentation is already gaining popularity in the development field. When the Bill
& Melinda Gates Foundation was looking to improve agricultural efficiency among
farmer cooperatives in Ethiopia, its staff used segmentation to identify the organizations with the highest potential. To start, they undertook a survey that compared
farmer cooperatives by their governance, representation, economic efficiency, service offering, strategic potential and business fundamentals. The resulting profiles
allowed the Gates Foundation to shape their investment strategy not only by identifying the cooperatives that would be able to use the assistance efficiently, but also
locate the specific areas where the cooperatives needed help. The foundation hopes
that this approach will maximize the program's benefits for the rural poor in Ethiopia,
since strengthening cooperatives could enhance linkages to domestic and international markets for smallholder farmers throughout the country.
A targeted approach can also help when there is a severe gap in knowledge among
farmers about an intervention. In countries where rice is a staple crop, introducing
20
a hybrid germplasm with built-in drought resistance and food tolerance can help
generate dramatic improvements in yield. But in many places, small farmers aren’t
familiar with the economics or logistics of using a hybrid strain. Identifying an early
adopter who has—or can be given—a strong base of knowledge may be the only way
to foster uptake from the first stages of the intervention. The same dynamic may
hold true for several kinds of intervention, such as programs that seek to introduce
crop insurance in communities where financial literacy is limited. In these cases,
segmentation can help development workers target farmers with an aptitude for
personal finance and the ability to influence their peers.
STRUCTURING A SEGMENTATION EXERCISE
Though segmentation techniques can help bring to light pivotal aspects of the local reality, they can also obscure important nuances if they are not used strategically. One of
the challenges of population segmentation is that the technique presents a snapshot
of the community at a specific point in time, but populations themselves are dynamic
as they move through time. For example, a farmer that was once resistant to adopting
a new technique might change her mind after seeing her neighbors’ success.
Pairing segmentation with a robust monitoring and evaluation (M&E) framework will
help to account for these changes. Repeating surveys at regular time intervals over
the life of an intervention would be ideal, but this is often too costly or otherwise
impractical. Rather, programs should build in an ongoing M&E strategy that can be
used to test initial assumptions that were informed by the farmer-led survey. For
example, a sensitive M&E framework might measure both the uptake rate of a given
initiative as well as local attitudes towards the intervention. When M&E data starts
indicating increasing community receptiveness to the initiative, development workers would be wise to adjust their initial segmentation assumptions and increase the
number of individuals targeted by the approach.
CONTROLLING COSTS
One of the greatest barriers to implementing farmer-led surveys that can help segment the targeted population is the perceived high price tag. But segmentation is
not only affordable, it may actually lower costs. Some interventions rely on economies of scale to be cost effective, which means that achieving a high take-up rate in
a short period of time is essential. This is often the case with the introduction of a
new product that will be part of an intervention. TechnoServe’s recent efforts to introduce new machines for washing coffee beans in Rwanda and Tanzania are a good
example. One of the leaders of the project estimated that the time for the program
to break even could be cut in half if he knew which farmers would act as leaders in
their communities, disseminating information and tips about the new machines.
21
In other cases, segmented surveys can be cost effective by narrowing the range
of farmers for targeting. For example, consider a program that is seeking to teach
10,000 farmers new farm management techniques at the cost of $10 a farmer for a
total cost of US$100,000. A survey costing US$20,000 could be used to identify the
20%-40% of the population that is best able to implement the new set of practices
and pass on the techniques through regular social channels. Rather than adopting a
shotgun approach that would address all 10,000 individuals, the intervention could
target as few as 2,000-4,000 particularly adept farmers. This would result in savings
of up to US$60,000. Using mobile and online communications, whose underlying
infrastructure is quickly spreading into even the most remote areas, can lower the
cost of communicating with farmers even further.
Finally, farmers in developing countries are the target of many different interventions, not all of them related to farming. Health, energy, education and communications programs may exist alongside agricultural programs, all being delivered by different organizations. Though they may all need different information from farmers,
they can share the cost of segmentation by combining their queries into single survey. Upon analyzing the results, they may also find that certain kinds of interventions
can be delivered more efficiently as bundles. But investors in development should
be careful not to target the same group of farmers continually; only by designing
different bundles for different groups do they exploit the full value of a segmentation
exercise.
A FINAL WORD
On the surface, segmentation is about breaking populations apart into separate categories. At its core, however, it is a tool for being better able to see the links between
seemingly disparate communities. As anyone who has tracked the journey of a crop
from plant to platter will know, the country and the city are inextricably linked. Farmers travel between these worlds on a daily basis, and they are aware of how their
role is changing and of their outside options. That’s why the time for blanket interventions is over. It’s time to see farmers as multifaceted people, not just identical
machines for growing precious crops.
22
deploying
capital
25
Leveraging Scarce Resources :
Blended Structures
Wouter Deelder, Serena Guarnaschelli
In emerging economies, investments that have social benefits as well as benefits to
investors often suffer from market failures: the road without a bridge, the village to
which no one will provide clean water, the promising small business that can’t get
credit. Private investors don’t have enough incentive to shoulder these investments
on their own, especially in risky markets, and the state may not have enough capacity to fund them either. In these cases, a blend of private capital with money and
contingencies from other sources can often catalyze a wider wave of investments.
Blended structures allow governments, aid agencies, and philanthropists to increase
the power of their funds. They usually assume risk disproportionate to the capital
they invest in order to make investing more attractive to other parties. For example,
a government in a low-income country hoping to catalyze the growth of a toll-road
system might try to attract big investments from private companies by guaranteeing
a minimum return for the first five years of operations. This kind of catalytic effect, or
leveraging, can work with almost any investment that has both a private and a social
return: clean water, education, renewable energy, etc. In some cases, it can even
help to bring a missing market into existence.
So far, blended structures have shown success in financing the purchase of commodities needed to fight epidemics, extending credit to small and medium-sized
26
enterprises, and attracting long-term commitments to agricultural investments. They
have also been suggested for areas as diverse as tertiary education in poor countries and strengthening healthcare systems in Africa.
Blended structures aren’t for everyone, though. It takes time and money to tailor
them to each transaction or market; there are very few off-the-shelf models. To use
them efficiently, it is important to ensure that the additional funding they attract
makes up for the costs of putting them together in the first place.
HOW BLENDED STRUCTURES WORK
Typically, a blended structure uses a small amount of public or donor finance to
unlock a much larger amount of private finance. In every case, the supply of private
capital is expanded by either reducing risk or raising the return for an existing investment. The implied subsidy does not have to be financial; advisory services that reduce risks in the implementation of investments can be part of blended structures,
if they are financed by a party other than the one with capital at risk.
Private investors
Social investors
Pure financial return
Development
finance institutions
Governments
Pure social impact
The parties involved in a blended structure will have different objectives. Some may
be interested solely in financial return, some solely in social impact, and some in a mix
of the two – or perhaps other objectives as well. They will also have different preferences for risk. Like all financial instruments, blended structures need to have financial
returns, seniority, maturity, and exposure to risk clearly specified from the beginning.
In addition to unlocking private capital, a blended structure usually creates a whole
that is greater than the sum of its parts. Private financing might not bring sufficient
technical assistance, whereas public or donor spending does not always come with
the same due diligence or flexibility that is customary in the private sector. When
27
all the parties involved in a blended structure are committed to the success of an
impact investment, they can bring all their diverse and complementary expertise
to bear. The more blended structures draw experienced financiers into the impact
investing field, the more valuable this support will be.
MODELS OF BLENDED STRUCTURES
Blended structures can cover financial markets ranging from debt (enhanced interest rates, loan guarantees, risk insurance) to regular equity (dividend enhancement
for social investments) to venture capital (soft start-up funding to overcome barriers
to market entry). Blended structures must be tailored to the investment process as
well as to the sophistication of the market, the transaction costs involved, and the
preferences of the counterparties. The diagram below shows what models for blended structures may be appropriate at different stages:
Market for
externality
Understanding of
financial/social
risks and returns
Cautious
co-payment
Safety net
Bespoke
co-investment
• Co-payment and markets
for externalities
• Wide accessibility; low risks
and transaction costs
• Co-payment for social impact
• Significant rules, regulations and risk
• Risk reductions for all eligible funds
• Increasing understanding of financial returns
• No uniform social impact measurement
• Risk reductions for hand-picked funds
• Little understanding of financial or social return
Scale
Bespoke co-investment
What is it? A bespoke co-investment is a customized solution provided by the public
sector to limit risk for specific private sector investors in a specific market. Tools include credit guarantees and subordinated equity. The private sector investors are carefully screened and chosen by the public sector. Examples include the Prototype Carbon
Fund of the World Bank in the early 2000s, and the IFC Aureos Healthcare Fund.
28
When do you use it? Bespoke solutions are best placed when public actors want
to pioneer investment in an area with presumed social benefits – in other words, to
blaze a trail that others may follow. At this stage, private sector investors often have
little to no information on the risk and even returns of these investments, and public
actors cannot yet fully define the social impact. For example, there is currently scant
information on the financial risks and returns for investors in education in Africa.
The hope is that pioneering models might resolve information asymmetries and
misperceptions, have a catalytic effect, and create a template for regular private
sector investment. To encourage handpicked private investors to explore this area,
a government might want to offer guarantees through one-on-one negotiations with
the individual counterparties.
What are the limits? Bespoke solutions have inherently high transaction costs
linked to the selection of the private sector investors and the customized division of
risks and returns between public and private players. The costs would rapidly become excessive if the solutions were replicated with a large number of investors; in
that situation, the safety net model might be more appropriate.
