7/29/2019 Final ADB IB Report, Beckwith January 2013
1/129
Final Report on the Prospects forEstablishing Inclusive Business
Facilities inSelected South-East Asian
andSouth Asian Markets
ADB Inclusive Business Fund Initiative
SUBMITTED BY NOAH BECKWITH
7/29/2019 Final ADB IB Report, Beckwith January 2013
2/129
ADB BOP INVESTMENT FUNDS INITIATIVEDATE: 19 JANUARY, 2013
2
7/29/2019 Final ADB IB Report, Beckwith January 2013
3/129
Table of Contents
Section Page
No.
Introductory Remarks
3
I. Cambodia 8
II. Vietnam
25
III. Thailand
43
IV. Laos 54
V. India and Sri Lanka
60
VI. Indonesia 84
VII. Philippines
94
VIII. Bangladesh
101
IX. Pakistan
107
3
7/29/2019 Final ADB IB Report, Beckwith January 2013
4/129
Introductory Remarks and Broad Conclusions from IB
Due Diligence
This report follows detailed due diligence undertaken between 2011-2012 in
Cambodia, Vietnam, Laos, Thailand, India, Sri Lanka, Indonesia, the
Philippines and Bangladesh, and an abbreviated desk study undertaken on
Pakistan. The focus of due diligence was to evaluate the prospects for
inclusive business (IB) in each of the markets, and to assess their suitability
to the establishment of several IB Facilities to provide finance to private
companies that do or might incorporate populations at the base of the
economic pyramid (BOP) into their activates as consumers, suppliers,
producers, distributors, or employees. The overriding conclusion of the due
diligence exercise is that there is a critical role for private sector investmentto play, accompanied by strategically-deployed technical assistance, in
addressing issues of access to, and affordability, choice, availability, quality
and price of key goods and services for the poor. Moreover, private sector
investment could be harnessed in the target countries to incorporate the poor
into supply chains in more sustainable ways thereby enabling them to
accumulate wealth and reduce insecurity and vulnerability, and drawing them
into production chains as producers and distributors. Finally, depending on
the size of investments made, in certain countries, the Facilities would havethe opportunity to affect the experience of BOP incumbents as employees by
focusing on issues such as wages, and improving skills and mobility through
training.
Whilst each market has its own particularities and unique set of challenges,
several overarching themes and commonalities have emerged through the
due diligence exercise, including:
1. A focus on the SME sector is required: Unsurprisingly, the lions
share of economic activity in all of the markets surveyed is attributable
to the small and medium-sized enterprise (SME) sector. This means
that drawing SMEs into supply chains, and helping them to capture
market share in the provision of key goods and services to lower
4
7/29/2019 Final ADB IB Report, Beckwith January 2013
5/129
income groups and the middle class alike must be a key component of
an inclusive business strategy;
2. Access to finance is a persistent challenge: The micro- small and
medium-sized enterprise (MSME) sector struggles to access finance
from formal institutions in every geography investigated. This
represents a significant bottleneck to their growth, which hampers the
ability of larger domestic companies and multinationals to draw SMEs
and micro-enterprises if feasibleinto their supply chains. In order
for ADB Facilities to be meaningful, to the extent that access to finance
issues can be addressed through targeted lending to financial
institutions, and complemented with concrete policy initiatives by
other parts of the bank, the effectiveness of the initiative will be
considerably enhanced;
3. Investing in financial institutions should be a prominent
theme: A corollary of point 2. above is that although microfinance has
made significant advances at the personal and, in some cases, micro-
enterprise levels in most of the target countries, access to finance
bottlenecks could be eased by helping financial institutions to develop
pro-poor products that enable SMEs and small entrepreneurs to
participate more effectively in the economy. Such products include
agricultural finance, micro-insurance, micro-health insurance, working
capital facilities and, more generally, the development of cash flow-
based lending expertise as a means of liberating SMEs from the
collateral trap which so often denies them finance;
4. Debt is preferable to equity: Given that financial and capital
markets are in their infancy in many of the markets considered, and
that entrepreneurs are generally not comfortable with opening their
shareholding structures to external ownership, in a first iteration, it is
advisable for the Facilities to focus on lending to businesses rather
than deploying equity. This significantly reduces exit risk, and will help
5
7/29/2019 Final ADB IB Report, Beckwith January 2013
6/129
to mitigate currency risk (somewhat) in that there would at least be
regular repayments back to the Facilities which could be transferred
back into hard currency at the earliest moment possible. In some
cases, as highlighted in the country analyses, there may be scope to
consider equity investment, but it is not a sine qua non for any of the
target geographies, and in some countries, such as India, it is debt
rather than equity the entrepreneurs desperately require;
5. Technical assistance is vital: The strategic use of technical
assistance funding will be critical to the success of the Facilities.
Investee companies desperately need hands-on engagement from fund
managers and technical and sectoral experts in the following key
areas, inter alia: corporate governance, management capacity-
building, management information systems implementation, strategic
planning, financial controls and accounting, preparation of information
and reporting, human resource management, talent retention and
incentivisation, marketing and customer-outreach. Technical
assistance packages should be conceived ex ante, i.e., as part and
parcel of the overall financial intervention in a company in order to
ensure that fund managers do not gain a reputation for providing
hand-outs. Additionally, recoverable grants and concessional loans
should be considered in larger, more advanced investees to ensure
that sponsors have skin in the game and do not view technical
assistance as free money;
6. Facility sizes should not be the focus: Facilities need not be
particularly large (i.e. greater than $100 million) in order to be
effective or meaningful. What matters is the establishment of proof of
concept, after which several things can transpire: additional
investment instruments can be introduced, larger facilities can be
raised, a broader range of investorsideally domesticcan be
attracted and more sectors can be tackled;
6
7/29/2019 Final ADB IB Report, Beckwith January 2013
7/129
7. Investment size is important: The Facilities must avoid the pitfall of
trying to be all things to all people, or in other words, attempting to
solve all access to finance and working capital issues in one initiative.
For this reason, loans (and especially equity injections) below $500,000
should be avoided, because the risks and intensity of engagement
increase vertiginously in such transactions. There is no question that
the void between the upper echelons of micro-credit and the floor of
the IB Facilities requires attention, but it must be acknowledged that
that is beyond their purview;
8. Dissemination of learnings is vital: Linked to the above two points
is the vital importance of disseminating learnings, especially across
Asia. It is important to engage governments, corporates and the
private sector more broadly in order for the concept of inclusive
business to take hold market by market;
9. ADB is particularly well placed to convene/facilitate the IB
Initiative: In all of the markets surveyed, ADB is perceived as a
natural convener of key stakeholdersgovernments, banks,
institutional investors and othersrequired to successfully launch
inclusive business initiatives and, critically, to secure buy-in at the
national, regional and local levels. This does not necessarily mean that
ADB must provide the largest amount of capital in any of the Facilities;
rather, that as the regions multilateral development bank, it is
naturally positioned to champion the initiative. In addition, it is well
placed to mobilise capital from development and donor partners based
in strategically-important member countries such as China, Japan and
Korea;
10. Partnerships with other multilaterals may be helpful: Some
multilateral development institutions, such as the Inter-American
Development Bank, the Corporacin Andina de Fomento and the
International Finance Corporation, among others, have been promoting
7
7/29/2019 Final ADB IB Report, Beckwith January 2013
8/129
inclusive business for some time. Partnership with such institutions,
leveraging their experiences and tailoring them to the Asian context
may be enormously helpful in avoiding some of the inevitable pitfalls
and teething problems;
11. Sub-regional Facilities are preferable: Due diligence revealed
that, in contrast to Latin America and Africa, there are no obvious fund
managers focused on Asia that would be able successfully to invest
one larger Facility across such a varied geography. In addition,
investors would likely consider a continent-wide Facility to be unwieldy,
and it would be extremely challenging to structure incentives across
such a range of target countries where considerable variations in
performance will inevitably emerge; and
12. Building fund manager capacity is vital: In addition to the above
point, few fund managers in the region, with the notable exception of
India, have been focused on inclusive business. This provides ADB with
the opportunity to achieve an additional development impact beyond
that of the funds deployed in helping to build capacity among fund
managers in the region so that they are better placed to invest to dual
(financial and social) and triple (financial, social and environmental)
purpose in future.
