This post is the fourth in a five part series on a radical new approach to scaling BoP business models, what we call a transformative sector strategy. In this segment, I discuss the common characteristics that make BoP business models in different sectors scalable solutions.

Searching for Transformational Models in New Sectors

If building the missing infrastructure could transform rural connectivity and health care, what about access to clean drinking water, especially for smaller rural and peri-urban communities? That's a proposition that WRI and Santa Clara University's Global Social Benefit Incubator are researching. There are some promising models in the field, such as Water Health International, that are beginning to scale. There are a number of additional enterprises, five of which will be mentored intensively in this year's incubator class. There are some promising new filtering technologies that use less energy than existing technologies, as well as other interesting approaches that have yet to be applied in emerging markets; we are undertaking a detailed comparison of both existing and newer technologies.

A number of community-initiated business models have produced good results, but they aren't easily replicable and don't scale. So we are analyzing both franchising and public-private partnership business models. Many of the elements that make rural connectivity and rural health care promising appear to be present in the water sector. It is too early to say what will emerge out of the research, but the scale of the unmet need is clear - a billion people without access to clean drinking water.

And after water, why not BoP energy? Our preliminary thinking is that there at least three sub-sectors of interest: Off-grid power and lighting, from mini-hydro to LED lighting; efficiency improvements in energy-using devices, such as cook stoves and motorbikes; and locally-grown, produced, and consumed biofuels that don't compete with food. We know of prototype enterprises and projects in each sub-sector, some of them already beginning to scale. We believe that the recent, rapid evolution of technology options will continue and can be adapted for the BoP. And we know that the unmet need is very large.

(This post continues past the break; click "Read More" to continue)

This post is the third in a five part series on a radical new approach to scaling BoP business models, what we call a transformative sector strategy. In this segment, I describe how this strategy could transform the health sector in emerging economies.

Last Mile Health Care Delivery

Talk to people in the rural communities of southern Mexico, in the new urban communities on the southern edge of Bogota, or in almost any village in rural Africa about getting decent access to healthcare, and their answer is the same: it usually costs more to get to a clinic, a doctor's office, even a pharmacy, than the cost of the service itself. In Bogota, most of the government-supported health services are in the north of the city, such that it can cost people in these new refugee communities a day's work plus bus fare across town and back to get help. Lack of access defines part of the last mile health care dilemma, and that means distributional business models, such as franchising, can be important.

Talk to Health Stores in Kenya, an enterprise trying to staff small pharmacies with nurses, and another part of the problem becomes clear: the sheer lack of doctors, nurses, and pharmacists in emerging markets. There are not anywhere close to the number of skilled professionals needed to cover rural areas, and these health workers overwhelmingly refuse to live either in rural areas or in urban slums. So technologies, organizational models, and legal changes that enable local diagnosis and remote practice by doctors and pharmacists could play a critical role.

Still a third factor leaps out from the data in The Next 4 Billion report that shows clearly that low-income households spend between a third and a half of their out-of-pocket health care expenditures on drugs. They typically don't go to doctors or clinics or hospitals, but rather to pharmacies or some other source of medicines and seek to self-medicate. That means they often get a guess as to what's wrong with them instead of a diagnosis.

(This post continues past the break; click "Read More" to continue)

This post is the second in a five part series on a radical new approach to scaling BoP business models, what we call a transformative sector strategy. In this segment, I tell the story of a rural connectivity pilot project; an example of this new model for development in action.

A Last Mile Model for Rural Connectivity

Son Tay commune, Quang Ngai Province. I was sitting across a table in a remote rural outpost of Vietnam, negotiating (via a translator) with the manager of a local radio station about access to his tower. He asked a series of technical questions and seemed satisfied with the answers, but then he wondered aloud: "Can we get Internet access here?" He didn't just want it for the radio station, it emerged, but for the surrounding small community - even though nobody there yet owned a computer. The manager understood that internet access could help transform their opportunities. And when we agreed to mount a small antenna to serve the community, the tower was ours.

The negotiation was part of a two year long process to pilot a novel approach to rural connectivity. It involved building an advanced, broadband network in three communes (groups of villages) in a very poor province in central Vietnam to provide Internet-based phone service and Internet access. Quang Ngai Province has no Internet access for its million-plus population outside of the provincial capital, and phone ownership is about 3 percent.

