Co-written by Felicitas Agoncillo-Reyes and Markus Dietrich
In the Philippines, about 60% of the population (57 million people) have family income of less than P18,000 a month ($3 per capita a day), 40% less than P12,000, and 26% live in absolute poverty with less than P8,500. To tackle this high level of poverty and address some of the related development challenges, the Government of the Philippines has identified the promotion of inclusive business as a key policy priority. In countries with high proportion of people at the base of the income pyramid, large inclusive business investments are needed to bring out about systemic impact. Business models need to reach scale to have a transformative effect on low-income populations. Smaller social enterprises can have an impact if they grow and replicate.
Micro, small and medium-sized businesses (MSMEs), though, are not inclusive businesses.
In the Philippines, there are very few large businesses; a majority of enterprises fall in the MSME category. These are defined as companies with an asset base of less than $3 million. Compared to other countries, the asset definition in the Philippines is relatively small. There are 786,000 MSMEs registered in the Philippines and about 2,300 large-scale enterprises. Most of those MSMEs are micro-enterprises working in the informal sector, 63,000 are small and 3,000 are medium-sized companies. More than 50% are in wholesale and trade, 35% in low productivity services, and only 15% are in manufacturing production.
Inclusive businesses in the Philippines are medium-sized family-based industries. This proliferation of MSMEs means the opportunity for large inclusive business investment is limited. A company with an asset base of $3 million would be considered small, while commercially viable investments in companies between $100,000 to $3 million would be seen as investment in social enterprise. Social enterprises also have less social impact, and some—but not all—do not seek financial return. Micro-enterprises are typically not so relevant for inclusive business because of their low scale of impact, low innovation social potential, and low profitability for investors outside of family and informal finance. However, micro-enterprises can be integrated in the value chain of an inclusive business model.
An 2013 ADB study estimated that there are about 20,000 social enterprises, cooperatives, NGOs and community-based organizations in the Philippines, all working somehow with the poor. Nevertheless, the poverty incidence did not decline since a decade. The study found that there are only perhaps 100 inclusive business models of which 15 are investable.
The Philippine government wants more inclusive business models, and is studying possible incentives for businesses and social enterprises to adopt these models through a number of policy initiatives. Inclusive business is listed under the 2015 Investment Priority Plan of the Philippines Board of Investments, which means the government is promoting inclusive business through MSME support programs, financial and other incentives.
The most pioneering step has been the development of an Inclusive Business Accreditation System to help distinguish an inclusive business model from other types of investment. This has been put in place for three key reasons:
- Accreditation systems establish trust and accountability in new concepts, as shown for example in the fair trade, sustainability and organic market sectors.
- While all companies contribute to economic growth, only a few companies have business models that make growth more inclusive.
- For government programs and banks to better target investment support, we must distinguish between companies generally contributing to growth, and companies with inclusive business models.
The accreditation criteria and weights are the same for both social enterprises and inclusive businesses. But since company size matters, as smaller enterprises will have less scale and less impact, the benchmarks have been adjusted to account for differences in size.
So how does the system work? Accreditation was piloted in three priority sectors: agri-business, housing and tourism. The accreditation criteria is currently being discussed between government and the private sector via business associations, and the tool is scheduled to be formally introduced in early 2016.
The accreditation system uses a composite rating tool, and it evaluates business models, not companies uses sector-specific criteria and benchmarks. Accreditation is based on an ex-ante assessment, and the preliminary rating is then validated after 6-12 months by checking the social impact. Companies can apply for inclusive business accreditation on a voluntary basis.
Felicitas Agoncillo-Reyes is Assistant Secretary of the Philippine Board of Investments, the government agency promoting inclusive business accreditation. Markus Dietrich is CEO of the Asian Social Enterprise Incubator and a former ADB consultant on inclusive business accreditation.
This blog is part of a series of blogs about inclusive business in Asia written by a wide range of experts following ADB’s 2nd Inclusive Business Forum for Asia in Manila. Visit the new Inclusive Business in Asia site here.