In conclusion, this compendium of due diligence reports presents a
compelling case for promoting a series of inclusive business facilities in
selected Asian countries. The Facilities would be well placed to demonstrate
that private sector can be mobilised by ADB and harnessed by domestic fund
managers both to address pressing social challenges, whilst also providing
attractive returns to investors. In the longer term, it is realistic to expect that
this initiative would stimulate greater flows of private-sector capital into
future IB vehicles as the concept becomes mainstreamed in the investor and
asset management community.
8
7/29/2019 Final ADB IB Report, Beckwith January 2013
9/129
I. Cambodia
Political LandscapeDespite the notional presence of political opposition in Cambodia, the
dominance of the Cambodian Peoples Party (CPP) effectively renders the
country a one-party state and the prime minister, Hun Sen, continues to
concentrate power in the executive branch of government unimpeded by any
significant checks and balances. Notwithstanding, the global financial crisis
and economic slowdown of 2009-2010, which led to factory closures and
redundancies, clearly demonstrated that Cambodia is not immune to social
tensions and unrest. On the one hand, this has encouraged Hun Sensauthoritarian instincts, leading the CPP to propose legislation to further
restrict organised labour. On the other hand, there is a growing realisation in
government that a thriving, market-driven private sector is critical to
maintaining rapid economic growth and, above all, to absorbing some, if not
all, of the 300,000 young Cambodians who enter the workforce yearly.
Despite the likelihood that trade unions in the all-important garment sector
will remain assertive and threaten strike action, emboldened by theredundancies in 2009-2010, and the fact that confidence in the judicial
system will fail to improvethe courts have upheld numerous convictions
against opposition figures in recent monthsfrom the perspective of the IB
Facility, Cambodia offers a relatively stable, very business-friendly
environment for investment. That said, three potential sources of political
and social instability should be noted:
1. Commodity prices: Ordinary Cambodians, many of whom live at thebase of the pyramid, are extremely vulnerable to commodity price
volatility. Increases in the cost of living hit the poor rapidly and very
hard, and renewed economic hardship could cause unrest and anti-
CPP sentiment.
9
7/29/2019 Final ADB IB Report, Beckwith January 2013
10/129
2. Land appropriations: Land grabs by large agricultural interests and
property developers with close connections to senior CPP figures will
continue. Many Cambodians are resentful of involuntary resettlement,
with de facto expulsions intermittently driving the poor from their
homes and communities.
3. Cross-border tensions with Thailand: The dispute over the sovereignty
of religious temples on the border with Thailand will continue. Some
dismiss the issue as a political diversion from domestic challenges
used by politicians on both sides of the border. Others argue that the
dispute is more substantial, and could flare up in a significant way if
left unchecked. Currently, there is little evidence that the issue has
slowed thriving cross-border trade, both formal and informal, and
Cambodias economic relationship with Thailand remains important.
However, an escalation of hostilities cannot be ruled out, which would
affect the Cambodian-Thai business corridor significantly.
Although it is important to note the key medium-term political and social risks
above, it should be emphasized that the business climate and operating
environment in Cambodia is extremely conducive to debt and equity
investments as envisaged by the IB Facility. Certain sectors, such as rice, are
politically sensitive because of their crucial contributions to GDP and social
stability, but the government will look favourably upon any investments that
strengthen them by boosting employment and exports.
Economic Policy and Performance
The Cambodian economy is extremely vulnerable to exogenous shocks:
fluctuations in commodity prices, volatile international oil prices, externaldemand for its exports and deteriorations in its terms of trade more
generally. The global economic crisis of 2009-2010 highlighted this
vulnerabilitythe United States accounts for 40% of Cambodian garment
exports, for exampleand it is unlikely that GDP growth will return to pre-
crisis levels of 10% for some time. According to Economist Intelligence Unit
10
7/29/2019 Final ADB IB Report, Beckwith January 2013
11/129
(EIU) data, economic growth rates will hover in the range of 6-6.5% in 2011
and 2012, underpinned by an increase in manufacturing activity and
strengthening demand for merchandise exports. Significant foreign direct
investment (FDI) from China, Vietnam and several north Asian countries, such
as Korea and Japan, will also drive GDP growth, and further increases in
garment sales to European countries can be expected, helped by the
Everything But Arms agreement which provides duty- and quota-free access
to European Union markets for least-developed countries (LDCs). Significant
expansion is also forecast in the agriculture, footwear, tourism and
construction sectors. Indeed, according to the World Bank, footwear exports
increased by 57% in 2010, creating 18,000 new jobs between December
2009 and February 2011. Similarly, tourism posted a strong recovery in 2010,
with a 16% increase in visitor arrivals on the previous year. From a socio-
economic and BOP perspective, it will be critical to boost expansion,
efficiency and value addition in the agriculture sector and, fortunately,
government policy is supportive in this regard.
There are several notable structural weaknesses in the Cambodian economy
which impede faster economic expansion and production efficiencies. It is
important for the IB Facility to take account of these because there is an
opportunity, through its investments in portfolio companies, to contribute to
redressing them to some degree:
1. Diversification: The diversification of the production and export base
is key. A supportive policy environment is critical in this area, as
evidenced by the near trebling of milled rice exports following the
governments policy to promote increased paddy rice production and
exports. Other sectors require similarly conducive policy regimes to
promote diversification and in order for Cambodian producers to
capture greater value domestically and move up the value chain.
2. Import reliance: The high import content of exports makes the latter
expensive, and augments producers vulnerability to price
11
7/29/2019 Final ADB IB Report, Beckwith January 2013
12/129
fluctuations of key factor inputs. Significant investment is required in
domestic capacity and production of inputs, especially in the
agriculture sector, to reduce import reliance and increase consistency
and quality of supply.
3. Dollarisation: The Cambodian economy is highly dollarised, which
undermines the effectiveness of monetary policy and leads to
systemic asymmetries that disproportionately affect small producers.
4. Limited Revenue Generation: The combination of increased
expenditure on defence and upward pressure on wages will keep the
budget in deficit for the foreseeable future. This prevents the
government from increasing spending on key social sectors.
On a more positive note, unlike neighbouring Vietnam, inflation has largely
been kept in check, and is well below double digits, hovering at 6%. The
government appears cognisant of the potential impact of inflationary
pressures on the economy from the Vietnamese experience, so it can be
expected to maintain its policy of keeping inflation under control.
Operating Environment for the IB Facility
As stated above, despite the pervasive presence of the CPP and the
politicisation of many business activities and relationships, especially in
larger companies, the business climate in Cambodia is extremely conducive
to the IB Facility as currently envisaged. Although the country remains
heavily dependent on donor funding, the conversation in the private sector
has become much more focused on entrepreneurship in recent years. Young
Cambodians with graduate degrees and MBAs from foreign universities arereturning to the country and infusing family-owned businesses with market-
orientated strategies. As one observer stated, whereas the employer of
choice among elite Cambodian graduates used to be the United Nations,
there is now a strong preference for banking and finance, and many are
starting their own businesses. Additionally, there is a realisation both within
12
7/29/2019 Final ADB IB Report, Beckwith January 2013
13/129
government and the private sector, that the country cannot rely on cost and
wage arbitrage as a long-term guarantor of export competitiveness in the
garment sector. Social instability and industrial action in China, coupled with
inflationary pressures in Vietnam, have highlighted the need for Cambodian
companies to move up the value chain asor ideally beforewages
inevitably rise.
