Nuturing and challenging private companies for sustained BUSINESS AND impact, a case of VIETNAM BUSINESS CHALLENGE FUND

NuturiNg aNd challeNgiNg private compaNies for sustaiNed BusiNess aNd impact, a case of vietNam BusiNess challeNge fuNd Author: Vietnam Business Challenge Fund Country: Vietnam Sector:

NuturiNg aNd challeNgiNg private compaNies for sustaiNed BusiNess aNd impact, a case of vietNam BusiNess

challeNge fuNd

Author: Vietnam Business Challenge Fund Country: Vietnam

Sector: Agriculture, Energy, WASH, Infrastructure

Vietnam has a rapidly growing economy, experiencing nearly a two-digit growth rate over the last decade However, Vietnam still has a high percentage

of households in poverty The hardest to reach to deliver benefits from such growth and employment are the rural poor These groups predominantly rely on agriculture for a living, are highly vulnerable to the impacts of climate change and are disadvantaged due to a lack of services, inadequate infrastructure, limited involvement in and access to markets

Although the most in need, there is little investment and development addressing the needs of the rural poor; improved availability and access

to services and products, such as roads, energy and improved water and sanitation, and job creation Such investments are often associated with high levels of risk due to substantial costs and uncertain returns; the private sector is often unwilling or unable to absorb such risks and therefore chooses not to invest An external stimulus is needed to support innovative yet risky private sector investment in areas that can deliver sustainable models of growth

Several private sector development initiatives have been conducted in the last decade in Vietnam, demonstrating the potential of businesses to effectively generate and lead poverty reduction solutions However, there are still several challenges that need to be addressed They are:

Now that Vietnam is a middle-income country, official development assistance will continue to fall whilst systemic pockets of poverty remain There are donors in Vietnam working on private sector development, but they mainly play a facilitation role, such as improving access to finance, improving the business environment and delivering business development services

CONTEXT

Private sector companies, both national and multinational operating in Vietnam

SNV is the fund manager of the Vietnam Business Challenge Fund (VBCF) which is capitalised by UKAid through the UK Department for International Development (DFID) VBCF is a specialised fund designed to support private sector companies in Vietnam to develop new business models that deliver both commercial benefits for the company and social impact for low income populations, including job creation, income improvements and access to affordable goods and services

SNV introduces an innovative approach; complementary to private equity funds and impact investing style funds, which fills the gap between financial return-oriented funds and social return oriented funds, that not only promotes an inclusive business approach within agriculture, infrastructure & basic services and low carbon growth initiatives, but also promotes capacity building at private sector level, links with public policies and aims to generate systematic change by scaling up models for sustainable inclusive growth

VBCF develops and nurtures innovative business ideas from private companies, which have the potential to generate sustainable benefits for the low-income population It provides advisory services, mentoring and non-reimbursable funding of up to 49% of the total investment in selected Inclusive Business inititatives in Vietnam through competitive open calls

VBCF aims to:

• Promote inclusion and innovation in the following sectors: i) Agriculture, ii) Low Carbon Growth and iii) Infrastructure and Basic Services;

• Overcome business risks and reduce transaction costs associated with including low income people in the value chain of companies;

• Remove barriers and improve the operation of value chains to facilitate inclusion of low income people in the core business of participating companies;

• Create incentives for companies to offer access to goods and services that include low income people in their value chain;

• Promote a better business climate for the private sector in Vietnam, addressing poverty eradication activities under innovative market-based and commercial mechanisms

Following two call for proposal rounds, VBCF received and assessed more than 400 applications, from which 21 inclusive business initiatives were selected for investment

1 Increased private sector investment into Inclusive Business initiatives: With a non-reimbursable investment

of approximately GBP 3.5 million, VBCF will leverage

a total private investment capital of approximately GBP

10 million by the end of VBCF In 2014, over GBP 3.5 million had been invested by the private sector This makes an impressive non-reimbursable funding/private investment ratio of 1:3

2 Successful Inclusive Business models provide market access to low income people and sustainable supply chains for businesses: In 2014, eight inclusive and sustainable business models were set up in the agriculture and food industry

CLIENTS

METHOD / SNV

INTERVENTION

VBCF supports companies’ value chains, including:

- Japonica rice

- Corn – biochar

- F1 hybrid corn seeds

- Medicinal plants

- F1 horticulture seeds

- MSC certificed sustainable scallops restoration

- USDA certified organic rice

- 2nd generation probiotics

3 Successful Inclusive Business models providing basic products and services

to low income people and new/

market entries to businesses: 4 new products and 4 innovative services have been introduced to low income people Over 2 million products adapted or tailor-made to low income people’s needs have been produced and sold

Improvement of business growth

VBCF supports inclusive businesses to increase sales, expand markets

or enter new markets, apply new technologies and introduce innovative products and services to the market The VBCF portfolio investees profile competitive and attractive financial and social returns for the commercial and impact investment industry

Improvement of living conditions of low-income people

Low-income groups benefit through the implementation of VBCF investees’ inclusive business projects as producers, suppliers, distributors and customers DFID’s expected social return on investment by the end of the VBCF includes the creation of 5,000 new jobs, 60,000 beneficiaries with increased income, and 200,000 low income people with access to basic products and services In 2014, VBCF business initiatives have created 4,000 new jobs, income increases for 34,000 people and access to basic goods and services for over 1.4 million low income beneficiaries

Reduction of environmental impacts

VBCF-invested companies have introduced environmentally friendly products such as the emission-free brick molding machine, the biomass cookstove, the biogas digester from recycled materials and power saving light bulbs Two businesses under VBCF’s agriculture portfolio contribute to environmental preservation through (i) restoration of sea resources and (ii) utilisation and production of biochar from corncobs and agricultural byproducts

Engaging private sector

• The Challenge fund is an effective mechanism that can be used to mobilise private sector resources to leverage limited development funds for development purposes

• Attracting attention of private sector actors requires professional and effective marketing communications, especially direct marketing

• Effective communications plays an important role in engaging the business community, sparking their innovative ideas, to turn these ideas into reality

Engaging low income groups

• Engaging low income groups in the inclusive business ventures of companies requires trust building, good knowledge of low income market needs and preferences, and different kinds of support such

as financial access and hands-on technical guidance

• Economies of scale make the difference in working with low income people, which often involves high transaction costs and is labour-intensive

• The name of the game in low-income markets is not higher prices for suppliers or lower prices for consumers It is about aligning suppliers with market demand and maximising productivity, quality and value addition; while for consumers it is about developing and delivering affordable and quality tailor made products and services

VBCF supports the development and distribution of basic products/services:

- Cook stoves

- LED light bulbs

- Recycled plastic based biogas digester

- Mobile banking

- Centralized water treatment plant

- Others

IMPACT

LESSONS LEARNED

• Innovations involve risks, so it is important to take possible failures into account and be well prepared, both operationally and financialy, to make the best use of the funds available

• Markets change rapidly, so planning and implementation should be flexible to meet the business requirements

• Private companies have limited information on low-income markets;

limited access to finance; can lack skills in sales, supply chain management, finance and administration specific to operating in low income markets

Systemic change and long term impact

• Priorities should be given to large/medium leading companies to deliver impact at scale

• Ecosystem development perspective requires long term vision and mix sources of investment (commercial and developmental)

“We are very excited at DFID to be participating in Vietnam Business Challenge Fund with SNV Our objective is to provide the kind of finance that

is not available from other sources, and the kind of technical support that is difficult for private sector companies to access This is just the beginning, from our perspective All we want to do is to get other people interested in

it, get the government, other donors, and a wider range of private sector partners to take ideas that have been generated by the Challenge Fund and move them forward, take them to the next level, deliver them at scale, unleash the potential of the private sector in a way that hasn’t been seen

before in Vietnam” Jim Carpy, Head of UK Department for International

Development, Vietnam.

“Without VBCF my business idea would never ever have come true” Mr Ngo

Duy Dong, Director of Green Environment Biogas Company producing and selling biogas digesters made from recycled plastic.

Contact details Javier Ayala Executive Manager - Vietnam Business Challenge Fund Corporate Lead – Global Inclusive Business Services Email: jayala@snvworld.org

For more about our work in Vietnam, visit: www.snvworld.org/Vietnam

TESTIMONIALS

STANDARD DATA

Project: Vietnam Business Challenge Fund Donor: UKAid - DFID

Dates: 05/2011 - 02/2014 Budget (GBP): 4,900,000 Program staff to

Partners Vietnam Chamber of Commerce & Industry of Vietnam, SPARK