But the province does have an AUSAID-funded rural development project (RUDEP) that had built trust by doubling farmer's incomes in many communes, and optical fiber to every district capital (owned by the national electric utility, EVN, which also owns a mobile phone company, EVN Telecom). Ultimately all of these became partners in the effort, as did USAID's Last Mile Initiative, Intel and other equipment providers.

(This post continues past the break; click "Read More" to continue)

This post is the first of a five part series on a radical new approach to scaling BoP business models, what we call a transformative sector strategy. In this segment, I introduce the conceptual framework for this innovative poverty-alleviation model.

"It doesn't exactly keep me up at night, but I do think about it a lot." Jacqueline Novogratz, head of Acumen Fund, and I were talking about getting to scale - about expanding private sector business development and investment aimed at empowering and providing basic services to the poor to the point of making a real impact.

I felt exactly the same, and I've had similar conversations with colleagues at Santa Clara University, at Ashoka, at private investment funds, and elsewhere. Ever since we finished our report on The Next 4 Billion, the numbers haunt me. How do you meet the unmet needs of four billion people?

Convincing a dozen multinational companies to take this market seriously isn't enough. Doubling or quadrupling the capacity of the organizations that mentor social enterprises and BoP-serving small and medium businesses won't do it either. Even investing hundreds of millions of dollars in individual enterprises in this sector doesn't guarantee success. I think the goal has to be to transform whole sectors in ways that catalyze mainstream investment in BoP economic activity and unleash market forces. To get there, I think we need a more systematic approach.

A Next-Generation BoP Approach: Transformative Sector Models

In this and subsequent posts, I'm going to suggest one such approach that I and my colleagues at WRI and elsewhere have been developing for several years, and that we are now starting to take into the field. I'm proposing this scaling model tentatively, and asking for feedback and for comparisons to other scaling models.

The approach builds on the perception that there is a growing amount of public and private capital available to fund BoP strategies - almost every month now I hear about a new BoP private equity fund - and the conviction that the bottleneck is a shortage of solutions in the form of investable enterprises. In venture capital jargon, what's missing is the "deal flow." And I'm suggesting that the way to create that deal flow and unleash a rising tide of investment is to focus not on individual entrepreneurs, not on individual companies, but on economic sectors.

(This post continues past the break; click "Read More" to continue)

It was sunny, and tempting to sit outside at the University of San Diego to enjoy the weather. Inside, however, a group of global practitioners and scholars - organized by Patricia Marquez of USD and Carlos Rufin of Sussex University and Babson College - were discussing the role of utilities at the Base of the Pyramid. (See 'attachments' at the end of this post, where I have uploaded the meeting's full agenda as a PDF.)

Utilities provide basic services - telecommunications, water, power - that are essential to people's lives and increase their productivity. But a decade ago, many utilities in emerging markets were failing—service to low-income communities was poor, and many of their customers simply didn't pay or acquired the service informally.

The picture that emerged in San Diego, however, was more optimistic. A number of utility companies have engaged BoP communities and increased their willingness to pay, in return for investment that improved service quality. Codensa, a power utility in Columbia with 400,000 non-paying customers (out of a total of 2 million), reduced non-paying customers dramatically. Manuel Bueno has an excellent analysis of the Codensa case in his post, "The Codensa Case: Electricity and Related Services for the BOP in Colombia," from December, 2007. And mobile phone companies improved service and access to service dramatically compared to legacy fixed-line telecom companies (sometimes another branch of the same company).

(This post continues past the break; click "Read More" to continue)

A new paper posted in our resources section gives a specific regional example of the potential benefits of biofuels for the BoP (this adds to our previous discussions on the subject here, here and here).

The paper - by Kathleen Robbins of the GreenMicrofinance Group - tells the story of a small NGO, aided by GreenMicrofinance and an enlightened multinational company, that is piloting an environmentally sound and economically sustainable approach to biofuels. The key element is a jatropha nursery that is incubating young plants and teaching a group of Haitian farmers how to grow them.