A salient challenge for Cambodian businessesand an area where the IB
Facility can play a very active rolewill be their ability to create and capture
more value within the country. Domestic value creation and capture are
currently hampered by the modalities of available financing in Cambodia. The
banking system is awash with liquidity, and not only do banks compete
vigorously for opportunities to lend, but formal and informal loans from
Chinese and Vietnamese traders are abundant. The problem in many
instances is the quality, appropriateness and terms of the financing. In the
case of Vietnamese liquidity, the government is directing their state-owned
enterprises (SOEs) to lead the charge into Cambodia as a counter-weight to
the fear of growing Chinese influence in the region. Private Vietnamese
companies tend to follow SOEs thereafterpressured or of their own volition
but the short-term and often expensive nature of the financing they offer
impedes longer-term thinking in Cambodian businesses. Chinese lenders and
traders are also rapacious, and see no value in building long-term
relationships with Cambodian entrepreneurs and SMEs.
Another significant issue in the Cambodian context which, again, underscores
a vital role for the IB Facility, is land acquisition and tenure. Land in
Cambodia can be held under soft or hard title, the difference literally
reflected in a paper (soft) or cardboard (hard) deed, respectively. Whereas
few banks and lenders accept the former as collateral, the latter confers
permanence of title and is a recognised asset. The government is slowly
dealing with this highly-sensitive issue, but the disparity between espoused
policy measures and concrete change on the ground will continue for a
number of years. Hence the importance of financing mechanisms which
consider cash flow-based lending and quasi-equity or equity as opposed to
13
7/29/2019 Final ADB IB Report, Beckwith January 2013
14/129
just collateral-based financing. The latter represents a de facto poverty
penalty, because it is generally the poor who cannot afford to convert from
soft to hard title if the opportunity arises, and assuming that they understand
the arguments for and means of conversion. As mentioned earlier, forced
expulsions and involuntary resettlement are also rife, particularly when land
is required for commercial or industrial uses.
Debt and Equity Transactions in Cambodia: Prospects for the IB
Facility
Despite excess liquidity in the banking sector, a vibrant semi-formal and
informal financing community and the pervasive presence of Vietnamese and
Chinese lenders, there is a very strong case for establishing an investmentfund which provides debt and equity financing (where possible) to private
businesses in Cambodia, for four main reasons:
1. Businesses require long-term partnership: Although Cambodian
businesses are often under-geared, their reliance on debt and the lack
of familiarity with equity perpetuates short-term thinking and poor
strategic decision-making. Additionally, as competition intensifies
within and beyond the region, the need for business developmentservices (BDS), technology, know how, management information
systems (MIS) and professional management is becoming ever clearer.
Most banks and semi-formal lenders have neither the capacity nor the
expertise to provide this value addition and mentorship to Cambodian
businesses, which is central to the IB Facilitys relationship with its
portfolio companies.
2. A growing recognition of the importance of value creation:Traditionally, Cambodian business-owners have focused on short-term
cash generation and intermittent dividend issues to extract cash from
their companies. In the case of family-owned businesses, beyond
personal consumption, cash generation generally is directed towards
repaying bank loans, which are perpetually rolled over. However, the
14
7/29/2019 Final ADB IB Report, Beckwith January 2013
15/129
economic downturn of 2009-2010 and the pre-crisis construction boom
and subsequent bust have begun to shift this mind-set. During the
construction boom of the mid-2000s, many businessmen and
entrepreneurs were acquiring and flipping land primarily in the
greater Phnom Penh area. Siem Reap, the gateway to the temples of
Angkor Wat, was also vastly over-built, fuelled by heavy north Asian
investment in hotel and other construction projects. Cambodian
entrepreneurs have learned from the subsequent downturn that
speculation is no substitute for generating long-term value in their core
businesses.
3. The emergence of an equity culture:The forthcoming establishment of
the Cambodian Stock Exchange (CSE) has gripped the business
community. Whilst the CSE will likely remain nascent for many years,
with few listings and limited trading volumes after its founding,
curiously, it has provoked vibrant discussion of the benefits of listing
and the modalities of external ownership. Following the bubble and
fallout on the neighbouring stock exchanges in Hanoi and Ho Chi Minh
City (HCMC), Cambodian entrepreneurs are beginning to consider the
concept of underlying value in their businesses more carefully and,
even if only in incipient and theoretical terms, the improvements that
might be required if they were to list. The governments recent
announcement that companies will be required to publish audited
financial statements when they reach a certain size is also encouraging
formalisation and professionalisation.
4. Collateral constraints: The Cambodian financing culture is predicated
on collateral although, of course, in the subsistence, small-holder and
SME sectors, informal and semi-formal financiers provide un- or semi-
collateralised loans often at punitive monthly interest rates. Assuming
that the government maintains its policy of diversification and export
development, especially in the agriculture sector, Cambodian
businesses will require appropriately-priced, medium- and long-term
15
7/29/2019 Final ADB IB Report, Beckwith January 2013
16/129
financing which provides them access to more than just money. Slowly,
the absence of recognised collateral, counter-balanced by the need to
invest and build critical mass to take advantage of export opportunities
is forcing Cambodian business open.
Cambodia: Target Investment Sectors for the IB Facility
The Cambodian economy is not particularly diverse. It is heavily dependent
on agriculturemostly subsistence and small-holdertourism and garment
exports. Other than tourism, which is centred around Angkor Wat in Siem
Reap, there is little depth to Cambodias economic base which, in turn,
hampers commercial and export relationships because of inconsistency of
supply and questions over quality and reliability. Although this is verygradually beginning to change as competition intensifies among Mekong
countries, Cambodian businesses desperately require outside expertise and
capital to professionalise and compete more effectively. From the perspective
of the IB Facility, despite these challenges and the need to be cognisant of
just how challenging the operating environment in Cambodia can be, due
diligence confirmed encouraging prospects for investment in the following
sectors and sub-sectors:
1. Agriculture
Cambodian agriculture and aquaculture is diverse and a
broad range of crops and raw materials are produced,
including rice, cassava, pepper, cardamom, cashews, other
nuts and spices, rubber, sugar and seafood, among many
others.
Because fertilizers, pesticides and herbicidesif and when
availableare generally made from natural products, it is
very easy to acquire organic status in Cambodia because
most production is effectively organic to begin with.
The main constraints to increasing crop yields and quality
include:
16
7/29/2019 Final ADB IB Report, Beckwith January 2013
17/129
i. Lack of access to and/or inappropriate usage of key
inputs, such as seeds, fertilizer and pesticides;
ii. Absence of technology, know-how and in many cases,
modern farming techniques;
iii. Access to irrigation systems, especially secondary and
tertiary channels, is largely random. As a result, most
farmers only grow one crop per season and are
dependent on favourable rainfall patterns;
iv. Quality assurance and traceability mechanisms are
generally non-existent;
v. Relationships with aggregators and processors are
random, and there is little loyalty to purchasers among
farmers. Crops are generally sold to the purchaser
offering the highest price, whether an aggregator who
purchased from a farmer the previous year, or an
unexpected Chinese or Vietnamese trader.
Consistency and quality of supply reaching domestic
processors suffer as a result; and
vi. Limited social organisation and co-operation among
farmers, which compounds information asymmetries
and un-level playing fields when it comes to pricing.
Infrastructure constraints in Cambodia are also significant.
There is no cold chain, storage facilities are poor, road and
rail infrastructure are poor and no Cambodian port can
handle ships carrying more than 20,000 tonnes of product.
