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An Inclusive Private Sector
Keynote speech by Lakshmi Venkatachalam, Vice President (Private Sector and Cofinancing Operations), Asian Development Bank, at The 2012 Forum on Inclusive Growth, Dili, Timor-Leste
Your Excellencies, Honorable Minister; Members of Parliament; Secretaries of State; Distinguished Guests.
It is indeed a pleasure to join you here today to contribute to your discussions on inclusive private sector development. Within the Asian Development Bank (ADB), I am responsible for our private sector operations, which primarily aims to provide various forms of financial and technical assistance to development-oriented private sector-led projects. The ADB strongly recognizes the private sector as a critical engine of sustainable growth and poverty alleviation. As has been seen elsewhere in Asia and the Pacific, I see a strong private sector to be critical to your long term success. Your Strategic Development Plan 2011–2030 clearly articulates the same by stating that "the development of a diversified private sector and the establishment of new businesses and industries are essential to create jobs for our people and allow us to make the transition to a non-oil economy." I would also like to take this opportunity to reiterate our President Kuroda's compliments when he commended you a few months ago for preparing "such a visionary plan to convert your petroleum wealth into a sustainable future for your country and liberating your people from poverty".
In 2009 the Asian Development Bank and its sister organization, the ADB Institute, published a book—Infrastructure for a Seamless Asia—which estimated that emerging Asia will need $8 trillion in infrastructure finance through 2020 to support current levels of economic growth. It is well accepted that most of this will have to come from the private sector. There is no doubt that such large investment requirements necessitate an enabling environment for fostering large projects and big businesses. There is a vibrant international dialogue on how governments can create such an enabling environment. In your case, the growth in your petroleum industry, your expanding portfolio of infrastructure investments, and your pursuit of public private partnerships are all positive developments that will contribute to bring in large scale investments.
But that does not mean that we should limit our attention only to big business. Small and medium sized private sector activities need close nurturing if you are to realize your inclusive growth agenda, and jobs are to be provided to everyone. I am therefore pleased that this conference is giving the micro, small and medium enterprises the attention they deserve.
Please let me draw on some of the experience of the Asia and Pacific region to offer some observations that I hope will assist today's discussion.
II. Opportunities at the base of the pyramid
My first observation, as it relates to inclusive growth, is that the time has truly come to focus our attention to the base of the pyramid, which typically refers to those with an income level between $1.25 and the $3 international poverty line. It is now recognized that majority markets are largely untapped and have a huge unmet demand for goods and services, presenting excellent opportunities for investment, growth and return on risk capital. It is estimated that the BoP market worldwide is upwards of about $5 trillion – and a good part of this resides in the developing and middle-income countries of the Asia and the Pacific. Those at the base of the pyramid typically lack access to financial services, communications, electricity, good roads, clean water, education, and basic health services. Many lack secure title to land, dwellings, or other property. Their activities are largely informal in nature, with poor prospects for income growth. I know that far too many Timorese share these characteristics. There is now a growing realization that business models serving the BoP offer a compelling opportunity for the private sector.
In Timor-Leste, for instance, the rapid expansion of mobile telephony in rural communities and the expansion in microfinance institutions are good examples to learn from. Expanding financial services further into rural areas in a cost efficient manner will need to make use of technology and innovation in delivery mechanisms. Branchless banking models using mobile phone banking or agent arrangements can be an effective solution to provide services in rural communities. There are many other opportunities waiting to be tapped to serve the BoP, such as micro insurance, development of localized renewable energy sources and small water and power supply systems.
Low income communities provide an opportunity where small enterprises can establish and eventually evolve into leaders. Yesterday I had the pleasure of meeting Ms. Agnes Imelda Hiu, who started with a small retail kiosk with support from the Institute of Microfinance. I was informed that she has now transformed her business into the largest combined wholesale and retail store in the Taibesi area in Dili. Her success has enabled her to become first medium-sized borrower of the recently-formed National Commercial Bank of Timor-Leste. There has also been good progress in Timor-Leste in engaging community groups in undertaking basic rehabilitation and maintenance of rural roads. I am happy to note that some of such best performing groups are led by women. These groups have the potential to become tomorrow's small scale contractors. Niche agricultural activities, such as organic farming, is another area particularly suited to lower income communities.