The oil squeezed from the plant will be burned in lamps and cookstoves and the remaining seedcake used as fertilizer. As supplies grow, a small refinery will be built to process the plant oil into biodiesel-and the local mobile company is willing to buy it to fuel the diesel generators on their cell towers.

(This post continues past the break; click "Read More" to continue.)

Mobile phone banking is already fully commercial in the Philippines, South Africa, and Kenya. It's about to happen in perhaps a dozen additional countries. With more than 1.5 billion mobile phones deployed in the developing world, the potential market is large and growing. The need is equally apparent-most of the BOP have no access to modern financial services, despite the success of microfinance.

So what is keeping this from becoming a revolution in financial services for the poor? In a word, regulatory hesitation. Central banks-and behind them, the U.S. Treasury-want to be sure that the democratization of financial services does not also lead to widespread money laundering and consumer fraud. And a key part of current security systems-the SIM card that gives each phone a unique ID-is device-based and potentially hackable.

Today we report new research that assesses the potential of biometric security systems-user-based, not device-based-for mobile phones. It turns out there is an obvious candidate, and that phones with this technology are already in commercial production.

I won't give away the story-read the report, Biometric Security for Mobile Banking-but the cost of including this technology in low-cost GSM or CDMA phones appears to be low, well within the buying power of most of the BOP. The report also places this new capability in the context of broader technology trends that could extend the reach of mobile phones-and mobile banking-into rural areas.

(This post continues past the break. Click "Read More" to continue.)

In a speech at Davos today, Bill Gates called for a more inclusive capitalism that "would have a twin mission: making profits and also improving lives for those who don't fully benefit from market forces." That is a major milestone in the evolving thinking of perhaps the most influential philanthropist of our time.

In 2000, I organized a conference in Seattle on Creating Digital Dividends at which Mr. Gates, in a keynote address, famously said that "poor people don't need computers" and rejected a business approach to alleviating poverty. Within a year, however, he had changed his mind, and Microsoft became a leader in seeking ways to provide affordable services to low-income populations—in some small measure with WRI's help.

The beginnings of a more full-fledged belief in inclusive capitalism, according to the WSJ today, came at a dinner in Seattle, organized by WRI, in which Mr. Gates spent several hours talking with BOP guru C.K. Prahalad (in his capacity as a WRI Board member). I was also at that dinner, and remember Mr. Gates saying to me that the question was how far towards the bottom of the pyramid could business approaches go—not too far, was his assessment. But again, his thinking evolved.

Now Mr. Gates is arguing that capitalism, appropriately pursued, is in fact the best hope to bring services and improve productivity and create opportunity for the world's 4 billion poor - and that, accordingly, the world needs to invest much more heavily in the micro, small, and medium-sized enterprises that are close to the poor. If Mr. Gates puts the muscle of his foundation behind such enterprise development - which we have long argued is the principal bottleneck to a successful BOP business approach - then perhaps the world will really change.

Update: The full text of Gates' speech is available over at Polity. Bruce Nussbaum at BusinessWeek also has some analysis, including kind words for NextBillion ally Acumen Fund and its CEO, Jacqueline Novogratz.

Santa Clara University is known in social entrepreneurial circles for its work helping to organize and judge the Tech Museum Awards – a showcase for social entrepreneurs, mostly from developing countries. Less well-known about the school is the Global Social Benefit Incubator, run by SCU’s Center for Science, Technology, and Society and a host of Silicon Valley volunteers.

The GSBI, under the guidance of Professor Jim Koch, selects 15-20 enterprises from developing countries and provides an 8-month mentoring process. The mentoring culminates with an intensive 10-day process in Santa Clara, where entrepreneurs work with their mentors, other experts, and each other to prepare themselves to succeed upon their return home. Applications for the fully-funded 2008 class of entrepreneurs are available now over at Social Edge.

This year, SCU has invited World Resources Institute to work with them on the GSBI process and accepted my suggestion that we focus a sub-group of the available slots on enterprises in the water sector.

The idea is to promote cross-learning among water entrepreneurs, and also to analyze the sector as a whole more deeply. This includes looking at geographic differences in the treatment challenge, the range of available and prospective technologies, business models, financing strategies, etc. The goal is to stimulate the sector as a whole.

