A summary of the address delivered by Dr Nachiket Mor, President, ICICI Foundation for Inclusive Growth at MMA Annual Convention 2008 held on 15 & 16 Feb 08 at Taj Coromandel Hotel, Chennai.

The world view I bring is the world view of much more pragmatism and to see what we can actually do about this whole challenge rather than a view that is defining the problem. We all know what the issue is or perhaps we need to understand it better, but what I want to try my hand at through the foundation is to see if we can actually do something about it.

It is not as if we are the only country in the world that has poverty or that there are people around the world who have not tried to address it, like Bangladesh who are much smaller than us, no doubt, but much poorer, much more exposed to the natural elements and the uncertainties caused by it. I have not been there but whatever I have heard more recently from Mrs. Kishwar Alhuwalia, that Bangladesh does not have the grinding poverty issues that we have in India and they have most certainly been able to, using a variety of ways, deal with certain issues in a certain way. They don’t have the growth we have and they don’t have some of the opportunities that we have, So, I thought let me take you through a quick snapshot of an approach that we are trying to adopt, in partnership with a local entity called IFMR.

They have created a new business incubator called IFMR Trust which actually has nothing to do directly with IFMR. It is a separate entity, it is a fore profit private equity fund actually, but works quite closely with IFMR, which is why it shares the same name. IFMR, as you know, has a very strong relationship with MIT. MIT has something called the Poverty Action Lab in which they do a fair amount of work on the ground, trying to understand in an action oriented mode what the issues are and what may be done about them. And in some ways, the Trust is born from that spirit.

The thought process behind the Trust and behind what the Foundation is trying to do is that there is an engine of growth that is producing 8-10 % growth numbers. The economists believe that the right growth numbers for us should be 7%. By growing at 9 or 10 we are overheating. But nevertheless it is well beyond the 3 ½ % that we have historically seen, very much a number that is much higher than the number that we have been used to.

Is there a way that, using careful thinking, using innovation, using many of the new ideas, we can link the challenges of growth of a larger group of people, 400-500, you can define what is the actual number depending on your favourite definition of the poverty line. Is there a way that we can link their fortunes in an organic symbiotic way to this engine of growth and the belief is indeed that is possible to do. There are reasons why it is not happening and can one take some approach and try and address it?

The Trust is a holding company. It has three broad components that it is proposing to launch. One is called the Network Enterprise Fund. I will explain in a minute what that is. Other is a Financial Services Channel and the third is the Non-Bank Finance Company. The Network Enterprise Fund is a fund that comes from the belief that the problems in rural India and amongst the poor can be viewed as problems of supply chain failures rather than as problems that are inherent in the production or in the demand side of India. I will get into the details of what is the logic that produces that belief.

The Network Enterprise Fund therefore invests only in supply chain companies. It will not invest in the producer, in the marketeer, but it will only invest in the stuff that goes on in the middle such as logistics companies and certification companies. Finance is very much an enabler: it is a supply chain by itself, but often times you can give an order to a small manufacturer and they are not able to fulfill it because they do not have working capital finance. So sometimes supply chains break down because somewhere in the middle there is a credit constraint and they are not able to connect the complete supply chain properly. Clearly the idea is to try and see if we can directly focus on supply chain failures.

What are some of the insights that are driving this whole belief that it is indeed possible to intervene in these supply chains in a corporate manner using private equity, return and equity numbers? The fund is promising people something like 15-25% return and equity, which in the days of stock market growth of the type we have seen, may not sound like much but it is an attractive rate of return given that many companies are delivering that kind of ROE.

There are two broad insights. One is that the rural customers pay more in absolute terms not in relative terms. If you ask somebody what it is that they are paying for health care, they are actually paying more money in terms of Rupees than in a normal situation that they might be paying. If you look at drinking water, clearly to get pure drinking water, they are paying a lot more money. Credit is entirely obvious, both from the money lenders and in fact you might argue from micro finance institutes and from self help groups: The lowest rates of interest that the self help groups offer today are 24% per year. Significantly higher given a zero default: a situation in which you have the credit risk that is comparable to that of a home loan in the order of 25-30 basis points, 0.2 -0.4%. Why is it that the interest rate is 24%? There is some logic about cost structure but as far as the customer is concerned, he is paying a price that is significantly higher than somebody with the same credit risk. I could argue to you that in urban areas, where there are higher credit risks, there are customers who are paying even higher rates of interest. You can take a short term personal loan that you may borrow from an ICICI Bank or a Citibank. That is 35% but with a default rate of 8%. These guys are defaulting only at ½ %. How is it that they are paying such a high rate? So this is one issue.

A more popular example is the sachets that you get from the FMCG companies. One argues that they are very attractive sachets that you are selling shampoos and oil in, but look at the price per gram that the customer is paying for that sachet relative to what you would be paying if you had bought the bottle. It is significantly higher. Because of credit constraints, the customer cannot have a bottle in his home and buys the sachet and ends up paying a big number.

