MEETING THE CHALLENGE Findings of an Action Research on Cost-effectiveness of BDS Approaches with Poverty Focus

Transcription

1 MEETING THE CHALLENGE Findings of an Action Research on Cost-effectiveness of BDS Approaches with Poverty Focus LOOKING BEYOND CREDIT International Conference on Impact of Micro-finance and Business Development Services on Poverty Alleviation September 23-26, 2002 Organized by SEEDS (Guarantee) Ltd. Kalutara Sri Lanka Chintha Munasinghe M. M. Kuruppu Vishaka Hidellage Sri Lanka

2 Abstract The paper aims to share the findings of an action research project; which is a conducted by ITDG South Asia and Enterprise Services Division (ESD) of SEEDS (Guarantee) Ltd. It focused on improving the cost-effectiveness of Business Development Service (BDS) approaches that cater to the poor, to increase their self-reliance and reduce vulnerability to changing context.. Cost-effectiveness of a service provider was assumed to be an essential indicator of sustainability of Business Development Services that aimed at poverty alleviation and to suggest ways of improving cost effectiveness while utilizing ESD as the testing ground was the expected outcomes of the action research The paper illustrates the outcomes and challenges faced by the project team during the cause, and the efforts made by them in overcoming the issues by changing the way of operation. Can a BDS provider operate on a 100% cost-recovery basis while involving the poor in accessing services? Can poor pay? How to maintain the balance between the requirements of micro-finance wing and the need to address external demands in the project model: BDS provision complementary to micro-finance programmes? Who will play the role of a donor if subsidized or free-of-charge schemes for poorer clients are to be continued? 2

3 MEETING THE CHALLENGE Action Research on Cost-effectiveness of BDS Providers with Poverty Focus Chintha Munasinghe M M Kuruppu Vishaka Hidellage 1. Introduction The paper aims to share the findings of an action research project 1, which focused on improving the costeffectiveness of Business Development Service (BDS) approaches that cater to the poor, to increase selfreliance and vulnerability to changing market conditions. The the challenges faced by the project team during the course, and the efforts made by them in overcoming the issues by changing the ways of operation is illustrated. 2. The Action Research Enabling poor people to take more control over their lives is a highly complex process that can be approached in a variety of different ways. Facilitation of business development by the poor is accepted as service that contributes to this. The effectiveness of this service is therefore is an important aspect in ensuring effectiveness of the development intervention. Assuming that the cost-effectiveness of the BDS provider is a satisfactory indicator of assessing the effectiveness of service delivery, this action research project was designedth the aim to refine ESD approaches small enterprise development to improve its efficiency and cost-effectiveness towards assuring sustainability, in addition to the BDS provision (extension) activities of ESD. The issue of sustainability of BDS providers, especially working towards poverty alleviation, was studied in the action research utilizing ESD as the testing ground. The research activities were built around following questions: How ESD will sustain itself in the long-run? Should ESD beneficiaries bear the cost of services provided? How to continue provision of services to the poor? Are there more effective ways of delivering the services? 2.1 The Organizations: ITDG (Facilitator) ITDG is an international development agency interested in identifying and offering appropriate technology options to combat situations of poverty and marginalisation. The brain child of an economist in the 1960s, Dr. E.F. Schumacher, the organization has grown to reach communities in several countries, with the work being coordinated from 7 offices around the world. The offices are located in Bangladesh, Kenya, Nepal, Peru, Sri Lanka, Sudan and Zimbabwe with the head office in UK. 1 The action research: Support for Small Enterprise Development (SUPSED) is a collaborative project between ITDG and Enterprise Services Division of SEEDS (Guarantee) Ltd. This action research has been supported by DFID-JFS, ICCO, NORAD, NOVIB, USAID and CommonWealth Foundation, covering the period ( ) 3