(This post continues past the break; click "Read More" to continue)

I found Peter van Dijk's comments on Ana's report from the Mobile Banking Conference interesting but not convincing. Not surprisingly, the evolution of mobile phone banking has not been without false steps, fraudulent operators, and systems that have flaws. But evolution also tends to produce winners that survive because they solve those problems. And the experience with G-Cash and Smart Money in the Philippines, with M-Pesa in Kenya, and, yes, with Wizzit in South Africa is that customers on the whole find a significant value proposition.

If these systems didn't work, didn't protect their customers' money, and didn't deliver value, they would hardly be growing at the rate they are. M-Pesa already has over 1 million customers (in 9 months), and the buzz on the street is very positive. But let's not pretend that these services are perfect, yet, but rather ask: What is the alternative for the several billion people who are unbanked?

Microfinance has had decades to fill that need, and has not--yes, it is very high value for most of the 100 million customers it does reach, but still a drop in the bucket. Mobile phone banking, on the other hand, has a realistic potential to add 1 billion customers to the banking system in the next 5 years (indeed, more than 1 billion low-income people in developing countries already own mobile phones). That potential is the big picture--the forest. It is especially important to many rural people who live far from banks and from micro-credit sources.

Of course, the evolution of mobile banking systems is hardly finished. A big remaining piece is enhanced security--to protect customers against fraud, and to protect banking systems against money laundering and other sophisticated criminal activities. But even this issue will yield to progress. In fact, we at WRI have recently completed research that suggests a biometric identification system on mobile phones is within easy reach--and we will be publishing that research next month.

We believe that much more secure ID for mobile transactions (including remittances) will greatly improve consumer protection and up the barriers to criminal activity--thus removing one of the main hesitations of banking regulators to the rollout of mobile banking. That in turn should accelerate what already seems like the next big wave of value-added services over phones in developing countries, with growing activity in Africa, Latin America, and Asia.

A recent Wall Street Journal article documents the demise of Nicolas Negroponte’s dream of a $100 "one laptop per child" for millions of schoolchildren in the developing world. (Thanks to Ethan Zuckerman for pointing it out.)  To give Negroponte his due, the idea stimulated significant technology development and focused market attention on the need for low-cost computing devices for BOP markets.  And from an engineering perspective, it's a magnificent machine.

But the $100 price was never realistic; the market is dominated by small businesses and only secondarily by educational systems, and the project lacked a real business model, including such essential details as training and technical support.  (We've written about OLPC's lack of training and tech support time and again here on NextBillion.)

It was from the beginning an inspiring but unrealistic vision—comparable to the "build it and they will come" belief that funneled hundreds of millions of development dollars into Internet access telecenters, 90% of which failed when the grants ran out. Technology push strategies just don’t work.

If there is any lesson that our studies here have shown, the essential starting point is a viable business model, grounded in a real understanding of needs, the value proposition as perceived by local people, and evidence of willingness to pay. Only then can technology opportunities really be evaluated. That is not to say that technology doesn’t have a critical role as an enabler for BOP communities—witness the still accelerating adoption of mobile phones (and their prepaid service business model).  But engineers—especially those that don’t know developing market well—should take to heart the real moral of the laptop story: First, it’s the business model.

(This post continues past the break; click "Read More" to continue)

A new report from Vodafone shows that data revenue topped 1 billion pounds this past year, not including text messaging revenues. Moreover, data revenues grew 49% over a year ago, compared with 7% for voice and 9% for messaging. Think of this as a measure of the growing use of internet-based mobile services, clearly the next big thing in mobile telecommunications.

So what does that have to do with the Base of the Pyramid?  A lot.  True, most of Vodafone’s revenue now comes from the EU, although that is starting to change rapidly as the company focuses its investment on emerging markets. But an article in the Economist, A Bank in Every Pocket?, reinforces what we have been arguing (in The Next 4 Billion:Market Size and Business Strategy for the Base of the Pyramid and elsewhere on this site)—that mobile phone banking is starting to take off. 

Fully commercial in the Philippines, Kenya, and South Africa, mobile phone banking could add as much as 1 billion new customers to the banking system in the next 5 years.  Such explosive growth would reflect the huge benefits of access to financial services for the BOP, many of them spelled out in the Economist article. 