Although primary production in Cambodia is probably too
rudimentary to be suitable for direct investment by the IB
Facility and is politically sensitive for land-related reasonsdiscussed above, any investment in agro-processing (see 2.
below) will necessarily be confronted with these issues.
Importantly, and in line with the IB Facilitys core objectives,
supply chains will have to be strengthened in order for
17
7/29/2019 Final ADB IB Report, Beckwith January 2013
18/129
investment objectives in any aspect of Cambodian
agriculture to be realised.
2. Agro-processing
The long-term prospects for agro-processing in Cambodia are
extremely bright, particularly in the rice sector (see below).
The challenge is one of achieving scale: few processors have
significant production capacity due to the absence of
hardware and modern machinery, which means that
investment is urgently required.
The influence of Vietnamese investment and procurement is
also significant, and generally value-destructive. In order to
avoid domestic taxes and address supply shortages in
Vietnam, traders simply buy up Cambodian crops and raw
materials and smuggle them across the border for
processing. At a formal level, Vietnamese enterprises
pledged $1.3bn of investment in Cambodian agriculture in
2010it is difficult to know how much of this actually
materialisedbut their true interest lies in input acquisition
in Cambodia for processing and value addition in Vietnam.
The Cambodian government and private sector will welcome
any investment initiatives that help to counter this dynamic.
Rice is the cornerstone of the agriculture sector, and the
government has set an ambitious target of increasing rice
exports to 1m tonnes by 2015. Given just 60,000 tonnes of
rice were exported in 2010, the 1m tonne target is probably
unrealistic. However, boosting rice output, improving
processing and quality in order to compete within and
beyond the region will remain high on the agenda. According
to one source, there is US$700 million of investment pent up
in the rice sector.
Although some mills are state of the art and could do the
colour grading and polishing demanded by international
18
7/29/2019 Final ADB IB Report, Beckwith January 2013
19/129
markets, poor paddy quality and supply impedes mill
calibration for particular varieties. Massive investment is
therefore needed in various areas: mills require better inputs,
storage facilities, modernised production processes and,
above all, they need help to adopt more entrepreneurial
approaches to milling. This, in turn, opens the door for
investment partners like the IB Facility, willing to support the
professionalisation of their operations.
As with other crops, consistency and quality of paddy supply
to mills is problematic, because mills cannot compete with
the price arbitrage of Vietnamese and Chinese traders. There
is an opportunity, therefore, to invest in rice mills with a view
to strengthening the supply chain not just through price-
competitiveness, but mutual reliability: millers need to know
that they can count on supply, and farmers need assistance
in organising in order to bargain effectively, with loyalty
clearly reflected in the prices they command. The BOP
impact of engagement in the rice sector through portfolio
companies could be significant, especially supporting co-
operatisation among producers and millers.
The IB Facility may find agro-processing opportunities in
other sub-sectors such as cassava and sugar cane. Cassava
has been booming recently, but there is little domestic
processing capacity and cassava chips are generally
exported to Vietnam.
3. Agricultural Inputs and Infrastructure
Cambodian agriculture is desperately in need of good quality
agricultural inputs, ideally produced domestically. Soil,
fertilizer, pesticides, tools, tractors and the like are all in
short supply and expensive to import.
19
7/29/2019 Final ADB IB Report, Beckwith January 2013
20/129
Chinese, Singaporean, Vietnamese and European investors in
Cambodian agriculture have all spotted this opportunity and
are investing aggressively.
There will be opportunities for the IB Facility to invest in
manufacturing, wholesale and distribution of agricultural
inputs, whilst the Technical Assistance (TA) Facility can play
a critical role in outreach, education of farmers and extension
services.
Access to water and irrigation schemes may also produce
investment opportunities for the IB Facility. The government
is responsible for primary and secondary channels, but
tertiary channels can be provided by the private sector.
Currently, irrigation schemes are haphazard and need
upgrading and extension to vast areas without facilities.
Distribution and logistics, with respect to both factor inputs
and raw or semi-finished product, are desperately lacking.
The absence of a cold chain compounds the problem,
creating opportunities to invest in simply getting inputs to
farmers and getting goods to market and export facilities.
4. Financial Institutions and Access to Finance
As discussed above, Cambodian entrepreneurs and SMEs,
including some medium-sized enterprises of substance,
struggle to access appropriate financing, either due to
collateral constraints or because they are used to seeking the
cheapest debt available. Vast segments of Cambodian society and, crucially, of the
productive economy, remain under-banked or un-banked in
this cash-dependent economy. Many communities have no
formal banks or financial institutions at all. Although there is
no shortage of microfinance institutions (MFIs) in Cambodia,
20
7/29/2019 Final ADB IB Report, Beckwith January 2013
21/129
the sector is unregulated and dominated by non-
governmental organisations (NGOs). As regulation and
transition to deposit-taking institutions inevitably take hold,
there should be opportunities for the IB Facility to invest in
MFIs and other financial institutions looking to provide access
to finance to BOP populations in numerous ways:
i. Agricultural finance, including factoring, reverse
factoring, commodity-based finance, warehouse
finance;
ii. Disaster and catastrophe insurance for small-holder
farmers;
iii. Micro-insurance, micro-health insurance and
vulnerability schemes;
iv. Mobile banking.
Over-indebtedness has become a big issue in Cambodia,
exacerbated by excess liquidity, lack of regulation, the
governments openness to the establishment of any new
financial institutions and an entrenched mentality among
borrowers of perpetual refinancing.
There is an opportunity, therefore, to help mould responsibly-
managed financial institutions that are able significantly to
undercut interest rates of 2-3% per month offered by traders
and informal financiers and some MFIs by offering products
tailored to borrowers at the BOP that take into account the
challenges around land ownership and collateral.
5. Clean Energy
Bio-energy and renewable energy projects have begun to
spring up in Cambodia. There are opportunities for
gasification, or the use of rice husks, cassava husks or
21
7/29/2019 Final ADB IB Report, Beckwith January 2013
22/129
sugar cane by-products for conversion to energy, thereby
reducing reliance on fossil fuels.
Significant investment will be required in commercial
approaches to waste-to-energy initiatives. Moreover, given
that Cambodia lacks a national electricity grid, there is room
for private sector energy generation. Agricultural waste
conversion can therefore be used to power processing and
milling plants and also be sold to local communities. Bio-gas
production for domestic consumption and animal dung
conversion for household energy are two other opportunities
for the IB Facility to support.
Technology and know-how are lacking, along with investment
in capital goods needed for conversion.
6. Garments
Although the garment sector is a critical contributor to the
economy, and certainly involves the BOP from a production
perspective, it would probably be best avoided by the IB
Facility. Following large job losses 2009 and early 2010, the
sector has begun to recover, but it is subject to aggressive
and often unscrupulous investment from Taiwan, China and
Hong Kong. Of the estimated 300 garment factories in
Cambodia, only 15 are locally owned. Many foreign investors
establish highly-mobile, under-invested operations in
Cambodia to take advantage of cheap wages (wages are
significantly lower than in Vietnam). The result is that many
factories are literally little more than tin sheds that can be
closed within days if necessary.
Unless the IB Facility encounters local garment
manufacturers with a long-term vision of establishing lasting
relationships with foreign buyers predicated on a gradual
move up the value chain, this sector is best avoided.
22
7/29/2019 Final ADB IB Report, Beckwith January 2013
23/129
7. Tourism
As with the garment industry, the IB Facility will have to take
a cautious approach to tourism investments. In recent years,
Taiwanese, Korean and Chinese investment has been
plentiful and unscrupulous, and over-construction,
particularly in Siem Reap, has caused a market glut. Land
acquisition is complex, often with brutal consequences for
the poor, so selection of partners would have to be carefully
managed.