4 ITDG develops and transfers technologies in such a manner that the community can manage and benefit from such technologies, a contributing factor to poverty alleviation. Technology for improving the viability of the micro-enterprises or technology useful for setting up viable micro-enterprises is part of this. ITDG recognizes that technology is one essential component of micro-enterprise and other support such as credit, market linkages, quality standards, institutional framework, information on financial and other management aspects etc., are equally important for ensuring the viability of micro-enterprises. In the pilot-demonstration project of ITDG, creating linkages and capacity building is therefore an important aspect. Further, ITDG expects that viable approaches that are developed and demonstrated will be replicated by other development agencies. Recognizing that this will happen only if effective support scenario are available for micro-enterprises by implementing agencies, ITDG initiated working with SEEDS 2 in 1990, providing technical assistance in the establishment of their Enterprise Development Wing 3, to understand and recommend effective support (other than credit) for micro-enterprises, as effectiveness of credit has been much researched and debated Enterprise Services Division (ESD) of SEEDS (BDS Provider) ESD is the Enterprise Development wing of SEEDS, which introduced a range of innovative BDS approaches to increase self-reliance and reduce vulnerability of changing market conditions for the poorer members in Sri Lanka through small enterprise development and employment generation. ESD s role is to deliver an appropriate and effective service of technical support to people who secure loans from SEEDS, in order to pursue income generating and small business activities in the community. From the time of its operation in Sri Lanka, Over the last decade, ESD has been addressing this need for technical and business assistance among Sri Lankan farmers and entrepreneurs, the provision of training, information on improved technologies and techniques, business counseling and market linkages. From its inception (in 1990) as subsidiary of SEEDS, it now extends its services to more than 2000 villages in 18 districts of the island. With the network of Enterprise Promotion Officers co-ordinated and supported by the Head Office team of specialists in Business Development; Technology Development & Training; Marketing; Research and Information Dissemination; Fundraising & consultancy and Finance & Administration, ESD is presently serving a wide range of micro- and small-enterprises with the outreach of more than 15,000 a year. 2.2 Methodology Introducing Business Thinking to staff at all levels was the first step taken by the project team. Number of awareness meetings and simple exercises organized to help them understand the importance of measuring cost-effectiveness of BDS approaches, resulted in greater support from them. 2 Sarvodaya Economic Enterprise Development Services (SEEDS) is the economic development arm of the Sri Lankan NGO, Sarvodaya and comprises three component units that operate in a co-ordinated manner: Enterprise Services Division, Training Division and Banking Division. SEEDS currently operated in 18 districts of Sri Lanka, working with about 2500 Sarvodaya Shramadana Societies covering a total of about 350,000 members. More than 60% of SEEDS clients are women. 3 In 1989, it had become clear that SEEDS needed a support programme to complement its savings and microfinance wing and help it to overcome its constraints, i.e. lack of technical information about loan applications, causing mistaken loan approval; insufficient technical knowledge making diagnosis of loan non-repayment extremely difficult; credit orientation of SEEDS field workers being at the expense of other aspects of small enterprise development; lack of access to technical data on markets and marketing. To overcome above constraints, a pilot project was launched in 1990 by SEEDS in collaboration with ITDG covering 6 districts, which was proven successful and was extended to 17 districts in the island. Today it is called, Enterprise Services Division. 4

5 Focusing on the issue of sustainability, a business plan was developed with the participation of ESD team (including district staff), representatives from other two divisions and in consultation with a sample of clientele. This was the base for monitoring progress of ESD towards its sustainability. In consultation with the ESD team, BDS approaches were also assessed separately with the view to refine them for improving cost-effectiveness. Information was generated from the SEEDS ESD by providing guidance to the staff to collect information, where staff were unable to do work with the existing workload, village youth who are members of Sarvodaya were trained and utilized as field investigators. Information / data was analyzed with the participation of staff and at times the management based on the issues identified. Outcomes of the initial phase of research were fed into management, which resulted in restructuring of SEEDS ESD to become more effective. 2.3 The Model ESD Approach to BDS Provision: As illustrated in the figure 1, ESD provides a package of BDS to its clientele focusing on the following outputs: Increased access to appropriate information by rural people (Information Dissemination) Enhanced sustainability of existing and new enterprises (Marketing) Increased Diversity of skills (Technical Training and Research & Development) More effective use of credit (Enterprise Development) ESD operates through district offices of SEEDS, where all the three divisions are represented allowing easy access to those living in distant villages. SEEDS district offices operate through a network of Sarvodaya societies as the village unit to represent SEEDS. These society members take up responsibility of promoting of ESD services and organizing community level activities. ESD is in the process of decentralization of BDS marketing with the establishment of Enterprise Promotion Centres at district level which are managed by Enterprise Promotion Officers Outreach ESD operates in more than 2000 villages in 18 of Sri Lanka s 25 administrative districts, serving more than 15,000 clients every year. About 17% of ESD clients being poor are eligible for acquiring BDS free of charge. Services provide by ESD can be outlined as follows: BDS promotion through mobile audio visual unit, media campaigns, exhibitions, business clinics etc., Technology transfer through Information products such as ESD s Small Enterprise magazine, leaflets, business profiles Market research Marketing training Market linkages through mini- and mega trade fairs, forward marketing, sales outlets Introducing new products and technologies in collaboration with other agencies Technology transfer through community level training Adaptive research Organizing apprenticeships for unskilled youth Business counseling Investment feasibility appraisals to assist Banking division Business plan preparations 5