Safety net model
What is it? Safety nets are standardized tools that aim to reduce risks for a wide
range of eligible investors (e.g. partial credit guarantees, minimum return guarantees). The difference with bespoke co-investment is that the offered risk reduction is
similar for all private sector investors. Safety net models reduce transaction costs in
comparison to bespoke models.
When do you use it? Safety net models work well when there is growing understanding of the financial return to an investment, but it remains hard to measure the
social impact. An example would be the small and medium enterprise (SME) investment space, where there is increasing clarity on financial returns—especially for
debt financing—but the difficulties of measuring social benefits may dissuade impact
investors from getting involved.
Safety net models are well placed for temporary market failures that can be resolved
by bringing together a critical mass of people and resources. For example, in the
SME lending market, temporary support might be needed to catalyze infrastructure
(e.g. credit bureaus), hone skills (e.g. risk screening by banks) and build up track
records (e.g. credit histories). The hope would be that regular investment from the
private sector would take over these gaps were filled. A classic success story in this
area is microfinance, where blended capital was needed to create the market but
private investors are increasingly taking over.
29
What are the limits? Even with their economies of scale, safety net models can still
carry significant transaction costs and bureaucracy, especially when public funds
are vulnerable to mismanagement. Overcoming one kind of transaction cost – say,
corruption – can imply incurring another kind, such as legal fees or government
officials’ time spent on contracts and enforcement. Moreover, the underwriting of
risks can lead to moral hazard and risk-seeking behavior on the side of the private
sector investor. In addition, if the private capital is far from the knife-edge in considering these investments, then a small subsidy from governments or donors may be
infra-marginal – in other words, it might benefit the few investors who did not need
any extra inducement without bringing the bulk of investors into the fray. Finally, the
social impact here is still a beneficial side effect of the investment, rather actively
targeted and managed.
Because safety nets are just supposed to get enterprises or markets ‘over the hump’
to self-sustainability, they are most appropriate in the early stages of development.
By the same token, if the social impact of a class of investments becomes more
easily measurable – perhaps as a result of using the Global Impact Investment Reporting Standards – then safety nets could give way to the broader impact investing
market. Finally, if a market failure proves persistent, or if there is an ongoing need
to offset externalities, then different models may be more appropriate for attaining a
large scale and long-term viability.
Cautious co-payment
What is it? Instead of reducing risks, as in the safety net structure, the Public investors or donors pay for the desired social outcomes on a piecemeal basis; they make
a fixed payment for each unit of benefit that a private sector investor or entrepreneur
addresses. The interaction of the public player is no longer solely with the private
sector investor, but starts to move towards the entrepreneurs or companies that
receive the capital and implement the investments. To ensure that the public sector
does not pay for fraudulent or infra-marginal activities, there are usually extensive
conditions for eligibility and detailed verification of impact.
When do you use it? Co-payment mechanisms are suitable for situations where the
public backers or donors either want to avoid the costs of tailoring subsidies to private
investors and/or don’t care which private investors receive the subsidy. In other words,
they work well for large-scale initiatives where verifying the level of social benefit generated by each private investors ex post is easier than making deals with appropriate
investors ex ante. Examples are the provision of primary healthcare in Sub-Saharan Africa, the development of vaccines for neglected diseases, and the offsetting or reduction of carbon emissions such as the Certified Emissions Reduction mechanism.
30
What are the limits? The main difficulty involved is in verifying that each private
investor has generated its claimed level of social benefit and that this social benefit
would not otherwise have been created, that is, its ‘additionality’. If the costs of verification are great relative to the value of the social benefit being generated, the cautious co-payment model may become one of ring-fenced, sub-scale project finance
rather than a large and liquid capital market for private sector investment. Furthermore, in contrast to bespoke structures, co-payment mechanisms are based on
promises rather than guarantees, and thus may imply some political risk for private
sector investors hoping to collect ex post payments for actions they’ve already taken.
Market for externality
What is it? This model is the cautious co-payment mechanism with the training
wheels removed. It targets widespread change by setting prices for social benefits
(or social ills), which are then paid (or collected) by the public sector. Examples
include the carbon tax recently imposed in Australia and subsidies for school attendance and immunization pioneered in Mexico and Brazil. ‘Additionality’ is not verified on an individual basis; usually, the public backer of the scheme checks annually
that a certain amount of social benefit has been generated in the aggregate.
When do you use it? This model is promising when the externality can be measured
with ease, accuracy and at low cost. In this context, innovation plays an important
role, as new technologies in tracing and tracking (e.g. radio frequency identification,
low-cost global positioning systems) can facilitate real-time tracking and tracing. In
addition, the social impact should be large enough to outweigh any subsidy wasted
on infra-marginal investment.
What are the limits? In a market for an externality, there is usually a single price
that applies no matter how many units of benefit are generated, yet that price may
not reflect the true value of the benefit. For example, a carbon tax implicitly rewards
companies for reducing emissions, but the first ton of emissions reduced may be
more important for health and the environment than the 10,000th ton. The lack
of verification can also be problematic; some carbon-offset schemes based on the
planting of trees have been found to be fraudulent, leading to warnings from the
United States Federal Trade Commission.
LONG-TERM BENEFITS OF BLENDED STRUCTURES
Blended structures can bring scale to development investments by leveraging private capital, as long as they’re well matched to opportunities rather than being
thrown willy-nilly at gaps in financing. With time, their usage may help to standardize
development investments, too, so that they can be pooled, bundled, and securitized.
31
When specific tranches of risk and return can be parceled out to different counterparties, these parts of the investment can be standardized while the thornier parts –
those requiring more due diligence, monitoring, or expert advice – can reside in the
hands of specialists.
Sometimes securitization can be used to hide risk, as it was in subprime mortgage
markets, so caution will be required here. But standardization will lead to efficiency,
too, as the investments become recognizable, replicable, fungible, and tradable with
much lower transaction costs. In time, blended structures will create a watershed
in access to finance, and hence in social wellbeing, as long as they are used with
diligence and care.
32
33
Maximizing Social Investments :
The Long-Term View
Jonathan Berman, Bruce Au, Retief Swart
For-profit companies can have many goals, both acknowledged and otherwise: creating value for shareholders, bettering society, building empires for executives, or even
engineering political change. For most large public companies, however, creating
value for shareholders is the overriding necessity. Indeed, the institutional investors
who typically hold the majority of these companies’ shares would be rightly dismayed to see the companies directing resources towards any other end. As mutual
funds, hedge funds, and pension funds, they have a fiduciary obligation to optimize
return to their backers and beneficiaries.
Yet many companies make an exception to this principle when it comes to “social
investments” such as community redevelopment, education or health. This is a mistake. These investments can create plenty of value for shareholders when appraised
with a long time horizon. The mistake also reduces resources for social investment
and limits their impact.
Treating social investments like other corporate investments helps to bring them into
companies’ core operations, potentially raising by orders of magnitude the resources
committed to them. A company that spends a few million on philanthropic activity
may gain some reputational brownie points, but one that incorporates social investments into every link of its value chain has the potential to change the world while
34
enhancing its profits. The challenge is aligning shareholders, boards, and executives
with this more productive long-term vision.
THE STATUS QUO
Current practices for making social investments tend to rely on justifications that
do not require a measurable return on investment. For example, corporate social
responsibility (CSR) programs are usually assessed in terms of their contributions to
a social or environmental bottom line. These metrics may have merit, but they are
fundamentally alien to most managers allocating the bulk of corporate resources.
Furthermore, they are rarely translated into the core metrics by which business unit
leaders are assessed, promoted or moved out. Shared value programs may not use
these extra bottom lines, but they force managers to work in reverse – engineering
social investments into profitability after the fact, rather than asking what social
investments may be profitable from the start.
The results are apparent in how most companies budget for CSR or social investments. They are treated as cost centers, and their budgets are essentially a portion of what is left over when the 'productive' parts of the business have been fully
resourced. Even in sectors where social investments are protecting the company’s
most valuable assets (such as a global brand or a scarce mineral resource) the
value delivered is rarely measured or compared to the value delivered by more traditional investments.
As a result, spending on CSR or shared value may be much lower than the levels
justified by return-on-investment in the long term. By the same token, some CSR and
shared value programs may not generate sufficient returns to be justifiable to shareholders. The only way to justify them is to use the kind of off-balance-sheet accounting implied by multiple bottom lines, or other ways of assessing social investments.
The use of these metrics in CSR and shared value departments can segregate
executives who manage to profitability from those who do not, with the latter group
naturally being marginalized. And if the metrics are used more broadly, executives
have little incentive to invest in social benefit beyond the levels associated with compliance with company norms.
THE RETURNS OF WELL-MANAGED SOCIAL INVESTMENTS
Social investments can operate in communities (building roads, supporting community schools) or inside a company (adopting cleaner production technologies, volunteer programs for employees), delivering a wide range of benefits:
■ Better reputation among consumers, leading to higher demand for products
■ Better relationships with government, leading to access to markets and resources
35
■ Better relationships with communities hosting operations, leading to fewer work
stoppages, protests, sit-ins, etc., and thus lower-cost operations
■ Increased loyalty among employees, reducing the costs of hiring and training new
workers
■ Increased job satisfaction among employees, which may substitute for financial
compensation
■ Increased competitiveness of firms in communities hosting operations, reducing
the number of foreign suppliers needed and thus lowering operating costs
■ Increased skill levels amongst local workers, leading to more efficient production
■ Increased incomes and general economic development in local communities,
eventually leading to more demand for products
This list is not new. It appears in one form or another in nearly every business school
class on social responsibility, sustainability and (most recently) shared value. Yet what
is still rare, and what we advocate, is investing to realize and maximize these benefits.