III. The importance of innovation
The second observation I would like to make is on the importance of innovation. One of the main reasons why the base of the pyramid remains so large in our region is that it is poorly integrated with the growing sectors of the economies. It is being left behind as business-as-usual is failing to integrate such communities into our region's growing economy. We therefore need to innovate to make our economies inclusive. In Latin America, for instance, the Inter-American Development Bank has set up a $300 million "Opportunities for the Majority" initiative, that supports a variety of financially sustainable, scalable and innovative approaches that
- Promotes higher quality and lower prices
- Builds local value chains
- Fosters co-creation of opportunities for business and local entities
- Adapts products, services and distribution channels to increase access
- Enhances product value, and
- Offers opportunities to repeat successful experiences
We need to think in similar lines in our part of the world as well. The policy and institutional barriers facing smaller private sector activities need to be better understood so targeted solutions can be found. Perceptions among the private sector that targeting the base of the pyramid carries too much risk need to be reversed. We need to build awareness of, and confidence in, the innovative approaches that are being developed.
The third and final observation that I would like to offer is the value of the government and the private sector working in partnership, and of including communities into this partnership. The much needed process of innovation will only be successful if we work together. Dialogues, such as that supported by this conference, are vital if solutions are to be found and made to work.
V. Learning from success
Ladies and gentlemen, please let me briefly illustrate these observations with some examples from my recent home/home state, the state of Karnataka in India.
Many of India's working class and poor have been unable to afford simple, low cost operations that could avoid problems as serious as premature blindness and kidney failure. The Yeshasvini Co-operative Farmers Health Care Scheme was established in 2003 to assist the poor meet the cost of medical treatment. Private insurers were not prepared to carry cover low income farmers, so the cooperative established its own fund that would share the cost of medical treatment among its members. For around $3.20 per year, around 1.5 million cooperative members now have access to 1,600 surgical procedures at 450 hospitals and nursing homes. The Yeshasvini scheme is market friendly. It now operates on a self-funding basis without government subsidy, its administration is out-sourced to a private firm, and it relies heavily on medical services delivered by the private sector. The scheme is providing a model that has been copied to serve another 20 million low income earners. One of the reasons the scheme has had so much success was the strong partnership between the cooperative and the state government, particularly during the all important start-up phase.
Secured transactions reform is another example of the type of innovation I am referring to. In Timor-Leste, as in many other countries in Asia and the Pacific, legal barriers unnecessarily restrict businesses and individuals from raising capital. In particular, it is difficult to pledge moveable property—such as cars, machinery, crops, livestock, and business inventory—as collateral for loans. This problem can be fixed by developing a secured transactions system that would allow borrowers to legally pledge moveable property as collateral in a manner that removes ambiguity and gives confidence to lender. Because such a system could avoid reliance on the judicial system, it could bypass the constraints imposed by a crowded court system. Secured transactions have proven very effective in other, similar economies, in quickly promoting entrepreneurship. In the Solomon Islands, for example, the secured transaction system recorded 8,200 new security registrations in its first two years, and about 2000 new loans were made using moveable assets as collateral. We expect that, with the benefit of strong partnership between the government and the private sector, such a system could shortly be launched throughout Timor-Leste as well.
VI. Concluding Remarks
Your excellencies, distinguished guests, ladies and gentlemen, in conclusion let me re-emphasize the importance of focusing on those at the base of the pyramid if the Millennium Development Goals are to be achieved, and to achieve the Strategic Development Plan's vision of an end to extreme poverty. These admirable aims have to be pursued through innovation, and by working together in partnership. I am sure that during the deliberations during this forum, you would have discussed many good ideas in this regard. ADB remains committed to supporting your efforts to ensure inclusive private sector –led growth and development in Timor-Leste.