Opportunities could nevertheless emerge in support services
to tourism, such as catering, laundry, logistics and
transportation. As visitor numbers increase, drawn initially by
the Angkor Wat temples, but increasingly aware of stunning
beaches and varied flora and fauna, eco-tourism is
developing.
Again, tourism is generally not a sector that lends itself to
closed-ended investment funds because holding periods to
realise value are often incompatible.
Cambodia: Proposed Fund Design
Based on due diligence, there is scope to deploy up to $15m in private
Cambodian businesses, primarily in agro-processing, agricultural inputs and
logistics, clean energy, distribution and logistics more generally and, possibly
carefully-selected light manufacturing and tourism deals. The key features of
the proposed Fund design for Cambodia are presented below:
Fund allocation to Cambodia:Due diligence suggests that it would be
challenging to deploy more than $15m in Cambodia over a five-year
investment period, and that a realistic figure lies somewhere in the range
of $10m-$15m. The average transaction size is likely to be $2m, although
if the IB Facility is able to gain exposure to rice milling opportunities, it
23
7/29/2019 Final ADB IB Report, Beckwith January 2013
24/129
should be possible to deploy $4m-$5m in one or possibly two transactions.
It should be remembered that it may be possible to gain exposure in
Cambodia indirectly, through Thai companies that are expanding or
acquiring operations there, primarily in agriculture.
Transaction Profiles:As emphasized above, Cambodia is a cash-based
economy. Individuals and entrepreneurs are familiar with debt from both
formal and informal sources. They have little or no understanding of
equity. The notion of opening up the ownership structure of a business to
external participation is alien, and in many transactions, the financials will
be neither comprehensive nor accurate enough to get a clear enough
picture of the business on which to base a valuation. For this reason, most
transactions in Cambodia will be time consuming and will likely involve
debt, although, very slowly, quasi-equity and equity are gaining the
attention of local businessmen seeking foreign partners. Cambodian deals
will be growth plays, with financing largely used for working capital to
boost output and achieve efficiencies. There is no management buy-out
(MBO) culture in Cambodia, and rescues, restructurings and start-ups
should be studiously avoided. They are far too risky.
On a positive note, the government is very pro-business and hands-off
when it comes to the modalities of foreign investment. Convertible loans,
preference shares, preferred shares and redemption clauses are all
permissible in Cambodia, not that they will be used very often. Other
more complex equity structures will probably be similarly received when
introduced. The key risk factor, however, is that no such deals have ever
ended up in the courts, so enforceability in case of dispute remains an
open question.
Risk Mitigation and Currency Issues:Cambodia is a highly dollarised
economy and to a large extent, the US dollar remains the currency of
choice for trade and investment. Denominating the IB Facility in US dollars
makes sense in the Cambodian context, and indeed, the Cambodian riel is
expected to appreciate marginally against the dollar in 2011. Where risk
24
7/29/2019 Final ADB IB Report, Beckwith January 2013
25/129
mitigation strategies are concerned, unfortunately it will not be possible to
de-risk investments through complex transaction structuring and strategic
use of investment instruments. Cambodian sponsors will be intimidated by
unfamiliar structures.
A critical factor in Cambodian transactions will be for the IB Facility to
work with competent local investment partners who are sufficiently
connected to cross-reference prospective portfolio companies
management teams. Undertaking know your client (KYC) checks is
challenging because political connectedness abounds and larger
businesses generally require strong links with the CPP in order to operate
and grow.
Two additional risks will need to be addressed in all Cambodian
transactions. First, many will be family-owned businesses. Corporate
governance arrangements are weak or non-existent, management is
rudimentary, strategic planning is not systematic and often financials
simply will not exist or will certainly fall far short of international
standards. Faced with these risks, the opportunity for the IB Facility
manager will be to persuade sponsors of the value of formalisation and
transparency. If it is argued that this is a likely conduit to strong
relationships with foreign partners and, possibly, an eventual listing,
forward-looking Cambodian entrepreneurs have reached a point where
such a message will resonate.
The second risk is on the fiscal side. The relationship between most
businesses and the tax authorities consists of creating a plausible
scenario for turnover during the relevant period (generally vastly
understated), and paying the tax representative the amount required to
handle the situation. Most businessmen avoid making truthful
declarations because, as they see it, it translates into a significant cost
disadvantage vis--vis their competitors. Again, the IB Facility will have to
persuade investee companies that the benefits of partnership and faster
growth, and hence higher turnover, far outweigh the perceived short-term
disadvantage of greater tax liabilities.
25
7/29/2019 Final ADB IB Report, Beckwith January 2013
26/129
Exits:As discussed above, the advent of the CSE, soon to be launched,
has changed the conversation significantly in Cambodia, and forward-
looking businessmen are slowly focusing on building and realising long-
term value in their businesses. That said, it is unrealistic to expect that
trading volumes and the number of listings will be sufficient to provide a
viable exit avenue for Fund portfolio companies. In other words, the IB
Facility should avoid transactions where the exit thesis is predicated on
listing, although of course, should the opportunity arise it will be a
welcome boon. Most exits will take the form of strategic sales to regional
or foreign buyers and company buy-backs, or redemptions. The fact that
production and export from Cambodia, due to its LDC status, confers duty-
free entry to many export markets increases the attractiveness of
Cambodian acquisitions to foreign purchasersall the more so if, as a
result of the IB Facilitys investment, the companies are well-run and have
implemented proper corporate governance arrangements.
Fund Managers: Presently, there are only two independent fund
managers in Cambodia: Emerging Markets Investments (EMI) and Leopard
Capital. By their own admission, the two founding partners of EMI are new
to private equity although they do have strong backgrounds in investment
banking and corporate finance. EMI benefits from its strategic partnership
with Aureos Capital, which has a seat on the investment committee and
provides input on deal structuring. However, Aureos Capital does not have
sufficient time or resources to take a very active role in the EMI portfolio.
Leopard Capital was unavailable to meet during the due diligence
exercise. Anecdotal feedback suggests that Leopard is not especially
methodical in its transaction execution and, although more experienced
than EMI, it is, on balance, the weaker of the two. See Section IV below for
further discussion of fund management options.
BOP Impact:As one of the poorest countries in the world, it is difficult to
see how the IB Facility will not have a significant impact on Cambodians
living at the base of the pyramid. Any labourers employed by Fund
26
7/29/2019 Final ADB IB Report, Beckwith January 2013
27/129
portfolio companies will likely be earning $2-$3 dollars per day, if that,
and farmers involved in the supply chain of agricultural processors and
aggregators generally live at or below the poverty line. The main areas of
BOP impact that the IB Facility could achieve in Cambodia include:
Employment generation: Increasing job opportunities through
portfolio company growth;
Supply-chain strengthening: Building mutually-reinforcing
relationships between farmers and processors is key to
addressing the quality and consistency issues that hamper
certainty and reduced volatility for the former, and the ability to
boost output and secure more favourable trading relationships
for the latter;
Reduced income volatility: Smoothing income flows for poor
farmers by helping them to form co-operatives and associations
(where appropriate and possible) and strengthening their
relationships with aggregators and processors;
Reduced vulnerability: If the IB Facility can identify a well-
placed, creative partner financial institution to invest in, it could
build pro-poor financial products that may have an enormous
impact on rural farmers and the rural poor;
Access to finance: Far from any formal institutions, rural
agriculturalists struggle to access appropriate financing that
takes into account collateral constraints (land ownership),
seasonality issues, limited access to inputs (or poor
quality/inappropriate inputs when possible);
Value-addition and value-capture:Particularly in the rice sector,
but in fact in most transactions, the IB Facility can help
Cambodian producers to move up the value chain and captureand retain more value in Cambodia;
Business formalisation and professionalisation: Management
capacity and corporate governance in Cambodian companies is
rudimentary at best. The IB Facility can make a significant
contribution, particularly through strategic deployment of TA
27
7/29/2019 Final ADB IB Report, Beckwith January 2013
28/129
Facility resources, by providing training and mentorship in this
area. By leaving behind a cadre of well-run, well-managed
businesses, the IB Facility can have a meaningful demonstration
effect on non-portfolio companies.