Maximization starts with measurement. Calculating the benefits of social investment in present-value terms is not always easy, but it is not impossible. In fact, it is
squarely within the core challenge business executives face every day of estimating
investment returns in the face of uncertainty. For example, energy companies regularly use probabilities and forecasts to predict the value of fossil fuel reserves.
Take for example a company that recently won a contract to extract offshore oil from
the government of a small developing country. The company was considering whether to invest in a package of community initiatives that would help local economic
development but with little near-term impact on its operations. Executives of the
company knew that the government would soon solicit proposals for another parcel
of offshore oil. They estimated that a successful investment in community initiatives would cost $400,000 and would increase the chance of winning the second
contract by at least 1 percent. The second parcel would be expected to generate a
stream of profits worth $50 million in today’s money. The formula for computing the
expected rate of return on investment is
Expected benefit
Expected rate of return = - 1
Expected cost
If the expected benefit is the increase in the probability of winning the bid (1%)
multiplied by the present value of the concession ($50 million), and the cost is
$400,000, the expected rate of return would be 25 percent:
0.25 =
(0.01) ($50,000,000)
-1
$400,000
36
That is a figure the business unit leader, the chief financial officer, and the profitmaximizing shareholder can all appreciate and compare with other investment
options. (Incidentally, our experience in the oil sector suggests that this is a very conservative estimate of expected return on investment for such a project.)
Now consider an example of a social investment with internal benefits. A software
company is considering launching a program that would create distance-learning
software for children in frontier markets with little or no access to a school. This is a
very typical social investment that would be chalked up to “doing the right thing,” or
at least as much of the right thing as the company can afford.
But what can the company actually afford? The key here is to measure and predict.
Surveys of its 5,000 employees suggest that the investment would raise morale and
improve the annual retention rate of personnel by one percentage point; 50 fewer
employees would leave the company per year. The cost of searching for, hiring, and
training a new employee is $40,000, so the savings from the investment are $2 million annually:
Expected rate of return =
$2,000,000
- 1
Expected cost
In other words, if the program costs less than $2 million per year, it has a positive
return for the company. Simply not losing money may not be enough to justify the
social investment, however. A profit-maximizing company would weigh up all of their
potential investments against the best alternatives. If the same software company
could invest in a different product line that was expected to generate returns of 25%
annually, then it would only invest in the distance learning software if it could attain
the same return. In this example, that would imply a budget cap of $1.6 million for
the distance-learning program. Of course, the company will want to include some
margins for error here, as no prediction can be completely precise.
The company might find other benefits from the program that could play a part in its
long-term calculations, too. By offering its software widely, the company might build
brand equity among a large group of future consumers. Its reputation might also be
enhanced by a high-profile project with social benefits. And its employees, in addition
to being more loyal, might demand lower raises in the future as a result of higher job
satisfaction. Considering all components of the return raises both the likelihood and
the likely budget of the social investment.
For most companies, assessment of the return on social investments will prove a
double edged sword. Investments that offer a competitive return will be expanded,
37
while those that perform poorly for shareholders will be reduced, revamped and
potentially re-assigned to managers who can do a better job with them. None of
these events is inherently bad. Such creative destruction, while painful, yields better
investments into which companies are prepared to invest more resources.
Naturally, some corporate executives will still want to pursue other priorities for
altruistic reasons of their own. This is of course laudable, and it is the raison d’être
for social enterprises around the world. Clearly communicating their motives will
allow these executives to attract financing from impact and social investors while
clearly informing other shareholders, who may be solely focused on profit, of their
intentions.
SHIFTING TO A LONG TIME HORIZON
Because social change is slow, many social investments will pass the company’s
threshold for investment only when analyzed over a longer time frame. Yet getting
managers to make decisions for long-term outcomes is the bête noir of many in
the investing community. Speculators are looking for short-term results and can
punish companies whose quarterly earnings fail to meet expectations. By contrast,
long-term investors know that some of the most profitable investments – social and
otherwise – can take years to pay off, and that it’s worth paying their upfront costs.
Shifting to a long time horizon requires a concerted effort by shareholders, board
members, and top executives. Board members need to steer executives toward longterm strategies, executives need to communicate these strategies to shareholders in
a way that makes their value clear, and shareholders need to reinforce the long-term
message through their influence on the board and in the market. Outsiders including
shareholders’ rights groups, think tanks, and academics can help companies to take
a long-term perspective, too, by showing and spreading the message that firms with
longer planning horizons perform better over time.
Though it may sound daunting, several types of companies are already accustomed
to taking on the challenges of long-term investing. As mentioned above, companies
in extractive industries routinely make decisions with long time horizons and under
significant uncertainty. For instance, the process of developing a new oil or natural
gas deposit routinely takes seven years or more from the initial phases of exploration through to bringing the resource to the surface. In the meantime, the market
price of the commodity and information about the size of the deposit can change
dramatically. Natural resource companies and their investors have learned to plan
for these time horizons as a matter of course. It’s therefore not surprising that some
of the largest social investments in the world are made in that sector.
38
Founder-run companies typically have long time horizons as well. In emerging regions
such as Sub-Saharan Africa, Latin America, and South Asia, many of the biggest multinational corporations are relatively young and still have their founders at the helm.
These corporate leaders tend to stay in their seats longer than the heads of public
companies no longer controlled by a founder. India’s Tata Group is an example of an
emerging market company where the influence of a founding family has led to social
investments that carry explicit expectations of long-term returns. At Kenya’s Equity
Bank, a core group of strongly likeminded shareholders and executives has played
the same role.
Regulators and exchanges also play a role in encouraging companies to shift decisions to longer time horizon. The European Union allows companies to file financial
reports semi-annually, with briefer trading statements expected at the end of the
odd-numbered quarters of the year. Nestle and Unilever are among the biggest companies that have taken advantage of this regulation, on the basis that reporting with
lower frequency better reflects their internal planning practices. If these companies
as a class can perform better over time, then other companies – and other regulatory environments – might follow their example.
PATHS TO PROGRESS
Many companies continue to have difficulty planning to long time horizons, due
to internal pressures from managers or external pressure from markets. For other
companies, integration of social investment returns requires a broader definition
of shareholder value than is permitted by their current vision. In both cases, these
companies reduce their ability to resource efficiently, assess accurately, and manage
effectively social investments.
We have been working with companies that take a more disciplined approach to
social investments and long-term shareholder value. In the coming year, we hope to
share further examples and practices that demonstrate the benefits of this approach:
social investments with better resourcing, better management, and better results.
39
40
41
Catalyzing a Market : Energy
for the Base of the Pyramid
Gaurav Gupta, Sonila Cook, Devanshi Mehta, Kanishka Bhattacharya, Nupur Kapoor, Priya
Pingali, Komal Aidasani, Malle Fofana, Chris Denny-Brown, MAYA Design Inc
Can households at the base of the pyramid (BoP) have the same energy-consuming
amenities as wealthy households? A typical household in a wealthy country has
virtually unlimited access to electricity and uses it to power a wide variety of appliances for lighting, cooking, communications, and entertainment. These basic needs
are shared by the BoP but most often remain unmet due to insurmountable deficits
in purchasing power and infrastructure. To date, most of the efforts aimed at reducing this needs gap have relied on the supply side, in new forms of energy generation.
Meanwhile, the role of the appliances themselves in stimulating demand has been
largely and mistakenly overlooked.
By 2020, a mix of decentralized energy generation and a set of highly efficient appliances could mean a paradigm shift in the basic services available to BoP households. Already, new household- and village-level technologies and business models
show promise for rapid improvements in living standards. Additional innovations and
incentives could lead to a world where all the basic needs of BoP households outlined below are met by 2020, as shown in the illustration on the next page.
Even meeting these needs, the energy consumption for the entire BoP household
could be less than 60 watts per hour – the same amount of electricity needed to illuminate one standard incandescent light bulb today.
42
Sanitation
Needs: Low-energy, waterefficient, durable and portable
solutions for households
Lighting
Needs: Durable, energyefficient, renewable energypowered solutions to provide
enough light for 1-2 rooms
Needs: Clean, safe cooking
solutions to replace traditional kerosene and firewood
Clean Water
Entertainment
Needs: Off-grid/lowenergy household storage
filters that can used effectively on salty, brackish
and dirty groundwater
Cooling
Needs: Energy-efficient space
heaters for winter, and low-energy
cooling devices with capacity to
cool at least one room
Cooking
Needs: Cheap and lowenergy TV and computer
solutions for education,
news and recreational
activity
Refrigeration
Needs: Low-cost/low-energy
fridges; volume of fridge
lower relative to mainstream
A NEW APPROACH
The key to meeting BoP needs efficiently is to focus not just on power generation but
also on the development of low-energy appliances. As innovators broaden the scope
of products and services that use electrical energy but are within the grasp of the
BoP – a water purifier, a television or a computer (or both in one), a low-energy fridge
– off-grid markets will become increasingly attractive for entrepreneurs.
Of course, there is usually a catch-22 in infrastructure-dependent industries like
energy: consumers won’t buy products until the infrastructure they use is installed,
but companies won’t invest in infrastructure until a large number of consumers are
already using the product. Particularly in the case of rural BoP communities, which
are often sparsely populated and dispersed over large areas, it’s unlikely that governments or private sector players will fund large upfront investments in energy
infrastructure to support an unknown energy demand.
For BoP households, however, it’s not so difficult to get over the hump: They can begin
buying inexpensive new appliances on a piecemeal basis, using decentralized power
generation sources (solar panels, mini-grids, etc.) until something bigger is available.
43
The availability of low-energy appliances allows the market for energy to grow incrementally and organically without risky and expensive infrastructure projects. When
demand for energy is sufficiently established to support larger infrastructure investments, then the traditional investors from government and the private sector will be
able to step in.
