What are the barriers to engaging small-scale producers and low-income consumers, and how can private sector interventions be improved to reach the poorest?
Linking small-scale producers from developing countries into more formal (sometimes developed country) markets to sell their goods can be difficult. The same is true of making sure low-income consumers are able to buy goods – whether shampoo or electricity – that are available in more developed markets.
The dichotomy between small scale and large scale, poor and rich, informal and formal, is the issue that the International Institute for Environment and Development (IIED) is considering in our latest research series, Linking Worlds. The paper series looks across sectors – agriculture, mining, energy and textiles – at the characteristics and rationale for innovative organisational models that engage with small-scale producers or low-income consumers to achieve greater fairness and equity.
Small-scale producers and low-income consumers are often marginalised or excluded from formal or more developed markets. The normal way that the market functions, at both the macro and micro levels, is often unable to overcome high transaction costs, challenges in product aggregation and distribution, and power and information asymmetries between actors.
Popular development responses to building these links have been to reduce costs by cutting out the middlemen, to have more formalised organisational structures among the poor so they can co-operate to compete, or to achieve economies of scale in products for low-income consumers at the bottom of the pyramid.
But these approaches can fail because they do not recognise the importance of intermediaries in a chain, informal ways of trading (that may not be organised by western standards), and applying business approaches that don't consider the nuances of the local socio-cultural context.
Our new research looks at new forms of intermediation that recognise the role played by so called middlemen and the value that they add. All the papers explore the models of intermediation that can reach the poor in new ways and result in real development (and at times commercial) benefits.
The first of this series, Sustainable Energy for All? Linking poor communities to modern energy services, looks at innovations in business models for delivering affordable and sustainable modern energy services to the poor. Energy delivery models are the combination of technology, finance and management required to supply energy to users. The delivery model can be designed as an enterprise, development project or a government programme, but innovations in the key elements of the model will help ensure positive sustainable development impacts. The paper also identifies a number of lessons that are shared across the sectors:
• Business model tools common to management schools can provide a useful framework for identifying where adjustments can be made to a model (whether for profit or not) to make it pro-poor in a way that doesn't compromise the key elements of a sustainable business, such as the unique selling point of a product or the cost structure. This paper employs Osterwalder's business model canvas to map a model and key to this is identifying a value proposition that incorporates social and environmental value, as well as economic value, not only to consumers but also producers and distributors in the chain (who may also be informal).
• Private sector interventions alone often cannot reach the poorest of the poor. They may be able to reach those with certain capabilities and assets but even this may require non-traditional business partners, such as government, non-government organisations, enterprise associations, social enterprises and communities themselves. Business as usual is unlikely to reach the poor as profits margins and time frames are less attractive. Case studies show that the most effective and long term energy delivery models for the poor are designed and implemented through collaboration with non-conventional business partners. Government subsidies, for example, may be necessary to reach the poor in energy delivery, but may need to be structured in a way that demonstrates financial effectiveness in the long term to attract mainstream investors in the scaling up of activities.
• Understanding socio-cultural context is important. This may help identify new entry points for the poor and ways of capturing their dynamism and innovation in designing products and services that meet local preferences, as seen in the energy paper. Designing a model that incorporates local preferences and expectations – such as women's views on health and the commercial value of local fuel wood can be a short-term investment that ensures the long term viability of the model.
This year is the year of the United Nations' Sustainable Energy for Allinitiative. After Rio, there is an increasing emphasis not only in energy, but across all sectors, for the private sector to play a greater role in delivering development objectives. We need to think carefully, and quickly, about how private sector and/or business models are able to deliver fair and inclusive benefits to the poor through the type of innovations identified in our research series. It is only in doing this that we will be able to ensure lasting development impacts.