_____________________________________
28
7/29/2019 Final ADB IB Report, Beckwith January 2013
29/129
II. Vietnam
Political LandscapeAlthough tensions and in-fighting have increased in recent months within the
Communist Party of Vietnam (CPV), fuelled by the urgency of taming inflation
and halting currency depreciation and contrasting approaches for doing so,
spats between conservative hard-liners and more reformist elements will not
undermine the partys grip on power. The government is more determined
than ever to keep political opposition in check, so despite the increasing
market orientation of the economy, the development of genuine democratic
opposition will not be tolerated. The economic hardship in urban and ruralVietnam in the wake of the global economic slowdown and financial crisis of
2009-2010 has made the government nervous of social tensions and the
possibility of uprisings or intermittent instability. In that context, the
diplomatic row with China over the sovereignty of the Spratly and Paracel
islands in the South China Sea has provided a useful pressure valve, and the
government, unusually, has allowed anti-Chinese demonstrations to take
place in Hanoi and HCMC. In the longer term, however, social unrest may re-
ignite unless the government is able to tackle inflation and reverse escalatingprices for staple foods. Resentment against the government is also caused by
haphazard and forced land acquisition for factories and large infrastructure
projects. Compensation is either woefully inadequate or simply not offered,
and the rural, urban and peri-urban poor affected are left with few means to
rebuild their livelihoods.
Such is the CPVs grip on power that the operating environment will likely
remain relatively stable throughout the life of the IB Facility, though themodalities of achieving stability may be heavy-handed. The government has
watched the industrial unrest and social upheavals in neighbouring China
with trepidation. It will use all means to avoid similar confrontations in
Vietnam, and from a strategic perspective, will seek to present Vietnam to
investors and major export markets as a contrasting oasis of stability. Again,
29
7/29/2019 Final ADB IB Report, Beckwith January 2013
30/129
in order to achieve this, inflation must be brought well below double-digits as
quickly as possible. Currency depreciation and the pressures of increasing
dollarisation will also need to be dealt with effectively.
Economic Policy and Performance
In this somewhat fragile political context, there is a question mark over
policymakers willingness to implement the hard-hitting austerity measures
required to stabilise the economy. The corporate sector has certainly felt the
full force of tightened monetary policy and interest rate hikes, and the
evidence suggests that it has been sufficient to quell the speculative activity
both corporate and personalwhich led to the boom and bust cycle of
2006-2009. Yet high oil prices have left the government little choice but to
increase subsidised retail prices for fuel and electricity which, naturally, affect
the poor most severely. A fundamental impediment to more effective policy
making is the governments fixation on a perceived binary relationship
between either achieving high growth rates or addressing fundamental
structural and systemic imbalances in the economy. Party dogma that
double-digit growth must be achieved at all costs and is critical to poverty
alleviationnot, in itself, untruemeans that price and currency stability are
foregone or not confronted vigorously enough. For example, domestic credit
creation has slowed somewhat since the economic downturn, but the
government has only reduced its target from 23% in 2010 to 20% in 2011,
not nearly tight enough to quell inflationary pressures. Further inflationary
pressures will be produced by consistent budget deficits in the region of 5%
of GDP over the next three-to-five years, and although the return to near-
double digit growth rates will boost government revenue, high oil prices and
expenditure on social welfare programmes and infrastructure projects will
keep the budget firmly in the red.
In the context of the IB Facilitys focus on people living at the base of the
pyramid, it is important to disaggregate Vietnamese inflation figures. They
can be misleading. Ironically, high inflation has actually benefited rural
30
7/29/2019 Final ADB IB Report, Beckwith January 2013
31/129
farmers because their products are commanding much higher prices. The
population segment that is being most affected by inflation are rural migrants
who generally are forced to accept the lowest-paid factory jobs in peri-urban
areas. With 41% of the Vietnamese inflation basket comprised of food, the
proportion of this demographics expenditure on food once in conurbations is
probably somewhere in the range of 40%-60%. In contrast, the rural poor and
less-vulnerable urban poor, even with marginally higher incomes, are
significantly less affected by high food prices.
To a worrying extent, given the export-dependence of the Vietnamese
economy and, further, the reliance on strong demand from two particular
trading partnersChina and the United Statesthe medium and long-term
GDP growth prospects are beyond the countrys control. Diplomatic sparring
with China certainly does not help matters, although to date this has not
significantly affected commercial and investment corridors. The salient
question is whether there is a significant slowdown in the Chinese and
American economies, which would rapidly reduce demand for Vietnamese
exports. For this reason, it will be important for the IB Facilitys investment
portfolio in Vietnam to be carefully balanced between domestic and external
sources of demand.
Operating Environment for the IB Facility
Business sentiment in Vietnam is at an all-time low. The real estate market
has fallen considerably and is expected to continue to do so, forcing some
real estate players to issue bonds with ludicrous coupons to raise capital, in
some cases 20% or higher. The speculative activity which caused the Ho Chi
Minh Stock Exchange Index to sky-rocket from 250 to 600 in 2008 has ended,
and the Index now hovers in the low 400s. It probably has further to fall.
Worryingly, during the boom, both corporate and individual speculators were
borrowing money from banks and interest rates of 10%-12% with a view to
making 40%-60% returns in short periods on the stock exchange. Although
the boom and bust cycle has been painful, four particular aspects of the
fallout are critical and, ironically, positive from the IB Facilitys perspective:
31
7/29/2019 Final ADB IB Report, Beckwith January 2013
32/129
1. An unprecedented focus on company value: Many businesses have
collapsed and continue to do so in the wake of the crisis. For the
first time, the government has allowed them to failincluding,
importantly, bloated SOEs. This unprecedented willingness to
tolerate bankruptcies has taught businessmen an essential lesson
in the difference between underlying company value and short-
term profit, a lesson not limited to public companies.
2. Recalibration of valuations: Historically, penetrating Vietnamese
businesses has been challenging for external shareholders not just
because of lack of transparency, but due to owners unrealistic
valuation expectations fuelled by the boom years. The challenges of
borrowing where once liquidity abounded have forced owners to
reconsider valuations and restructure in order to attract much-
needed capital.
3. Greater openness to equity: Vietnamese businesses have
traditionally used debt to fund growth. Equity is not as unfamiliar as
in Cambodia and Laos, but Vietnamese businesses owners are
generally much more comfortable with debt. The fallout on the
stock-exchange, combined with interest rate hikes and more
stringent lending conditions, is forcing companies to consider equity
participation where previously it would have been shunned. The IB
Facility will therefore be well placed to invest in businesses using
equity, quasi-equity and debt, which will provide a welcome
counter-balance to debt-based transactions in Cambodia and,
possibly, Laos.
4. The structure of post-crisis indebtedness is important: It is
noteworthy that indebtedness levels are much higher in the
corporate sector than in the personal sector. Speculative activity in
the latter was, by and large, confined to business people in HCMC
32
7/29/2019 Final ADB IB Report, Beckwith January 2013
33/129
and Hanoi who had significant disposable income to bet on stocks.
It will take a long time for banks to regain confidence in the
financial viability of all but their largest clients. This, again, will help
the IB Facility to access transactions which would have been almost
impossible pre-crisis.
Another feature of the current business climate in Vietnam is also significant.