Here is how it would work. With each low-energy appliance that came to market,
demand for electricity would rise. This would occur in parallel with declining costs of
generation. Mini-grids supplying ten watts per hour to each household would grow to
20, 50, 100 watts and more, finally achieving the scale that had previously proven
elusive. Advancements in both generation and usage would work together to create
a robust market; as people found more appliances within their reach, they would
demand more energy, and vice versa.
Companies can begin to explore this opportunity today, and leaders in government
and civil society can also do much to bring this energy future closer. Indeed, in some
industries it is already here; according to research we undertook for the International Finance Corporation’s “Lighting Africa” project, the global off-grid lighting market alone is worth more than $15 billion annually – an indication of huge incipient
demand for electricity. Simultaneously, low-energy appliances provide critical health,
educational, and income-generation opportunities for households. By examining current technology trends and looking forward, we can see how new appliances might
meet the needs of BoP households in 2020.
AMENITIES FOR THE BOP HOUSEHOLD
The BoP is an enormous and diverse group of people living in varied conditions
around the world, but they have many wants and needs in common. In fact, these
wants and needs are shared by virtually everyone in the world, though to date they
have been less easily fulfilled for the BoP: clean water, food, a manageable climate,
light, communication, and information. Each of these basic needs can be met by a
combination of existing technologies and continued innovation.
■ Clean water. Low-energy filters such as the Palo Alto Research Center’s spiral
concentrator are capable of providing a steady supply of purified water at minimal cost using a simple pump.
■ Food. The two main needs here are cooking and refrigeration. Biogas and electric stoves can be more fuel-efficient than wood, charcoal, and kerosene. They
also create less pollution both indoors and outdoors. Refrigerators are also
hugely useful, since they preserve food for consumption or for sale, reducing
health risks in the household and in the community at large.
■ Indoor climate. Hot climates – where most of the BoP lives – need cooling, or
44
at least air circulation and ventilation. Low-energy fans can fill this gap, as can
building materials that help to moderate indoor temperatures. In cool climates,
low-energy space heaters could fill the need for warmth in a more efficient and
healthy way than fires.
■ Light. Light-emitting diode (LED) fixtures, especially those powered by solar
panels, offer a low-energy alternative to conventional light bulbs and kerosene
lanterns, which also come with health risks. With light at night, BoP families can
extend the time available for working, studying, socializing, and bonding.
■ Communication. Mobile phone networks have penetrated deep into regions
where no other infrastructure is present, but people still need a way to charge
them. When there is no electrical grid, solar-powered chargers can provide the
solution.
■ Information. Radios, televisions, and computers allow people to connect with
the rest of the world, keep up to date with current events, feel more integrated
into society, and participate in democratic processes. Low-energy or renewablypowered versions are just now moving past the prototype stage.
HOW THE NEW APPLIANCES WILL EVOLVE
Several channels of innovation will lead to new appliances that are accessible to the
BoP. One channel that is already fairly well established is the evolution of existing models. Large manufacturers, including multinationals like Funai and Philips, have lowered
the cost of television sets and other mid-priced appliances by replacing materials with
inexpensive substitutes and stripping out non-essential features. Once these avenues
are exhausted, companies can use other techniques to reduce energy usage while
sticking with the same basic technology.
Another channel is to keep the technology that provides the amenity or user experience (such as a liquid crystal display, or LCD, screen) but to change the power
source. Replacing alternating current from a grid with solar, hand-cranks, and other
sources of power, some of them carried by direct current, may require more refitting
of products but can greatly enlarge their market.
Finally, there is the development of entirely new technologies that can provide the
same, better, or different user experiences in comparison to existing appliances.
These often spring up in research labs, the brainchildren of tinkerers motivated by
intellectual interest or altruistic effort rather than a desire to create a commercial
product. For instance, Paul Polak, a onetime psychiatrist who was recently profiled in
The New York Times, has invented numerous devices for the BoP, including a wildly
successful treadle pump that helps farmers to access groundwater during their dry
season. Yet the size of the BoP market – 4 billion people constituting a $5 trillion
45
global consumer market – suggests that big companies, too, should seek out such
research efforts as the basis for new product lines.
HOW COSTS WILL FALL
Even for existing appliances, costs will fall as a result of long-term trends and marginal refinements. These will come from economies of scale in production, as demand for new appliances and power sources grow, and also from the development
of new materials and manufacturing techniques. Just based on current trends in
these areas, the cost of a solar-powered LED light might reasonably be expected to
drop from $20 to $12 between now and 2015, and overall costs for lighting could
fall 50 percent or more:
Performance forecasts for the three major
lighting sources
Price forecasts for LED lighting technologies up
to 2020 (forecast)
Efficacy in lumens/watt
USD/kilolumen
200
150
Compact
fluorescent
100
50
Incandescent
1990 2000 2010 2020 (forecast)
Year
Very Good
200
$ per kilolumen
Efficacy in lumens/watt
LED
0
Quality of Light
225
175
Good
150
Medium
125
Low
100
75
50
25
0
2010 2015 2020 2025 2030
Year
SOURCES: Narendram, N., "Overview of Recent Technology: Trends in Energy-Efficient Lighting," Lighting Research
Center at Rensselaer Polytechnic Institute (2009); Dalberg analysis
There are also promising areas for cost reductions in water filtration, with nanofilters
set to become more powerful and economical in the next several years, and in televisions, with LCD and LED screens becoming ever more energy-efficient.
Besides the usual constraints implied by bringing a new product to market, another
main driver of costs in BoP communities is the absence of the usual economies of
46
scale in energy generation, distribution, and usage achieved through investments in
infrastructure. When households cannot be connected or networked, economies of
scale may disappear. Yet the growth of demand for energy and the availability of new
appliances may begin to allow these communities to capture the benefits of scale.
Sometimes, the economies of scale are not a result of the physical realities of
production or consumption, as in the typical example of a power grid. They can also
stem from network effects in other markets. For example, four households using
water purification equipment may be able to lower their joint usage of electricity by
trading clean water with each other; shortages and surpluses within a household
are balanced against the other households’ water needs, resulting in more energyefficient production for all of them.
SERVING THE BOP MARKET
The nexus of new appliances and new sources of energy has created a tremendous
opportunity for companies to serve the BoP as a profitable market. Already, LED
lighting arrays are being mated to either household-level solar panels or to minigrids, lighting up villages and at the same time making a return for local entrepreneurs. Similar inflection points in technology are in the pipeline for needs such as
water purification, cooking, low-energy televisions, computers, refrigeration, fans
and more. By 2020, BoP households could fill a wide variety of needs for the same
amount of money that satisfies just a few of them today. In India, for example, the
possibilities for roughly 83,000 rupees spread over five years, or about $340 per
year, are poised to expand, as detailed in the chart on the next page.
Making this shift possible will require innovations in financing and marketing, too.
At the most basic level, microcredit schemes may be able to help households spread
the cost of new devices over time. Some providers of appliances have already made
progress in this area. ToughStuff, which manufactures durable solar panels, LED
lights, and mobile phone charging connectors, has worked with microloan providers
and other non-profit organizations to help people afford its products and become
entrepreneurial distributors.
Another option is to tap sources of value accessible to the BoP. For example, households may be able to finance their purchases using carbon credits. This mechanism
has already been used by Vestergaard Frandsen to finance the distribution of its
water filters; because households that use its water filters no longer need to burn
fuel to boil water, the company can accrue carbon credits that subsidize or eliminate the cost of the product to consumers. Appliances that save energy or substitute renewable energy for other fuels could benefit from a similar program. Twinning
47
2011 Scenario
Need Appliance (#)
2020 Scenario
5-year
costs
Need Appliance (#)
5-year
costs
Lighting
Kerosene lamp
(1)
Rs. 8,000
Lighting
Solar lantern
(2)
Rs. 1,500
Cooking
Kerosene stove
(1)
Rs. 4,000
Cooking
Improvide biomass stoves (1)
Rs. 3,660
Communication
Mobile phone
(1)
Rs. 5,000
Communication
Mobile phone
(1)
Rs. 4,600
Cooling
Solar-powered
fan (1)
Rs. 30,650
Cooling
Solar-powered
fan (2)
Rs. 14,068
Entertainment
Solar-powered
TV (1)
Rs. 39,900
Entertainment
PC tablets (2)
Rs. 8,500
Insulation
NA
Insulation
Insulation
materials
Rs. 2,500
Clean Water
NA
Clean Water
Advanced
nanofilter (1)
Rs. 2,500
Refrigeration
NA
Refrigeration
Thermo-electric
refrigerator (1)
Rs. 21,608
Sanitation
NA
Sanitation
HDPE latrine
(1)
Rs. 24,640
SOURCE: Dalberg analysis
communities from developing countries with communities from wealthier countries
could also provide a variety of financing options, from direct loans to the exchange
of carbon credits.
Bundling products can also make them more accessible. Manufacturers can cut
costs by selling bundles via each other’s distribution networks, opening larger markets and generating economies of scale. Bundles of products imply a larger one-time
expense for the consumer, of course, but the larger outlays may also be easier to
finance. A local bank, for instance, might be more amenable to a loan of $200 than
to a loan of $20, whose interest might not be worth the paperwork.
FURTHER OPPORTUNITIES AND RISKS
The benefits of low-energy, low-cost appliances can be amplified when they work in
cooperation with each other and even with the structure of the house where they
reside. Appliances do not always use the same amount of energy when they are in
48
use; refrigerators, for example, turn their compressors on and off in cycles throughout the day. If appliances can communicate with each other, they can manage their
cycles so that they do not all demand peak usage of energy at the same time. Controlling peak demand lowers the cost of generation and prevents brown-outs and
black-outs within the household.