6 Figure 1: ESD Approach to BDS Marketing/ Provision RESEARCH & DEVELOPMENT TECHNICAL TRAINING MARKETING SEEDS - ENTERPRISE SERVICES DIVISION BDS RESEARCH & INFORMATION DISSEMINATION Head Office ENTERPRISE DEVELOPMENT FUND RAISING & CONSULTANCY Consultancy/ Institutional contracts DISTRICT ENTERPRISE PROMOTION OFFICERS District Office OTHER ORGANISATIONS Poor clients (Sponsored) Non-poor (Cost-plus basis) Non-poor (Cost-plus basis) Poor (Subsidized) NON-MEMBERS SARVODAYA MEMBERS Clientele 6

7 2.4 Strategies for Covering Programme Costs: In 1996/97 ESD s operational cost was recorded as 11,225,556 SL Rupees, of which funding from International Donors covered 83%. In 1997/98, as part of the action research project, in consultation with all stakeholders, a business plan was developed which committed ESD to placing considerably greater emphasis on increasing revenue-generation and, where possible, on reducing costs. A target of reducing donor dependence to 40% by the end of the project was set (Refer Table 1). Specific commitments included: introducing a fee for the provision by ESD of market linkages resumption of fund-raising from local sources resumption of consultancy activities increasing training fees introduction of fees for loan appraisals As a result, in 2000/01 ESD was able to decrease its donor dependence to 53%, despite the increase in operational costs i.e. 16,083, SL Rupees. Table 1. Trends in ESD Cost recovery (%) 2000/01 Income Source 1996/7 1997/8 1998/9 1999/00 Achievement Target Market linkages - 0.1% 0.2% 0.8% 5.1% 18.0% Local Fundraising 5.0% 4.1% 5.0% 0.9% 10.8% 20.0% Consultancy - 1.4% 4.4% 12.9% 2.8% 6.0% Training & Information 1.0% 2.2% 4.5% 5.2% 6.4% 4.0% Service charge for loan 8.0% 11% 12.3% 14.3% 15.6% 7.0% appraisals Endowment Interest 3.0% 2.6% 5.4% 5.4% 6.3% 4.0% Total Donors 83.0% 78.6% 68.2% 60.5% 53.0% 40% 3. Special strategies designed to serve the poor: Majority of ESD clients are members of Sarvodaya and high proportion of Sarvodaya members are also members of Samurdhi The government poverty alleviation programme. It was also noted at the time of developing the business plan that significant number of clients, to some extent have graduated out of poverty as a result of assistance from SEEDS. This group is primarily comprised of those who have benefited from programmes promoting diversification away from traditional crops into higher value activities. SEEDS with the strong poverty focus of its activities, the action research team of ESD & ITDG did note the challenge involved in maintaining poverty focus as ESD sought to improve its performance in terms of cost-recovery. The strategies designed to meet the challenge are as follows: 3.1 The provision of free training to ten poor producers in each of the societies not covered by the CIDA project (launched in 1998) specially designed for the poor women members: Voucher scheme for free training and counseling for all those who meet the following criteria: - a monthly income of less than SLR 1, ($15.00) - head of household has no permanent job or steady income - presently engaged in subsistence agriculture, but willing to diversify and - having the potential to put into practice some new business activity 7