The government is emphasising the importance of industrialisation both for
job creation and to reduce the import-content of exports, which remains
stubbornly high (see below). Given the structure of the Vietnamese economy,
successful industrialisation will necessarily require the inclusion of the SME
and sector and non-SOE sector more generally into the supply chains of
larger companies and public-sector projects. As the government has set
about achieving this, the degree of weakness of commercial and
infrastructural linkages between larger businesses and the SME sector,
mirroring similarly fragile linkages between the two largest conurbations,
HCMC and Hanoi, and rural areas, has been thrown into relief. As a result,
there is a growing realisation in government and the private sector that
supply chains, value chains and the interface between the SME sector and
larger businesses, let alone export markets, needs urgent attention and
strengthening. This dynamic is beneficial for the IB Facility because portfolio
companies will be much more minded than before to invest time and
resources into establishing robust supply chains and business relationships to
improve consistency and quality of product.
Transactions in Vietnam: Prospects for the IB Facility
The extent to which the economic downturn of 2009-2010 has shaken
Vietnams financial community, altered the financing landscape and affected
the business mind-set cannot be overstated. Access to cheap debt, unbridled
issuing of corporate bonds and their subsequent treatment as assets rather
than liabilities all helped to fuel the unsustainable boom of the mid-2000s.
Unsurprisingly, along with sharp increases in interest rates, commercial
banks have tightened lending policies, collateral requirements have become
33
7/29/2019 Final ADB IB Report, Beckwith January 2013
34/129
far more stringent and access to capital for the private sector is challenging
for all but the strongest companies. It is important to distinguish between this
dynamic and the SOE sector. Although the government has tolerated some
SOE failures, there is no question that politically-directed lending to SOEs
perceived to be strategic, regardless of their health, continues.
The salient point from the IB Facilitys perspective is that acute credit
constriction and the inability to raise funds from speculative investors on the
capital markets is forcing the creation of an equity culture in Vietnam. De-
listings from the bloated stock exchanges are common, as companies seek to
sell stakes at private equity-level valuations. The whole concept of company
value is subject to re-evaluation, and in addition to being compelled to open
their ownership structures to external partners, business owners have less
power to resist the critical managerial and operational changes that the
former introduce to increase transparency and drive efficiencies.
Unsurprisingly, it has become more difficult than ever for SMEs to access
financing from formal financial institutions in the post-crisis environment, let
alone larger companies.1
Collateral constraints:The smaller the company, the greater the
struggle to provide acceptable collateral. Proof of land ownership
can be especially challenging for small-holder farmers.
Poor accounting practices: Accounts are generally managed and
presented so as to minimise tax liabilities. Sales are heavily
discounted and costs are bloated to show little or no profit. It is
difficult to gain an accurate financial picture of a business.
Non-banked cash flows: Many SMEs route cash flows outside of
official bank accounts. Generally, a companys principal bank
1 For the purposes of this report, the term SME is used for convenience. Thereference is really to the medium-sized enterprises or lower mid-caps that the IBFacility will be targeting, or enterprise able to absorb $1m-$10m of debt, quasi-equityor equity.
34
7/29/2019 Final ADB IB Report, Beckwith January 2013
35/129
account is used to receive payments from customers, but not to
deposit revenues or pay suppliers and staff. As a result, banks are
even more reluctant to consider cash-flow based lending.
Lack of information:The pervasiveness of the debt culture means
that SMEs are often unfamiliar with financial products and which
might be appropriate for them.
Again, regardless of size, cash constraints are obliging companies to seek out
financing partners for the longer term, requiring, in turn, greater openness
and a willingness to professionalise.
Vietnam: Target Sectors for the IB Facility
Although the Vietnamese economy is largely export-driven, it is relatively
diverse, and the near 90 million-strong population translates into robust and
strengthening domestic consumption. As highlighted above, the salient
challenge to achieve more consistent, rapid economic growthand, crucially,
more balanced growthwill be to further unlock both the productive and
consumption forces of the domestic economy. In many parts of the country,
physical infrastructure still impedes access to inputs, markets, appropriate
financing and information. These shortcomings need to be addressed in order
for productive sectors as a whole to move up the value chain. Additionally,
there is much reputation building to be done by Vietnamese companies
domestically and internationally. Made in Vietnam is not synonymous with
quality as a brand. Domestically, this often leads consumers to choose more
expensive imports over Vietnamese product if they can afford to.
Internationally, some producers and importers are wary of significant
exposure to Vietnam because of poor reliability. That said, the backlash
against certain Chinese goods, such as toys and dairy products, within and
beyond China has been carefully watched by Vietnamese industry, and there
is an awareness of the opportunity to exploit increasing disenchantment with
Chinese producers and business relationships in some sectors. As the outline
of target sectors demonstrates below, many of the investment opportunities
for the IB Facility will be found in agriculture and light manufacturing, but
35
7/29/2019 Final ADB IB Report, Beckwith January 2013
36/129
there may be some interesting and very BOP-relevant opportunities in
services, including healthcare and education:
1. Agriculture
The base of agricultural products in Vietnam is much more
diverse than in Cambodia, with crops and raw materials ranging
from coffee, tea, cardamom, pepper, acacia, cassava, fresh
fruits and vegetables, to fisheries, horticulture and floriculture.
Indeed, as the worlds second-largest coffee producer, Vietnam
is on the map as an agricultural player in a way that Cambodia
is not. Nevertheless, significant challenges need to be overcome
for the agriculture sector to achieve more rapid and consistent
growth and, crucially, for small-holder farmers to capture more
of value and income from their output.
Given the likelihood of several Fund investments in agro-
processing, working through portfolio companies will provide
opportunities to address some key challenges to the sector, of
which the following should be highlighted:
i. Weak processing capacity: Resulting in many raw
materials and unfinished products being shipped to
Thailand for processing;
ii. Value chain dislocations: Due to poor logistics,
transportation and distribution networks. For example,
avocados sell for $0.20/kilo at harvest points, but $2/kilo
in Hanoi and HCMC, and often arrive spoiled;
iii. Weak supply chains: Medium-sized producers and
aggregators are realising the need to foster more
consistent supply chains by building lasting relationships
with individual farmers and co-operatives. Consistency
and quality of supply are enormous challenges in
Vietnam;
iv. Contract enforceability: In order to achieve iii above,
processors and aggregators must rely on relationships
36
7/29/2019 Final ADB IB Report, Beckwith January 2013
37/129
rather than contract enforcement. Farmers often have
little or no understanding of contracts and they are
certainly not enforceable through the courts. The only
way of preventing farmers from selling to the highest
bidder, regardless of signed contracts, is for purchasers to
build trust, price competitively and offer security and
reliability through repeat business;
v. Poor co-operation among farmers: Top-down
collectivisation and co-operatisation have generally been
unsuccessful in Vietnam. This leaves individual small-
holders more susceptible to predatory purchasers and
lenders. If, however, bottom-up organisation is
encouraged through Fund portfolio companies with a view
to establishing equitable, lasting relationships, the
chances of success could improve;
vi. Rudimentary growing techniques: Most Vietnamese
agriculture is un-mechanised, seed quality is often poor,
and hardware and machinery is lacking. Again, to
strengthen supply chains, processors need to offer
technology and know-how as part of their engagement
with farmers;
vii. Erratic land distribution: Land is distributed to farmers by
the government, but is often random and, when deemed
necessary for industrial plants or infrastructure projects,
simply appropriated. Because land is the only asset most
farmers holdand even that is tenuouspurchasing
relationships are random, production is inconsistent, crop
timing is variable and pricing fluctuates considerably.