The structure and composition of the house itself can also matter. Many electrical
appliances give off part of the energy they use as heat. Can the house capture this
heat on cold days? Is it constructed in a way that minimizes the amount of wiring
between the source of energy and the appliances being used, thus reducing energy
loss in transmission? Does it monitor energy use so that its residents can attenuate
their own usage to minimize their spending? Answering all of these questions in the
design and construction process will help to make BoP households more energyefficient and capable of supporting even more amenities.
There are some important risks here, however. As BoP households find new ways to
generate and use energy without the benefit of traditional infrastructure, their governments may decide that they do not need that infrastructure. For example, some
Ghanaians have been loath to install solar-powered lights in their households for
fear that having illumination at night will discourage the government from bringing
access-to-energy programs to their villages. Farsighted and responsible policymaking
can reduce this risk by making new appliances and energy sources one step toward
a mature energy market.
Governments and public institutions can facilitate the invention and adoption of innovative appliances on both the demand and supply sides. On the supply side, they
can use a combination of carrots and sticks: tax breaks for manufacturers of energyefficient devices and mandatory standards for efficiency and emissions. On the
demand side, they can offer rebates to consumers who buy energy-efficient products
and provide financing to refit households that may not be able to pay the entire cost
upfront. Awareness programs can also help to spur demand and lower the cost of
marketing for suppliers by explaining the value proposition of the new products to
consumers. Similarly, enhancing public infrastructure for distribution can ensure
that consumers who want the new products have access to them.
Public-private partnerships will be a useful tool to coordinate these efforts. But
once the virtuous cycle of appliances creating demand and generators providing
supply begins to expand the energy markets for BoP communities, governments will
be able to devote their limited resources to catalyzing other improvements in living
standards.
49
50
ensuring
results
53
New Mechanisms for Monitoring :
The Global Health Institutions
Vicky Hausman, Daniella Ballou-Aares, Jasmin Blak, Nicolas Theopold
Global health organizations have achieved remarkable successes in the past decade, immunizing almost 300 million children, distributing almost 200 million antimalaria bednets, and saving the lives of more than 12 million people infected with
life-threatening diseases. With tremendous resources, however, comes a tremendous need for transparency and accountability. Some of these organizations, notably
the Global Fund to Fight AIDS, Tuberculosis and Malaria, have been bogged down by
scandals and questions about the use of their money. The right response to these
problems is to use mechanisms that create accountability from the bottom up, not
from the top down. Global health programs offer a particularly apt context for these
mechanisms, since they involve billions of dollars of physical, verifiable commodities
moving through complex supply and distribution chains.
In most aid organizations, the typical response to a case of embezzlement, bribery,
fraud, or other misconduct involves one or more of the following steps: punish the
known wrongdoers, create an investigative committee, and modify the bureaucracy and
its processes to include more checks on officials’ conduct. Some organizations also try
to see whether similar misconduct has occurred in other areas, as the United Nations’
refugee agency did in the wake of a child sex scandal in West Africa in 2002. Another
popular strategy is to set up confidential internal hotlines for reporting misconduct, as
World Vision did after discovering embezzlement in its Liberian programs in 2009.
54
These actions may help an organization to re-establish its credibility in the short
term, but they don’t necessarily help it to function better in the long term. New internal processes and top-down oversight can even hamper the delivery of aid and the
organization’s responsiveness in the event of a humanitarian crisis, without deterring individuals who are bent on corrupting the system. In global health, these delays
can cost lives. And giving donors a sense of security that does not reflect the organizational reality may lead to more funds being misused in the future.
AN ALTERNATIVE TO BUREAUCRACY
There is another way: installing mechanisms that generate accountability from the
ground up. The most accurate and effective monitoring is done by the people who
are supposed to receive aid; they know better than anyone else whether or not
they’ve received it. Yet global health organizations that fund but do not implement
programs (the Global Fund, GAVI, etc.) currently have very little interaction with
these people, who are essentially their clients. As providers of money but rarely the
implementers of interventions, global health organizations are removed from their
clients by many layers of officialdom, distribution, and logistics. This is the way aid
for health typically makes its way to the consumer, for example in the delivery of
lifesaving drugs:
Negotiating
prices and
purchasing
directly
Global health
institution
Funding
Medical
commodity
producer
Direct
shipments
Purchases
using
grants
District
dispensary
Clinic or
pharmacy
Local government
Indirect
shipments
Distribution
Household
Though the global health institution and the household may seem very far from each
other, technology can connect the two ends of the chain. Recipients may not be able
to visit bureaucrats’ offices or send complaints through a reliable postal system, but
55
they can still make themselves known using mobile networks and the Internet. These
channels offer global health organizations a direct connection with their clients.
The mechanisms available to organizations include text messages to confirm delivery of aid, surveys conducted by mobile phone, and websites that map where aid is
supposed to occur and allow reporting of shortfalls. The technologies are versatile,
so they can be adapted for different combinations of funders, aid programs, and
populations of recipients. They can be implemented by global health organizations
on their own, in the case of direct communication with recipients, and via requirements of their grantees.
Recipients of aid may be the most important source of information, but the other
links in the chain – suppliers, local officials, clinic managers, pharmacists, distributors – are also part of the solution. By giving all of them a chance (and an incentive)
to report problems, funders can achieve 360-degree visibility of the aid delivery
process without creating a lot of new bureaucracy or claims on people’s time.
IMPLEMENTATION
Mechanisms that use mobile and Internet technology could improve accountability
in several different parts of the supply and distribution chains of global health organizations. These mechanisms will be most effective when they adhere to the following guidance:
■ Give beneficiaries a voice in the most direct way
■ Make it easy for them to participate, both logistically and financially
■ Protect them from retribution that could otherwise result from participation
■ Use them to highlight the organization’s successes and failures
With this guidance in mind, here are some options that could be implemented today:
Mobile-enabled data and information as part of monitoring and evaluation. The
budget for every grant by a global health organization could include funding for an
independent agency to collect information about the grantee’s activities on the
ground via mobile telephony. This would enable faster and more precise identification of potential fraud, both by empowering individuals to report corruption and by
tracking data on supply chains and the delivery of health care. Technology already
in use in some countries allows community members to alert the health system to
health workers’ absences and to identify and report counterfeit drugs via text messages. Data collected this way could also be used to assess the quality of medical
products and services, the efficacy of training for health workers, and eventually the
impact of grants on people’s health.
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An open aid-rating platform to better understand country-level effectiveness. An
online aid-rating system using a social media platform would allow communities
receiving aid from the global health grantees to report on the quality of their programs and the potential misuse of funds through their mobile phones. Precedents
for this kind of system already exist; Charity Navigator, for example, supplies financial information about charities online and also allows users of its website to leave
comments with their own opinions and experiences. All over the world, technological
mechanisms are already being used to identify and fight social ills, too. One of the
most common applications is a crowd-sourced map to locate hotspots of violence
or corruption. In Argentina, the “Mapa de la Inseguridad” plots episodes of crime in
the city and province of Buenos Aires in real time. In India, “I Paid a Bribe” offers a
website for reporting bribes and comparing the cost of corruption across different
cities. And in Germany, the “Vroniplag Wiki” offers a centralized database for plagiarism in doctoral dissertations. Similarly, platforms such as Ushahidi and Frontline
SMS have enabled individual feedback that can be mapped to specific geographies
and programs, providing tools to better understand the magnitude and location
performance problems. The platform could also be extended to gather data on the
ultimate effects of the grants on people’s health – information that aid agencies
often fail to collect.
Electronic verification. The delivery of medical commodities to consumers and retail
distributors is a verifiable event, and mobile networks are well suited to documenting
it. A mobile phone can be used the same way that a FedEx, UPS, or DHL employee
uses a tracking device to confirm a shipment has reached its destination. All that is
needed is a text message with a tracking number both to register a delivery and verify
that the product is legitimate. These processes already exist in the private sector but
could clearly be incorporated into the monitoring systems of global health institutions.
Because electronic verification is a mechanism for improving transparency and
accountability in supply chains, it can be incorporated directly into contracts, logistics, and the like. By contrast, implementing mechanisms on the distribution side
requires a two-sided process. Before they can be useful, the intended beneficiaries
of global health programs will have to find out about the mechanisms’ existence
through media campaigns or other publicity specified in grant funding.
Once the mechanisms have been publicized, the question becomes who will collect
the data that they generate. Because of the potential conflicts of interest among
grantees and the global health organizations themselves, independent agencies or
contractors would have the most credibility as repositories of complaints, evidence
of shortages, and other information contributed by the beneficiary population.
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Under most conditions, this information should be made public so that it is transparent and verifiable. In some cases, of course, legal obligations may require the
independent contractors to share the information privately with authorities first.
Here is how the mechanisms might connect the links of the aid chain in practice:
Reporting
missing
drugs
Informing about
reporting
mechanisms
Medical
commodity
producer
Global health
institution
Verifying
compliance
Using online
purchasing
clearinghouse
Checking for counterfeits
District
dispensary
Clinic or
pharmacy
Household
Sending redistribution
instructions
Local government
Checking inventories
The next question is how the information will be used – by whom, verified how, and
with what frequency. If individuals are offering feedback but begin to perceive that
their actions are not resulting in tangible changes, then they will stop using the new
mechanisms. Visible, rapid reactions to legitimate problems will ensure the mechanisms’ success: Governments and funders will have to build the agility and flexibility
needed to provide these reactions into their health programs.