Second, the belief is, overall in a house hold, there is some spare capacity. People are not, either in terms of quality of work that they are doing or in terms of the time that they are spending, fully employed. I sense that there are too many people doing too few tasks. There is some spare capacity there that one can actually use. At the same time you are experiencing severe shortages in urban economies. You ask a construction company and they are telling you that there is no construction labour to be hired. I understood from somebody that Chinese construction companies are bidding in India with labour. It is an interesting situation that they are bringing labour from China to help us do our construction work when in fact we have an enormous capacity in the country. But somehow the supply chain is not getting connected up smoothly. If you look at retailers, everybody has gone out and built these big malls. But on the shelves, there is not enough to put. You are not getting enough variety, not getting enough product design. It is all the same stuff that you are buying which is cheap but not getting enough value. Many people are using real estate place to get into it but what about the product? Clearly, in the interface to market, there are two issues. One is remoteness: The producer or the supplier of labour is situated in the back of beyond and is not able to connect somehow because the distance is just so far that it produces information that is symmetrying and produces transactional costs. Is there a way that in our view, there is a commercial opportunity for companies that actually focus on somehow trying to fix this failure of the supply chain? And our sense is that this is what these companies will actually try to do.

Which are the sectors and companies? There is actually just one company in each sector that they want to do. They have already done investments in five companies. The water companies, for example, sells water at 4 paise a litre to the household. And if they want it home delivered, they sell it at 6 or 7 paise per litre. There is already a 60% capacity utilization, there are hundred water plants that are operative, each plant serves about a population of 10,000 people, and the amount of money they are absorbing currently is in the neighbourhood of about 50 crores in terms of total investment required. This is in collaboration with Dr Reddy’s Labs. There is a potential for 5000 plants to come about, each of them commercially selling water at 4 paise a litre. Skills training is an area which seems to be of common interest. This whole issue of how can you build a multi layer kind of filtering process. There are companies in Bangalore for example, that are “temping companies”. These are companies that hire people on permanent contract but offer them on temporary assignment to companies. They recruit one person every 6 minutes. Now this company is telling us that if they had supply of labour that is trained at a minimal level, they could become 4 times the size they are today. Today they are about 1 lakh people per company and they would go to 4 or 5 lakh. But they do not have supply. Their view is to build a supply chain for them, of people that are filtered slowly: some basic training given right where the person is and some basic filteration in terms of discipline is done right there. Once you have a sense that this person can actually graduate to the next level, then bring him to a city, give him much more organized training and then feed him into a job.

The strategy is identify sectors in which producers have a competitive advantage, for example, if a rural household in a craft sector can use an hour of spare capacity that the woman of the house has to stitch a pillow case, is there a way you can build a supply chain that can deal with that much diversity, that much variety and still deliver a consistent quality to a Big Bazaar or a Fab India? The belief is that it is indeed possible to do so. So far the money that these guys have put to work across these 4-5 sectors is not very large. It is about 50 or 60 crores in total across these 4-5 sectors but the early evidence is that these supply chain failures can be fixed and it is possible to do so in a competitive manner with no subsidy. The idea is that you are taking the competitive capability of the poor household. One of the benefits that households bring is that they are distributed geographically. One of the large FMCG companies approached us and said that their “Atta Strategy” in which they where making the atta centrally and distributing across the country has failed. Because the Indian housewife is not prepared to pay a premium for the atta since the transportation cost is enormous. The company wanted to know if we can build them 700 production centres across the country each one of them only serving the nearest city and they said can you give us a minimal level of quality control? They gave us a price point of Rs 23 per kilo of atta in every city. They said at that price, they will add Rs 2 or Rs 3 as marketing margin and sell as much of atta that we can produce. Now that is a fabulous opportunity for a low income producer.

Paint brushes, again another opportunity nationally. They want 1500 production centres across the country, because once again the transportation cost is enormous. Wherever a lot of variety is needed, women’s clothes or garments for example, is an area where the poor can be very competitive. We are working with the Pune Municipal Corporation for example, where a small group of 150 women making products that are just of a unique design that are only required in small lot sizes, not big lot sizes. But they can make them in a competitive manner. And the idea is to try and actually go out there and build this stuff.

Certification is an important reason why supply chains fail. You are a seller and you are buyer but you do not know each other. Think of rural schools from that perspective. You know English Medium works. When they are spelling English Medium with a spelling mistake in the word “medium” you know exactly there is a problem in the certification process. Is it possible to build a certification, not for a brand like a Delhi Public School brand, but for a Mass Rural School brand? In Bihar, for example, we visited a healthcare entity called Janani that has built two brands, Thithli and Surya, butterfly and the sun. And they have advertised Thithli brand all over the place. Now I am not entirely sure that the full claim that they make in terms of service delivery is fulfilled by the product. But indeed the brand has added value, and it is possible it could work here. Each one of these are specific examples of innovations that are happening that has potential
.
I will stop here, there is a fair amount of detail. The core idea that I want to leave with you is that it may be possible for us to go out there and use the fact that there is a supply chain failure. Use the best possible understanding, and even as we speak, the team at the IFMR Trust is going through a six hour session from a supply chain expert, who has run one of the best known courier companies, to try and understand how these hand offs work and how do you make sure that you have extremely long supply chains.

Courier companies work on the longest of all supply chains. Individual to individual: They can pick up at the most remote location, aggregate all the way to an airport, fly it down, and again take it back to the individual. How do they make sure that all of the pieces actually fit together when they are relying on railways, public transportation etc. to make it happen? Clearly, our sense is that we could actually go out there and do this overall work. Of course, those who are interested in learning more about it there is a website address here. It’s not ICICI, there’s an independent company, ICICI Foundation is partnering with it to try and make sure that they are able to be effective on the ground?