8 In order to balance the need to retain reasonable levels of cost-recovery, no more than 15% of participants in any one training course can pay with vouchers. Poor clients receive coupons for no more than one year, after which they are expected to be able to pay for services. 3.2 Introduction of a sliding scale of charges with targets of full cost-recovery for services provided to individual producers with long exposure to ESD as illustrated in Table 2. A graduation element has also been introduced into the charging arrangements. Those below poverty line receive free training for a period of only one year. Thereafter, they are required to pay the subsidized rate. From the beginning of their third year of receiving training form ESD, all subsidies are removed and training is provided on cost-recovery basis. 3.3 Clients who are classified as non-poor and are not Sarovodaya members required to pay on a cost-plus basis from the outset, as a way of cross-subsidizing services aimed at poorer society members. Table 2: Details of Sliding Scale of Charges for ESD Training Services Client Economic Status Payment Scheme Sarvodaya member Below poverty line Free Sarvodaya member Above poverty line Subsidized Sarvodaya member Non-poor/ Rich Cost-recovery basis Open market Below poverty line Allowed to obtain Sarvodaya membership for free services Open market Above poverty line Allowed to obtain Sarvodaya membership for subsidized services Open market Non-poor/ Rich Cost-plus basis 3.4 A checklist was designed for adaptive research/ collaborative partnership projects in technology transfer, which re-affirm the poverty focus of SEEDS: Is the project beneficial to micro- and small enterprises? Is there a possibility of recovering cost? How can the project involve poor? Is there a way to facilitate SEEDS credit flow? What are possibilities for enterprise creation, expansion and diversification? 4. Cost effectiveness Measures: During the project period ( ) ESD was able to reduce its expenses especially when staff costs (27% decrease) and travel costs (35% decreased) are concerned. This was due to the refining its operational structure that adopted cost-effective approaches to BDS supply, such as group counseling, business sessions, counseling days, business clinics, etc., Following the cost-effectiveness measures recommended, cost-effectiveness of ESD programme is illustrated below: Total operational costs (2000/2001) $222,459 No. of clients served 4 16,091 No. of enterprises started 8,045 No. of full time jobs created 12,515 4 As ESD provides a range of diversed services (refer section 2), please note that an average of total number of clients served by ESD is represented here as measure to avoid duplications. 8

9 Fees recovered from clients $60,420 Total revenue generated $104,416 Average monthly income of enterprises assisted $ Cost per client: Total operational cost / No. of clients served = $222,459 / 16,091 Cost per client = $ Cost recovery rate Fees recovered from clients / Total operational costs = $60,420 / 222,459 Cost recovery rate = 27% 4.3 Take up rate No. of enterprises started / No. of clients served = 8,045 / 16,091 Take up rate = 50% 4.4 Cost per enterprise Total operational costs / No. of enterprises started = $222,459 / 8,045 Cost per enterprise = $ Cost per job Total operational costs / No. of jobs created = $222,459 / 8,045 Cost per job = $ Payback period Total operational costs / Monthly average income of = $222,459 /($46x8,045) Enterprises started Payback period = 0.6 months 5. Impact on poverty alleviation ESD in many ways has contributed to the improvement in economic status of the rural poor in Sri Lanka. Following are some evidence in economic terms, that were revealed through evaluations and costeffectiveness studies conducted by universities and international research agencies and researchers: 5.1 A repeat impact survey, conducted for USAID Micro-enterprise Best Practices Project covering 6 districts in the Central Province reported that the average monthly gross profit earned by ESD assisted businesses was $46. It was also revealed that 50% of those who acquired services were able to earn living through enterprises started, while 37% of enterprises have expanded rapidly through horizontal diversification in a very short period (6-months). 5.2 Between 60 72% of the new enterprises surveyed during the mid-term evaluation have been able to survive the first year. 5.3 Programme specific cost-effectiveness studies conducted in collaboration with universities, revealed that BDS provided by ESD contributed to the increase in income of its clients (Refer Table 3): Table 3: Average Annual Increase in Income per client served Average Annual Increase in Type of BDS Income/ Client SLR $ Dairy Development Programme (Estate community) 56, Dairy Development Programme (Farming community) 41,