PRECEDENTS IN GLOBAL HEALTH
These mechanisms are not entirely new to the field of global health. The “Stop
Stockouts” campaign encouraged consumers and pharmacists in six countries
across Sub-Saharan Africa to report shortages of medicines and other products via
text message, resulting in hundreds of reports in a six-month period. SMS for Life,
initially sponsored by the Novartis Foundation but not a commercially available product, used text messages to reduce shortages of malaria drugs to zero in a matter of
weeks in Tanzania, with no additional purchasing of drugs required.
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At least two organizations have used mobile technology to stop fraud in medical
commodities, too. mPedigree Network, a non-profit, invented a mobile phone-based
system for protecting patients from fake pharmaceuticals. Its model has been integrated into national regulatory systems in Kenya and Nigeria and has also been
set up in four other African countries; the organization is also starting to work in
South Asia as well. Sproxil, a social enterprise based in the United States, also offers a service for authenticating medical products via mobile phone with scratch-off
labels that reveal codes for text messages. It recently completed a pilot in Nigeria
with BIOFEM Pharmaceuticals, one of the country’s biggest medical distributors, to
protect the company’s sales of drugs for diabetes. In less than three months, sales
increased by more than 10 percent, with returns to BIOFEM estimated at more than
1,000 percent – a clear indication that mobile penetration was sufficient in Nigeria
to make a difference.
LIMITATIONS AND ROOM FOR IMPROVEMENT
There is no doubt that these bottom-up mechanisms have their shortcomings as well.
They may be better at catching large instances of corruption, mismanagement, or
theft than small skimming. Moreover, it can be difficult to hold people in government
or multilateral agencies accountable for problems in global health organizations if
they are insulated from the malfeasance by contractors and other intermediaries.
As a result, these mechanisms should be thought of not just as appropriate for the
global health organizations themselves but also for their partners in the public and
private sectors. A coalition of actors in the field, perhaps convened by a third-party
group such as the mHealth Alliance, could coordinate standards for and implementation of technological mechanisms for accountability.
Another shortcoming is that these mechanisms depend on the penetration of technology. Deprived areas not yet reached by mobile and broadband infrastructure
are likely to be left out, and so opportunities for corruption will continue to arise.
Because of the rapid spread of technological infrastructure, however, those areas
will become fewer with time. Moreover, the largest concentrations of beneficiaries,
where corruption could occur on the biggest scale, are those most likely to be covered by the mechanisms proposed here.
Even with these limitations, there is enormous scope for improving accountability
through bottom-up mechanisms – not just in global health, but throughout the
development field. They are likely to yield much greater returns to the marginal dollar
of investment than additional bureaucracy, and they can be relatively inexpensive to
implement in the aggregate. It makes sense for global health organizations to give
59
these mechanisms special priority, since their interventions depend so greatly on
the verifiable delivery of products and services through complex supply and distribution chains. To foster accountability within these chains, everyone must have an
incentive to fulfill their obligations. Bottom-up mechanisms can supply that incentive
in real time.
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61
A New Compliance System for
Human Rights : Certification
Shashi Buluswar, Shyam Sunduram
It’s a terrible irony: an increasing number of household-name companies whose
investments have helped emerging economies to grow have been found violating the
rights of their workers and damaging the communities where they operate. Chevron,
Gap, Apple, and many others have faced serious allegations about their practices
and those of their suppliers. ‘Name and shame’ campaigns have tried to make companies’ customers aware of alleged violations of human rights, and some groups
have even mounted lawsuits against the companies at their Western headquarters. But these actions have led to a largely adversarial relationship between rights
groups and corporations, with few large-scale improvements. A certification system
for protection of human rights can be a more effective and cooperative mechanism,
but only if it sets positive incentives for all the parties involved.
Over the past decade, there have been several attempts to be more proactive in the
protection of human rights through the creation of operating standards and certification mechanisms, especially in extractives industries. Unfortunately, these attempts
are often slow to implement, lack adequate enforcement and accountability mechanisms, or are at risk of becoming obsolete due to competition and infighting between
certifying organizations.
A certification process can work, however, if it engages corporations in a cooperative
62
way with a market-driven approach that works across a broad range of industries,
especially in retail. Such an approach will build on a number of favorable global
trends, such as the proliferation of social media (e.g., YouTube, which significantly
increases public transparency into alleged violations) and growing demand among
consumers and investors for increased corporate responsibility. But the main reason
for corporations to participate will be the certification mechanism’s ability to protect
revenue and reduce costs.
HUMAN RIGHTS VIOLATIONS IN THE CORPORATE CONTEXT
Extractive companies (oil, diamonds, etc.) are often the poster children for allegations of human rights violations by multinational corporations, but they represent
only a minority of cases. One of the most comprehensive studies on allegations of
human rights by corporations – Michael Wright’s “Corporations and Human Rights”
from 2008 – found that extractives were implicated in only 28 percent of cases,
with seven other industries making up the lion’s share. About 60 percent of these
alleged violations were committed directly by multinational companies, and the
remaining ones by their suppliers, contractors, security staff, or other value chain
partners.
Distribution of alleged human rights violations across industries
All other
Heavy manufacturing
IT, electronics & telecom
Food & beverage
Financial services
5%
4%
6%
Extractives
28%
7%
8%
9%
Infrastructure & utility
21%
12%
Retail & consumer goods
Pharmaceutical & chemical
SOURCE: Wright (2008)
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Among the alleged violations that spread across more than one industry were a
series of cases in Burma in the late 1990s, where companies were accused of
complicity in human rights violations conducted by the ruling State Peace and Development Council: forced labor, arbitrary arrests, and even rape and murders. In the
face of such pressure, many multinationals from the textile and extractive industry
sectors (e.g., Eddie Bauer) withdrew, citing fears that a volatile political environment
and mounting international sanctions could hurt their operations. The oil company
Unocal, which had invested in a $1.2 billion pipeline, insisted on staying, arguing
that the allegations were false and the subsequent lawsuits were frivolous. Yet in
2005, Unocal was forced to settle a lawsuit with villagers from Myanmar for an
unspecified amount, for the very same violations it was accused of a decade earlier.
In this case, Unocal clearly made a choice to stay despite the allegations because in
their internal calculus, the benefit of remaining in the country and ‘weathering the
storm’ outweighed the cost of abandoning an extremely lucrative investment.
If there is an explanation for the difference between Eddie Bauer and Unocal’s decisions, it may have to do with the visibility of their brands. Unocal operates in a commoditized industry where the loyalty of individual customers is of limited concern.
Companies that sell retail to consumers, on the other hand, can face more intense
pressure from activists and a more direct threat to their revenue from consumers.
But there are subtler lessons from these examples, too.
First, voluntary self-regulation is not always a reliable mechanism. Corporations have
an incentive to focus on short-term returns. Many companies claim to be committed
to ethical practices (and many have internal human rights policies), but there can
be a big gap between policy and practice. For instance, companies might reduce the
violations that would incur the greatest private costs, rather than those that incur
the greatest social costs. And though ex post costs can be high to individual companies, and can potentially drive them out of business, they do not often lead to systemic industry-wide changes. Finally, the punitive measures that add to ex post costs
(e.g. fines or lost revenue from ‘name and shame’ campaigns) may help to stem the
damage caused by violations, but they do not necessarily make victims and communities whole.
Proactive prevention (assuming it can be implemented) is a far better option. There
are several financial incentives for companies to participate in a proactive mechanism: they avoid future costs from lawsuits and restitution; they gain a reputational
boost from advertising their certification status; and if an incident were to occur,
certification could act as a check on damaging overreactions, since the company
can genuinely claim to have acted in good faith.
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ATTEMPTED FRAMEWORKS FOR STANDARDIZATION AND CERTIFICATION
To date, a number of mechanisms have been developed for more proactive engagement of corporations. They have tended to be collaborative efforts between governments, industry groups and non-government organizations (NGOs). So far they have
not found unmitigated success, but they have offered some helpful lessons.
The Kimberley Process. The Kimberley Process Certification Scheme (KPCS) was
devised to stem the flow of so-called ‘blood diamonds’ used to finance bloody civil
wars in countries like Sierra Leone. A coalition of governments working within the UN
framework launched the KPCS in 2003, agreeing to monitor extraction and flow of
diamonds across international borders to ensure the source of every diamond sold
on the consumer market was known. After showing some initial promise, the KPCS
appears to have lost its momentum as a number of influential NGOs (most prominently Global Witness, one of its early backers) have withdrawn their support for the
process. Peculiarities of the diamond supply and distribution chains have weakened
the scheme by making traceability extremely difficult. But more importantly, intergovernmental politics have eroded the mechanism’s neutrality, and the KPCS’s
top-down, government-led model has given too much power to individuals; unscrupulous government ministers can distribute licenses and certificates based on narrow
private interests.
United Nations and voluntary frameworks. In 2011, the United Nations Human
Rights Council endorsed the “Protect, Preserve and Remedy” framework authored
by the Special Representative, John Ruggie, who called for a high-level statement of
policy on human rights within companies, and a due diligence process for monitoring potential violations. The Ruggie report has been widely considered a significant
step in the right direction, but the process for translating its recommendations into
practice has yet to evolve. Indeed, its framework has been criticized by leading NGOs
including Human Rights Watch as inadequate, in large part because of a lack of
accountability mechanisms. The same criticisms – slow development and missing
accountability mechanisms – have been leveled at the “Voluntary Principles on Security and Human Rights,” a set of operational recommendations for extractives and
energy companies created by a coalition of governments, NGOs and corporations.