And banking traffic is data traffic, whether done via messaging or directly via the Internet. So think of the Vodafone report as a harbinger for what will happen in developing countries too, even before the growth in voice customers begins to slow.

Co-ops are big in Brazil. They are how small communities organize to help themselves, given that they are often overlooked by large companies. Recently I had the opportunity to visit just such a coop in Valente, a town deep in Bahia in Brazil's Northeast.

A WalMart-type logistics system, tracking every sale of every item at every outlet? Surely that's overkill for a base of the pyramid (BOP) business--or is it?

Last week Julia Tran--WRI's BOP health sector specialist--and I visited Mi Farmacita, a franchise pharmacy that provides low cost, certified generic drugs and other essential services to many low income communities in Mexico. We've written previously about Mi Farmacita, which is also supported by WRI's New Ventures/Mexico enterprise development activity.

The visit was intended as part of a more in-depth investigation of the need and the business opportunity in serving BOP pharmaceutical markets in Latin America, an activity we are undertaking jointly with the Inter-American Development Bank and our partners in the Network for Inclusive Markets (Avina and Fundes.) The interest is motivated in part by our analysis in The Next 4 Billion: Market Size and Business Strategy for the Base of the Pyramid that showed both the extent of the unmet need and the fact that BOP households spend a very large share of their healthcare dollars on pharmaceuticals, yet often don't have good access to high quality medicines at affordable prices.

For a distribution problem, think about distribution models, such as franchising. Ergo, we're looking into whether the Mi Farmacita model could be "cloned" in other parts of the region and the world.

CEO Guillermo Krasovsky graciously showed us around and answered our questions. But the most fascinating aspect of the visit--and one the distinguishing features of the Mi Farmacita model--came when Guillermo demonstrated his computerized, web-based logistics system. With the click of a mouse, he could show us both the volume and the dollar value of every pharmaceutical sale, for hundreds of different products. The information was aggregated by month and year, for each of nearly 80 different outlets--and the system has the capacity to handle the 1000+ outlets that Mi Farmacita's business plan calls for. The system captures sales on a daily basis, automatically, and also is the basis for reordering and distribution management. It shows clearly the seasonality of cold remedies, for example, and regional differences within Mexico of the prevalent disease burden.

(This post continues past the break; click "Read More" to continue)

Following famed venture capitalist Vinod Khosla to the speaker’s podium at the huge annual conference of The Indus Entrepreneurs (TIEcon 2007) was interesting. First, some of the audience decided it was time to go to lunch. More interesting was the unexpected similarity of what we both had to say about quite different fields.

Mr. Khosla described how important it was to find sustainable energy solutions to address the climate challenge, and pointed to a number of promising technologies and the growing market for them. But his basic message was that we know how to solve business and technology problems—and we will. His firm is putting its money to work doing just that.

My message was about poverty, but had the same theme—that poverty can be addressed by the right combination of business and technology solutions, and that there is a growing market for such solutions, as we document in The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Poverty may be a harder problem than climate—at least humanity has been struggling with it longer. And market-based approaches won’t meet every need. But we’re way far from exhausting the possibilities to provide better services, and better opportunities, to low income communities.

After the speech, and the taping of a short video, quite of number of people from this high-tech audience approached me to say that the message resonated with them, and to learn more about the work and find out how they could get involved. But as the Khosla comparison illustrates, one thing that market-based approaches to poverty don’t yet have is plentiful venture capital resources to test and scale all the good ideas.

That’s why the decision of the Acumen Fund to raise $100 million in new resources to build BOP businesses that can help alleviate poverty is a hopeful sign. Only half-a-dozen years old, Acumen has emerged as a powerful model for channeling philanthropic risk capital into enterprise development. The energy and excitement at their Advisory Board meeting in New York City was palpable, especially when they announced having already raised the first $10 million. The thought and preparation Acumen has put into building the team and the systems to be ready to scale was equally impressive.  Of course, we need 10 Acumens, and maybe 10 New Ventures and 10 Technoserves—4 billion underserved people is a huge challenge. But at last there are beginning to be serious attempts to organize risk capital for the base of the pyramid.