Tuesday, September 06, 2005
For-Profit Development
If you are here looking for information on the plane crash. Scroll down ...

The last two days we have had a strike in Pucallpa. All the transportation workers (moto-cars, collectivos, buses, etc...) are on strike because of high gas prices. I'm not quite sure what they expect to achieve as the price of gas is largely determined by global market forces, not local ones. Somehow I don't think that King Saud of Saudi Arabia is going to start pumping another million barrels of oil because the taxistas in Pucallpa are ticked off. But what do I know?

We have been confined to our house as the taxistas have been a bit violent and it isn't really safe to walk to work. Hopefully the strike will be over by tomorrow. I have been using the extra time at home to read the book "Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits." It is very interesting. It's main conclusion is that poverty eradication is not solely the domain of NGOs and governments, the private sector can be a player as well. It concludes that there is a viable market at the "Bottom of the Pyramid", or BOP (the poor, yet numerous consumers in developing countries), which companies can profit off of by providing goods and services to untapped markets. This may seem like heresy to some out there whose natural instinct is to recoil from anything with the word "profit" in it when talking about the poor and development. But the more I think about it the more sense it makes to me. Let's explore some reasons why the for-profit model might work better.

1.) Sustainability: One of the buzz words in development circles is sustainability. What happens when the NGO leaves a project after a couple of years? Are the gains achieved sustainable or does everything unravel after the agency leaves? For example, Food for the Hungry goes into a community and builds a bunch of latrines. After we leave the communities and return 5 years later are the latrines still there? Has the community built new ones if they have broken down? Unfortunately, more often then not, projects like this don't succeed long-term. Often times the community does not value something that they didn't have to pay for themselves. By definition, a project that is profitable is sustainable as the company won't quit providing the good or service if it is making money. If the poor see enough value in something and are willing to purchasing the product then by definition it is sustainable. As an example, the government here provides chlorine tablets free of charge to river communities around Pucallpa to purify water. But the residents don't like the taste of the chlorinated water and don't purify it even though the chlorine is free. If a company were able to come up with a purifying tablet that actually made the water taste better and sold it at a cheap price that still allowed them to profit the poor in the communities would be better off.

2.) Efficiency: After working with Food for the Hungry for two years I can honestly say that I believe the organization is efficient and honest in their programs. But there are a lot of drawbacks to the non-profit/NGO model. The first is that the organization is dependent upon donors. Anybody who has worked in a non-profit can attest to the inherent instability of donors. Donations are rarely given with no strings attached. In the for-profit world you are generating your own operating budget. If you don't have money it is because your product or service is not selling and you have no excuse. While this environment is a bit more demanding, I believe it incents managers and workers to deliver more. This being said, some of the hardest workers I know work for NGOs so don't think I am saying people in the non-profit world don't work hard. Tricia worked at World Relief for several years and that is an organization that does a lot with little. But I also worked in a couple non-profits before coming to FH and I think World Relief is the exception to the rule, not the rule.

3.) Mentality -- Consumers/Clients vs. Beneficiaries: One of the most difficult patterns to break in people living at the BOP is the "give me a handout" mentality. Many normally very hard working people will expect something from an NGO rather then expect to do something for themselves. People see themselves as poor and expect to be given something by the outside group coming in trying to help. No matter how hard the NGO tries, it is still always seen through the $$$ lens. The for-profit model turns this idea completely on its head. The poor become the clients and consumers. It is currently chic in the NGO world to refer to the people you are working with as "clients" or "participants" vs. "beneficiaries". In the online development class Tricia was taken to task for referring to project participants as "beneficiaries". But even if you don't like to call them beneficiaries, "a rose by any other name..." In the for-profit model the people at the BOP really aren't beneficiaries. They are receiving receiving something, but they have just as much right to it as you or I because THEY PAID FOR IT. They are the clients. They are the ones who are always right. The corporation (which takes the place of the NGO in this model) also gains in profit, but it is a win-win situation. This model gives the people at the BOP the dignity that they deserve. Just because a person only makes $5 a day doesn't mean they shouldn't have access to the highest quality brand-name products.

4.) Historical Results: This bullet point is a bit difficult to write, but we must face the fact that NGOs and development agencies as a whole don't have a great track record of success. Most of the success stories in the last 50 years aren't because of NGOs and development aid. Most of the development successes such as Japan, Germany, South Korea, and China are largely due to market reforms which unleashed the creative energy of their populations to create something from nothing. Wealth is not given, it is created. You can have the best intentions in the world, but just giving stuff away doesn't cut the mustard. A for-profit development model is a new way to think about the issue of poverty and I believe it better matches the human nature and the incentives that drive wealth creation.

So while you may think what I am saying sounds cool (or you may hate it which is fine too), I am guessing that you are wondering how this model would actually work. The best way I can explain is through an example that was in the book.

is the #1 Mexican cement producer. Towards the end of the 90's they found themselves having difficulty expanding their market. They had saturated the formal (upper class) market and were having difficulty entering the BOP market (families earning less then $5/day). In most poor countries, houses are not built at once like they are in the states because people have no access to the capital or financing that are available in the developed world. So the way they build their house is "poco a poco", or "little by little". In Mexico, it takes an average of 4 years to build a single room in a house. The people usually do it themselves or use unskilled or semi-skilled labor. They save their money till they can buy some cement or brick and then use it to build part of a wall. Often time material is left over and wasted or needs to be stored where it is at the mercy of theft and the elements. Often times money that is being saved is spent on beer or parties. The result is a very inefficient construction process and the people at the BOP suffer because of it.

CEMEX came up with a solution to this situation that has dropped the average construction time of a room from 4 years to 1.5 years. The program is called "Patrimonio Hoy". Leaving something to your family after you die is very important in Mexican culture. The savings or assets you accumulate is called Patrimonio. So the name of the program means something like "Savings Today". I will try to briefly explain how it works. CEMEX came up with a savings/credit scheme which gives people a savings and credit mechanism in which to build their house. People organize themselves in groups of 3 people each who know and trust each other as the program is never sold to individuals. Because credit is being extended, the "peer pressure" of being in a group (where if a single person fails to pay it affects the whole group) helps keep default rates to a very low rate. Before the program starts, an architect from CEMEX comes out to the 3 houses and determines what materials will be needed and a plan is drawn up. CEMEX will sell the whole solution, not just the cement. The group then starts paying a set amount to CEMEX every week. The program lasts 70 weeks. After 5 weeks of payment, 20% of the materials are released and the people can start on the house. At this point, the company is extending credit because the group has not paid 20% of the cost yet. At 10 weeks another X% is released and so on. If at any point a member of the group fails to pay for a week the whole group is assessed a fee and the next materials delivery date for all 3 is pushed back a week. By week 60 all the materials have been delivered and the clients are able to finish the construction. CEMEX also provides construction workshops on how to build your home. The end result is people who are able to build their home quicker, better, and more efficiently with top quality materials. The program has also been very successful financially for CEMEX who is now entering a market they had previously had difficulty entering.

Well this post has gotten way out of control, but if you made it this far you are likely interested in this type of stuff and I recommend reading the book Fortune at the Bottom of the Pyramid.


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