Fair trade. In fair-trade certification, NGOs such as Fair Trade USA and Rainforest
Alliance develop their own standards for determining whether or not a company’s
products are produced ethically. The biggest challenge faced by fair trade is the
proliferation of competing standards: Most consumers do not know the difference
between Fair Trade certification and Rainforest Alliance certification. In fact, there is
nothing to prevent any organization, regardless of the quality of its standards, from
65
declaring itself fair trade (or some variation thereof) and launching an aggressive
marketing campaign to promote itself as the standard-bearer of ethical business
practices. Most consumers would not know that these products were not externally
certified. In addition, as certifying organizations compete for market share, there
is a very big risk of lowering standards in order to make the label more affordable
to companies. This lack of common standards that certifying agencies can use to
determine whether or not products are compliant represents the biggest threat to
fair-trade certification.
Without a standard set of certification criteria for each industry—and without broad
agreement across corporations and NGOs—competing criteria can emerge, causing confusion as well as a potential race to the bottom. Yet mechanisms driven by
governments and intergovernmental processes are slow and fraught with political
compromise, and can often settle on the least common denominator. Also, unless
companies are sincerely committed to making changes, rather than just to creating
an appearance of change, top-down mechanisms will often offer loopholes.
Though intergovernmental bodies can overcome some of the barriers faced by single-state actors, they suffer from a lack of ability to enforce standards. The UN’s Human Rights Council is committed to furthering a regulatory framework and sees its
role as one of inviting elaboration and fostering uptake, but recognizes that it cannot
create nor impose a set vision of corporate behavior. The lack of progress, according to Ruggie, stems from the resulting absence of an “authoritative focal point” for
standards and enforcement. We propose such a focal point below.
AN EFFECTIVE CERTIFICATION MECHANISM
Among the most successful certification schemes oriented toward social benefit is
the International Organization for Standardization’s 14000 series of standards for
environmental management. This scheme is internationally recognized, and allows
compliant companies to exhibit a readily identifiable mark on their products and
communications. A certification process for human rights would adopt these features
but with a slightly different structure because of the special sensitivities involved.
A non-profit licensing agency created by the coalition of industry, governmental and
non-governmental actors would issue audit licenses to individual auditing agencies.
The auditing agencies would assess the policies, processes and practices of companies and their contractors—at individual facilities or more broadly—to determine
how likely the company is to commit a human rights violation. The auditor would rate
the level of risk and recommend changes, whose effective implementation could
then be reassessed at a later point. The audits would only be made public at the
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companies’ option, so that there would be no disincentive to participate. The auditors would likely need a fee-for-service model to be financially sustainable; in principle, they could be for-profit entities, much like financial auditors. The confidentially
requirement (especially if the certifier were summoned to testify in court) implies
that the auditors would likely need to be protected by some form of attorney-client
privilege across jurisdictions.
This mechanism fulfills the following criteria, which the examples above strongly suggest are necessary for success:
■ Goes directly to the constituents most critical to companies’ financial interests:
customers. If a clear and consistent customer base cannot be identified, or the
customers do not value human rights, there is limited leverage; and that particular industry is likely going to be difficult to gain traction in.
■ Has a single consistent and transparent set of standards; without these, certifiers will be tempted to let standards will get lax in a race to gain market share.
■ Offers confidentiality for companies, so that they can be transparent without fear
of prosecution or reputational damage for the mere existence of risk factors.
■ Is tailored to industry realities, and acceptable to all major stakeholders: workers
and their communities, corporations, civil society organizations, and (if relevant)
government agencies.
■ Is verifiable, in case its credibility is disputed.
CHALLENGES FACING CERTIFICATION
Clearly, it is naïve to believe that such a complicated issue with potentially misaligned incentives will have a simple solution. There will be many risks, uncontrollable externalities and unintended consequences. Before human rights certification
in these challenging contexts can become a reality, five significant hurdles will need
to be overcome.
Credibility and trust. It is an understatement to say that many NGOs and communities harbor high levels of distrust of corporations and even governments; the distrust
is likely mutual. Creating coalitions in this atmosphere of distrust will be difficult
and protracted. The Voluntary Principles process, for example, required a decade
to produce concrete outputs, and much still remains to be done. All parties will
need to invest the requisite time. In addition, they will have to invest in confidencebuilding measures to slowly build mutual trust. The initial backers of the process will
need not only the knowledge to create useful standards but also the connections
to bring in a critical mass of companies as inaugural participants. These pioneers,
which would optimally be leaders in their industries, will be essential for building the
certification’s brand. Networks and trust at the community level will be necessary as
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well. Companies will not be the only ones putting their faith in this mechanism; the
communities where they operate will also have to be willing to participate, using the
auditors and the licensing organization as their channels for addressing grievances
to companies. As a result, starting the certification regime among companies active
in the same region of a single country may offer the best chance of early success.
Financial feasibility. Certification is an investment for companies that may take
many years to pay off. This will be particularly true if the cost of certification is high.
Therefore, rather than simply assume demand from corporations, certifiers will
need to ensure the financial value proposition of their services. They will have to
control costs without compromising on audit rigor, and—as an industry—periodically
revisit their model to ensure it is resulting in a win-win for all sides. The best way to
do this may be by training and employing local or regional staff rather than highpriced expatriates.
Complex externalities. The most egregious incidents usually occur in countries that
face a number of interrelated challenges, including extreme poverty, political turmoil
and conflict. Therefore, it will be important to design audits and recommendations
for specific scenarios (e.g., contingency plans for avoiding violations in the event of
the outbreak of political turmoil, given the typical security challenges that can arise).
A competitive race to the least common denominator. It is likely that auditors will be
in competition with each other for the investing companies’ business. They might
therefore tend to target the violations that would have the highest cost to companies, and even become complicit in cover-ups behind the veil of confidentiality. To
stem this behavior, the licensing organization—and potentially legal authorities as
well, if fraud was involved—would have to be vigilant in monitoring the bonafides of
the auditors, and in revoking licenses if required.
Competing standards. One of the challenges faced by the fair-trade movement—as
discussed earlier—is the emergence of competing standards, with each standard
criticizing the other as being too lax or too inflexible. Competing standards can cause
confusion among consumers, and leave the door open to a race to the bottom. It will
be important for the global licensing body to carefully manage its brand and maintain its legitimacy.
Industry realities. NGOs seeking to drive certification models should try to gain
traction in consumer-facing, brand-dependent industries like consumer goods and
information and communications technology. Though they need not abandon similar models in the extractives sector, the heavy focus on such challenging industries
68
can distract them from achieving the quick wins that might be possible in industries
where brand and reputation among retail consumers are paramount. Momentum
from successful campaigns in the more tractable industries can then be used to
penetrate the less tractable industries.
THE IMPETUS FOR CHANGE
There are a number of reasons why companies are more likely to be interested in
preventative measures in today’s climate, compared to the past. First, consumers
appear to be demanding greater levels of corporate responsibility, as evidenced
by the growth of fair-trade certified products. Investors are also choosing socially
responsible portfolios; in 2010, the Forum for Sustainable and Responsible Investment reported that nearly one out of every eight dollars under professional management in the United States was in a socially responsible investment, up 15 percent
from 2007.
Monitoring and enforcement are improving, too, if slowly. The rapid proliferation of
social media (e.g., YouTube) makes it possible for victims, communities, witnesses
and civil society organizations to publicize incidents; video footage, in particular, can
go viral very quickly. This significantly reduces companies’ ability to control a story
after it has occurred, leading to potential public relations nightmares. In addition,
courts in mature economies seem more willing to hear cases on violations committed in other jurisdictions. In the United States for example, the Alien Tort Statute of
1789 has been increasingly used to file lawsuits against companies in third countries; since 1980, more than 120 lawsuits have been filed in U.S. courts against 59
corporations for alleged wrongful acts in 60 foreign countries.
It has taken decades—since the first waves of public outcry against corporate violations of human rights—for the various factors described in this report to converge.
The most recent decade has witnessed legitimate steps towards collaboration by
stakeholders with historically adversarial relationships. NGOs and corporations are
recognizing the value of constructive engagement with each other. In this atmosphere, there is definite momentum for some form of robust standardization and
certification, especially when all sides can benefit commercially while protecting and
preserving the rights of workers and their communities.
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70
71
Evaluating Impact :
Balancing the Three Emphases
Veronica Chau, James Mwangi, Paul Callan, Wijnand de Wit, Michael Tsan, Jason Wendle
How well are global development efforts really working? Given the squeeze in funding for aid, the question has never been more urgent nor more challenging to answer. To invest scarce resources in the most effective way, we need to whether our
efforts are truly helping people to escape poverty. But we also need to know what
makes the organizations that implement these investments effective, and whether
the right strategy for these organizations is to maintain their objectives, change
course, or close up shop. All three of these emphases have a place in the burgeoning field of impact evaluation, and balancing them is the key to getting the most
bang for the buck in development investments.
In current discussions of impact evaluation, ‘proof of concept’ – showing that a
program has its intended effect – often dominates. Randomized controlled trials,
quasi-experimental studies, and other rigorous research approaches are now the
gold standard for answering this question scientifically: for example, if administering a deworming pill to children boosts school attendance, or if microfinance loans
to women affect household wealth. Studies like these offer important insights and
evidence, but poverty cannot be eliminated solely on the basis of this knowledge.
Programs will not be successful unless there are strong organizations to deliver them
and enabling environments surrounding them. Indeed, many rigorous impact evaluations conclude that the main drivers of success for a given program or intervention
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are the capabilities of the organization implementing it and the local conditions
where it operates.
As a result, there is increasing interest in development strategies that go beyond the
programmatic level. These strategies focus on building strong local organizations
(public, private, and non-profit) and fostering more enabling operating environments.
Efforts to improve financial inclusion, for instance, now hinge on strengthening financial institutions; similarly, several agricultural initiatives are now working to bolster
farmers’ cooperatives. At the macro level, a growing number of initiatives are trying
to improve value chains – like Puma’s recent exercise to measure the social impact
of its entire supply chain – or infrastructure supporting markets and even whole
sectors. We believe that interest in these strategies should be matched by interest in
the best ways to evaluate them.