10 Ornamental Fish Farming (Colombo) 39, Market linkages - Pineapple Cultivation (Badulla) 168, , Food enterprise training (Hambantota) 45, Many of clients assisted by ESD expanded their businesses by re-investing their profits and extending their geographical coverage to become self-sufficient in managing their businesses 5.5 A study carried out under the sponsorship of INAFI Network on Effectiveness of the Food Processing Programme of ESD in Hambantota district, Sri Lanka reported that the increase in monthly income after ESD assistance ranges between $ When the pattern of increased income utilization was studied, 76% found re-payment of loans as the first priority. Food expenses (72%) recorded as the second highest followed by children s education (66%) and re-investment on enterprise (59%). 6. The Challenges: Issues need to be further studied 6.1 Could a BDS provider operate on a 100% cost-recovery basis while involving the poor in accessing services? Can poor pay? Majority of SEEDS clientele being rural poor with less access to services and markets, ESD will find it difficult to assure sustainability if they depend only on their clients for revenue generation. Thus, it is essential for BDS providers with poverty focus to put special efforts in developing alternative and innovative mechanisms for revenue generation and resource management. 6.2 How to maintain the balance between the requirements of micro-finance wing and the need to address external demands in the project model: BDS provision complementary to microfinance programmes? The ESD programme was developed as a supporting unit to the micro-finance wing of SEEDS, to address the following issues: Lack of technical information about loan applications, causing mistaken loan approaval Insufficient technical knowledge making diagnosis of loan repayment extremely difficult Credit orientation of field workers of the micro-finance programme being at the expense of other aspects of small enterprise development Lack of access to technical data on markets and marketing As illustrated in the figure 2, in the year 2000/01 about 38% of ESD revenue generated from the Banking division, for serving their clients in effective use of credit. It is understood that 62% of ESD operational costs required to be generated from other sources such as fees from clients, collaborative projects, consultancy etc., Therefore, the BDS providers integrated to microfinance institutions, having the priority of serving the poor, need to plan ahead their revenue generation strategies in order to overcome the issue of maintaining the balance between the requirements of micro-finance wing and the external demand. 6.3 Who will play the role of a donor if subsidized or free-of-charge schemes for poorer clients are to be continued? As visualized by the Donor Committee for Small Enterprise Development, the country s government is responsible for enabling the environment while playing a regulatory role thus indication that the government should be the successor of donor agencies, assuring the continuity of effective programmes leading to poverty alleviation. Therefore, in due course there is a need for developing a responsible authority to co-ordinate, assist and monitor those agencies involved in poverty alleviation through enterprise development, Encouraging active 10

11 participation of country s private sector in the process is also essential for exploring the opportunities in the global market that suit the capacity and expectations of small enterprise sector. Figure 2: Breakdown of Revenue by Source- ESD Programme of SEEDS, Sri Lanka, an NGO provider...seeds program illustrated in Figure 2, SE revenue accounts for 27% of overall revenue, up from 14% 16% the previous year. In addition, ESD 38% generates 38% of its revenue from fees paid by SEED's micro - finance program. An additional 13% comes 22% from consultancies to other organizations and 22% from straight 13% grants. Thus, although SEEDs MSEs Partnerships Orgnisations SEEDS Banking sustainability based on SE revenue alone is low, indicating that services to SEs are subsidized, its overall picture of financial diversity and stability is strong. With SEEDS, the increasing cost-recover from 17% to 22% over the course of a year reflects their new efforts to become financially sustainable. One service, credit support services, paid for primarily by the SEEDS micro-finance program, is generating 93% cost-recovery; whereas, the technical 5 training services are still highly subsidized at 21 % cost-recovery. Source: Technical Note on the Research Findings of the Performance Measurement Framework Field Research By Mary McVay, Alexandra Overy Miehlbradt and Tim Canedo 5 Some might argue that the micro-finance program payment should not be included as SE revenue, but because SEs pay for these services by being charged a higher interest rate than customers who do not receive training, SEEDS included these payments. 11

12

13 SERVICE PROVISION MODEL OF SEEDS ( ) Donor BDS Facilitator BDS Provider (Credit Plus) CLIENTS DFID, ICCO, NOVIB, NORAD ( ) From 1990 to 2001 ITDG helped SEEDS to establish the Enterprise Services Division, with more focus on the development of technology transfer Enterprise Services Division of SEEDS (Guarantee) Ltd. Operating in 17 administrative districts through Enterprise Promotion Officers & the village society network Technology Transfer through training and adaptive research Information services & business promotion Marketing support Business counselling Project appraisals and feasibility studies Field officers of SEEDS as BDS Brokers (not efficient due to their credit priorities) Farmers, Micro & Small Enterprises in Sri Lanka covering both Sarvodaya members and nonmembers Donors Credit Funds Financial Service Provider (Savings & Credit) CLIENTS NOVIB, NORAD, DFID SEAD ( ) Central Bank of Sri Lanka, CIDA, World Bank ESD Project, National Development Bank Banking Division of SEEDS (Guarantee) Ltd. Operating in 17 administrative districts through district offices and the village society network Sarvodaya Society manager as village Bank Manager Sarvodaya Members including micro- and small enterprises in Sri Lanka Fig. 2