Assessing the success of initiatives like these is a challenging task, however. Most
development programs have a slew of moving parts and are subject to several kinds
of external shocks. As a result of this combination of complexity and uncertainty,
organizations often make significant investments in impact evaluation, only to find
out that resulting reports – long and voluminous though they may be – don’t answer
the most important questions in a rigorous or practical way, if at all. How can they do
better?
CLARITY OF PURPOSE
If the purpose of an evaluation isn’t clear from the start, its results are likely to be
of little usefulness. More than one kind of evaluation can serve the goals outlined
above, but in every case the same questions must be asked: Who is the audience?
What is the pivotal question being answered? In the figure on the next page, we lay
out the purposes that correspond to different emphases in evaluation and eventual
applications.
Though each purpose is important, there is often a temptation to achieve multiple
purposes through the same exercise. That is, efforts that are commissioned on the
basis of accountability are used as a substitute for learning and continuous improvement. Analysis of actions in the past are used to derive recommendations for the
future. These reports, however, tend to be unsatisfactory to those who are actually
implementing the future plans because they extrapolate rather than taking a rational, forward-looking view using all the information available.
Investing in evaluations in a more strategic way will enable leaders to get the data
they need to make decisions, while not over-investing in complicated research
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Purpose of evaluation
Fact base
Continuous improvement
Future planning
Audience
External
Internal
Internal and external
Key question
Can our program have
the desired effect?
How can we do better?
What should we do next?
Emphasis
Impact verification
Performance review
Strategic positioning
assessment
Format
Independent study
of past actions
Participatory discovery
process
Analysis and business
planning
Outcomes
Rigorous evidence and
implications for future
investments
Internal alignment and
improved capabilities
Strategic and operational
plans
Main
applications
Achieving 'proof of concept',
improving systems
Building strong
organizations
Building strong
organizations,
improving systems
projects that may or may not answer the most important questions. Our suggestions
build on some on some of the initial framing of this question by Alnoor Ebrahim and
V. Kasturi Rangan (in “The Limits of Nonprofit Impact: A Contingency Framework for
Measuring Social Performance,” Harvard Business School Working Paper 10-099,
2010), providing some specific approaches that are aligned to the strategy of the
development effort and purpose of the evaluation.
THREE EMPHASES IN GAUGING IMPACT
Each of the purposes above corresponds to a different emphasis in evaluation. The
greater the clarity of purpose, the more obvious the choice of emphasis will be. Each
of these emphases has its own set of methods and personnel who will optimally be
involved. An evaluation can – and sometimes should – combine more than one emphasis, but only if clarity of purpose can be maintained.
Impact verification
What is it? A process of verifying the self-reported results and identifying ways to
strengthen an organization’s approach to gathering and managing social impact
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data. The majority of data that is used to guide decisions in international development is unverified. Very rarely are these data subject to scrutiny to determine how
accurate they are. Inaccurate social impact data is a symptom of need for improved
data management capabilities. Strengthening these capabilities will not only contribute to a better understanding of social impact, but also stronger implementation
capabilities for the organization.
What does it involve? An independent team visits an organization on site. Interviews
are conducted to understand how the organization currently gathers, manages and
analyzes data on its social impact. Spot checks are conducted to verify some of the
self-reported figures, triangulating indicators across multiple sources. Opportunities
for strengthening the management information systems are identified.
Who should be involved? This function should ideally be performed by a third-party
organization in order to achieve neutrality and independence. This third party should
have expertise in social impact data as well as direct operational experience in the
relevant sector or program area. An alternative is to conduct these reviews using
internal staff, but ensuring that the staff conducting the review are independent
enough from the operational team that is being reviewed. A successful process will
require close engagement of those who are involved in the day to day process of
collecting and managing the data. The process should be conducted in a spirit of
identifying ways to strengthen data management systems rather than an adversarial
attempt to expose inaccuracies.
How does it add value? Implementing organizations get pragmatic ideas for how to
strengthen their social impact data reporting and management. Donors and other
supporters get a better idea of the reliability and key assumptions underlying the
reports they receive.
Performance review
What is it? A process that involves regular reviews of performance in order to optimize impact, foster alignment and build capabilities of those involved in the efforts.
What does it involve? These reviews happen while the program is still operating,
with enough time left in its lifecycle to make changes in personnel and processes.
A performance review will reveal problems that are well known to management
experts: conflicts between leaders, failures to recognize underperformance, not acting on warning signs, poor alignment of resources, etc. These problems need to be
caught early in order to be corrected. Practical evaluators talk with members of the
team and perhaps even observe them at work to identify the obstacles to success.
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By keeping the lines of communication open with the team, evaluators may gain useful information about their day-to-day working processes.
Who should be involved? An effective process of this nature requires an evaluator who can effectively build relationships and trust. Members of the team may be
reluctant to give themselves poor grades or to suggest improvements as a result of
internal politics and capacities. Even with independent evaluators, however, conflicts of interest and agency problems are a constant concern. Evaluators may feel
compelled to be overly positive if their jobs depend on the program continuing. By
contrast, they may be overly negative if they are trying to cultivate a reputation for
rigor, or if they lack the knowledge of the context. One way to align incentives among
evaluators and program backers is to reward evaluators for the improvements resulting from their work. Part of their compensation could relate directly to the cost
savings they create or to the increased efficiency with which the program is able to
deliver its products, services, or interventions.
How does it add value? Organizations gain practical insight on how to operate and deliver programs effectively. Emerging from this process, an organization should be able
to learn ways to get the most output from its inputs, including optimizing how staff and
resources are deployed, improving process , and raising the quality of the offerings.
Strategic positioning assessment
What is it? These assessments ask a higher-level question: whether the team is pursuing the right objective and doing so with the optimal model for achieving impact. If
impact verification is about effectiveness, the performance reviews are about efficiency, and strategic positioning assessments are about direction. A strategic positioning
assessment is an opportunity to question the overall goals of the strategy – a chance
to reconsider priorities. A strategic positioning assessment can take into account the
results of a performance review (“We’re no good at doing this, so we should do something else”) but need not depend on it (“We’re very good at doing this, but this is no
longer a priority for our backers, so we should do something else”).
What does it involve? A strategic positioning assessment begins with a new look
at the landscape – an updated assessment of demand, competition, partners, and
other factors that may affect its success. Most development programs have many
stakeholders whose views will also help to set the priorities of the backers and implementing organizations. Collecting their input provides the base for a strategic positioning assessment. Ultimately, however, the content collected for a strategic positioning assessment will depend heavily on the position of the organization’s leadership (if
it is independent) or its backers (if it depends on outside funding or support). On the
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basis of this information, implications and recommendations are then derived on the
basis for whether the strategy should continue, and if so, in what direction.
Who should be involved? Strategic positioning assessments should be conducted by
third parties in virtually all cases. Depending on the situation, the right recommendation from an assessment might be to end, or significantly redirect a strategy. As a
result, the implementing team cannot have an unbiased view on the organization’s
strategy; the same might be true of the backers’ staff members who have close connections to the program. The results of strategic evaluation need to go directly to the
ultimate decision-makers: the funders and boards of organizations with backers, or
the top leaders of independent organizations. Aligning incentives for strategic positioning assessments is not so simple, since it is hard to tie the evaluators’ compensation to the results. Indeed, the evaluators may find it most appropriate to serve the
preferences of the program’s intended beneficiaries rather than those of its board or
backers. Strategic evaluators face a choice: they can cultivate a clientele by avoiding
controversy and focusing on success stories. The alternative is gradually creating a
reputation for recommendations that maximize the impact of development programs
through rigorous and unbiased assessment.
How does it add value? Understanding the positioning in the landscape and future
trends will enable sharpening of strategy. The resulting recommendations should
directly inform strategic and operational planning.
COMBINING APPROACHES
Together these various approaches can supply the guidance that an organization
needs to achieve impact and deliver to its backers, leaders, or intended beneficiaries in the long term. Combining the various types of evaluations is more than a
matter of timing. It also involves choices about personnel and governance that are
more complex than they would be for one kind alone. For example, should the same
independent contractor conduct each type of evaluation? It might be more costeffective to use this approach, but doing so would require a contractor with expertise
in both management processes and strategic vision. Conflicts of interest might also
arise if, for example, the recommendation of a strategy included recommendations
for the frequency and depth of future practical evaluations.
The key is to think about these issues in a way that minimizes risks and maximizes
returns. Raising the quality and, especially, the appropriateness of an evaluation accomplishes both of these goals. Organizations will find the most success when they
ask how they can obtain unbiased and thorough evaluations that help them to pursue the most beneficial goals with the highest possible efficiency and effectiveness.
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Acknowledgments
Editor
Daniel Altman, Director of Thought Leadership
Contributors
Partners
Daniella Ballou-Aares
Jonathan Berman
Shashi Buluswar
Paul Callan
Thomas Carroll
Veronica Chau
Sonila Cook
Wouter Deelder
Serena Guarnaschelli
Gaurav Gupta
Angela Hansen
Vicky Hausman
James Mwangi
Michael Tsan
Wijnand de Wit
Consulting Staff
Naveed Ahmad
Oren Ahoobim
Komal Aidasani
Bruce Au
Lorenzo Bernasconi
Kanishka Bhattacharya
Jasmin Blak
Adam Bradlow
Chris Denny-Brown
Malle Fofana
Nupur Kapoor
Devanshi Mehta
Priya Pingali
Nicolas Theopold
Shyam Sundaram
Retief Swart
Jason Wendle
Designer
Liesl Goecker
Collaborator
MAYA Design Inc.
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