14 PROPOSED BDS SUPPLY MODEL OF SEEDS AT THE END OF SUPSED PROJECT SECOND PHASE ( ) Donor/ Facilitator BDS Facilitator (Credit plus) BDS Provider (Credit plus) CLIENTS ICCO, NOVIB, NORAD, EC / APT Enterprise Development UK Enterprise Services Division of SEEDS (Guarantee) Ltd. Operated through 18 district level Enterprise Promotion Centres responsible for co-ordinating individual BDS providers in 17 administrative districts in Sri Lanka Network of SEEDS BDS providers (Enterprise Promotion Centers) At least 4 Technology Transfer Centres of SEEDS A network of BDS trainers coordinated by SEEDS in 17 districts An Island-wide network of enumerators (society members) co-ordinated by SEEDS Society link persons as BDS Brokers at village level Farmers, Micro-, Small & Medium Enterprises in Sri Lanka covering both Sarvodaya members & non-members Facilitators Credit Funds Financial Service Provider CLIENTS Sri Lanka Govt. Sarvodaya Society members, etc., Sri Lanka Government funds, SEEDS funds & Sarvodaya Society funds SEEDS Banking Division operating through a network of SEEDS District offices and Sarvodaya Village Societies Bank Manager employed by the society Sarvodaya Members including micro- and small enterprises in Sri Lanka 14

15 7. Conclusion: BDS programmes similar to ESD are playing a greater role in adopting enterprise development to alleviate poverty. In economic terms, these kind of programmes may not necessarily consider as cost-effective, when comparing with those having higher cost recovery rates. The paper illustrates that BDS programmes with poverty focus, explore the capabilities and capacity of the poor in contributing to the country s economy. Such entrepreneurial poor may not have identified or exposed, if programmes like ESD are not in existence. Understanding the fact that managing an BDS extension network is expensive, there is a need to review such programmes against a business plan regularly. Marketing trends and opportunities for BDS provision as a part of revenue generation required investigating continuously (Figure 2 & 3) Bibliography: SUPSED: Application to ODA Joint Funding Scheme for Project, April 1997 March 2000, Jeans. A, Ruthvens. O. (1996), ITDG Rural Enterprise Development Services Business Plan, , Dawson, J. (1997), ITDG SUPSED: Mid-term Evaluation, Jeans, A. Peiris, K, Kumarasinghe, K (June 1999), ITDG BDS-PMF Field Research: Impact Tools Development and Baseline Survey Report, Munasinghe, C. (August, 2000), USAID Micro-enterprise Best Practices Project Paper on Contribution of BDS Complementary to Credit Services: A case Study from Sri Lanka- FOOD PROCESSING TRAINING PROGRAMME OF SEEDS, Munasinghe, C. Wijesinghe, S. (December, 2000), INAFI Network BDS-PMF Field Research: Report on Outreach and Market Development Indicators Survey, Munasinghe, C (January 2001), USAID Micro-enterprise Best Practices Project BDS-PMF Field Research: Sustainability & Cost-effectiveness Assessment Report of ESD SEEDS, Munasinghe, C. (May 2001), USAID Micro-enterprise Best Practices Project SUPSED: Evaluation, Dawson, J (May 2001), ITDG Technical Note on the Research Findings of BDS Performance Measurement Framework (PMF), McVay, M. Miehlbradt, A. O. Canedo, T. (August, 2001), USAID Micro-enterprise Best Practices Project SUPSED: Project Completion Report submitted to DFID Joint Funding Scheme, April 1997 March 2001, Munasinghe, C. Crawford, P. (November,2001), ITDG SUPSED Phase II: Cost-effective BDS Marketing Model Complementary to Credit Institutions: Application to European Commission, Jeans, A. Kuruppu, M. M., Abeysuriya, S (April, 2001), APT Enterprise, UK