2. Agro-processing
Not surprisingly, the demographics of Vietnam have fuelled
demand for processed fruits, vegetables and, above all, fish
sauces. Fish and agro-processors have realised that in order
37
7/29/2019 Final ADB IB Report, Beckwith January 2013
38/129
to compete with imported products, which often sell for ten
times more than domestic equivalents, they must improve
quality, presentation and packaging. This, in turn, means
addressing many of the challenges listed under 1. above.
In order to move up the value chain, increase market share
and develop export markets, agro-processors also need to
invest in compliance and traceability systems, certifications
and production best practices. Marketing, branding and
packaging also need improvement. Opportunities to provide
high-end niche and organic products have not gone
unnoticed by Vietnamese producers, but they require know-
how and, in some cases, technology.
From a transaction and exit perspective, consolidation in
agro-processing is slowly taking hold. Because of supply
chain constraints, larger players are looking to purchase
smaller players to increase market share. This is a significant
proxy indicator for pent up demand for processed goods,
suggesting enormous growth potential for the sector.
Downstream from agro-processing, there will be
opportunities for the IB Facility in fast moving consumer
goods (FMCG) in two particular areas: re-packaging and
distribution for export and for the domestic market.
3. Agricultural inputs
As in Cambodia, Vietnamese agriculture is hampered by poor
quality inputs, including seeds, fertilizer, pesticides, tools and
hardware. In some ways, the impact in Vietnam is more
serious because farmers are often tricked by intermediariesinto purchasing fake, adulterated or noxious products.
Traditional herbal medicines for animals and pesticides for
plants that are safe to use are in desperately short supply.
The demand for quality factor inputs is vast, and there are
opportunities for several players to aggressively grow
38
7/29/2019 Final ADB IB Report, Beckwith January 2013
39/129
companies who build reputations on high-quality, reliable
and, above all, safe products. Again, this will require portfolio
company engagement with farmers to establish
relationships, and provide training on usage and best
practices.
4. Fisheries
There is significant potential for fisheries and fish-processing
in Vietnam. Once again, however, consistency of supply and
quality control are significant obstacles for local producers.
Shrimp aggregators and processors tend to own their own
farms, but output is rarely sufficient so they are forced to
purchase from individual farmers and households.
With burgeoning demand for seafood, fish products and
sauces, there is an opportunity to work through investee
companies to develop new models of aggregation and
contract farming.
Moreover, the fact that two fish processors have gained pre-
approval status from the US Food and Drug Administration
(FDA), meaning that inspection is not required when product
arrives in the United States, has highlighted to the sector the
relationship between investment in technology and best
practices, and the development of export markets.
5. Healthcare
The Vietnamese are enormous consumers of healthcare and
pharmaceuticals, both in rural and urban areasindeed,
Vietnam is the second-highest self-medicating country in the
world. One of the main problems with the geography of
healthcare in Vietnam is that the best care is concentrated in
urban centres, particularly Hanoi and HCMC. There is
burgeoning demand for better healthcare at lower socio-
economic echelons and, of course, at the base of the
39
7/29/2019 Final ADB IB Report, Beckwith January 2013
40/129
pyramid. However, those reliant on free public healthcare
the vast majority of the populationhave little choice but to
wait for attention, sometimes for day. The quality of the care
they receive is highly variable.
Recent analysis of the Vietnamese healthcare sector
suggests that those in the upper segments of the BOP are
willing and able to apportion some of their disposable income
to quality healthcare. The three areas for which there is
particularly strong demand include:
i. Oncology consultancy and cancer treatment;
ii. Maternal healthcare; and
iii. Paediatric healthcare.
Because the public healthcare system is strained, and
medical professionals are not well paid, many doctors see
patients privately as a way of increasing their incomes.
Thriving groups of medical professionals have sprung up in
urban areas that are fully private. There is, however, vast
under-served, or entirely unattended, demand in the rural
areas. Due diligence suggests that the IB Facility will be well-
placed to help doctors and private clinics to formalise and
develop hub-and-spoke structures through which to serve
marginalised communities and the rural poor. Further, such
investments would probably require $5m-$10m, providing a
counterweight to smaller investments in the Vietnamese
portfolio.
The privatisation of primary healthcare as a strategy for
alleviating pressure on public resources has become topical.
In addition to hub-and-spoke approaches mentioned above,investment will be required in clinics serving mostly lower-
income groups in secondary and tertiary towns and cities.
As the healthcare conversation in Vietnam has started to
focus on affordability, new models for financing and delivery
of care have sprung up. Some financial institutions are
40
7/29/2019 Final ADB IB Report, Beckwith January 2013
41/129
realising that the market for pooled healthcare products and
risk-adjusted models for coverage provision to lower-income
groups could be a huge growth area. Tele-medicine and
remote diagnostics models are also emerging. The IB Facility
could well find opportunities to invest in financial institutions,
most likely MFIs, that are specifically targeting access for the
poor as their growth strategy.
Professionalisation of hospital management and clinic
administration, particularly childrens hospitals, may
generate additional deal flow.
6. Education
Demand for better quality education is burgeoning in
Vietnam, and not just among middle and upper classes, nor
only in urban centres. Particularly in the language school
segment, there are many cowboy institutions offering
appalling quality instruction, but the problem extends to
primary and secondary education and professional
education.
The standard of instruction is especially poor in the social
sciences, entrepreneurship and business education, with a
dearth of well-trained graduates coming through the ranks.
There are good prospects for the IB Facility to invest in
education franchises and school chains at various levels
primary, secondary, professionalin rural and urban areas
alike. A hub-and-spoke approach may also prove effective in
extending reach to rural areas and lower-income groups.
7. Sanitation
The government is very focused on the urgent need to
improve sanitation and waste-water management at the peri-
41
7/29/2019 Final ADB IB Report, Beckwith January 2013
42/129
urban and rural levels. Importantly, space is being created
for the private sector to participate through outsourcing.
Public-private partnerships (PPPs) would be complicated for
the IB Facility, because the government tends to retain
control of what it considers the most strategic or lucrative
parts of operations, but once full outsourcing begins, there
could be opportunities to invest up to $10m in this sector.
State-of-the-art machinery and know how are in short supply.
8. Small Hydro and Clean Energy
Whilst many small hydroelectricity opportunities will, in
themselves, be too large for the IB Facility, there will likely be
opportunities to deploy up to $10m, accompanied by project
finance in a consortium. Some aggregators have begun to
roll-up small hydro opportunities across communities.
The build-operate-transfer (BOT) approach could well prove
effective in this sector. The government needs additional
capacity and supply which, realistically, can only come from
the private sector.
In addition to opportunities in waste-to-energy, there may be
cleaner production plays possible in light manufacturing. An
example cited during due diligence was a lighting company
that needs $5m to modernise operations, introduce new
technology and reduce reliance on fossil fuels to reduce
costs.
9. Light Manufacturing
The manufacturing sector has not fully recovered from thedownturn of 2009-2010. Investment has dried up,
competition with Chinese producers is vigorous and the high
import-content of almost all manufactures makes the cost
base very high. The closure of a Sony assembly plant in 2010
dealt a strong blow to the sector: the closure was not
42
7/29/2019 Final ADB IB Report, Beckwith January 2013
43/129
attributed to poor labour quality, rather high import costs
vis--vis other South-East Asian countries.
The opportunity in Vietnamese manufacturing is to invest in
technology, know how, improve efficiency and productivity
and, above all, to focus on quality and reliability. Domestic
producers of components and parts are in desperately short
supply. Over time, manufacturing will also need to move up
the value chain in order to reduce import dependence.
The retail exports that Vietnam has gained a reputation for
may also provide prospects for the IB Facility, including
clothing, shoes and other leather goods, furniture, wooden
flooring and so on. Again, quality and reliability are the key to
developing entrenched export relationships. There are some
examples of Vietnamese exporters competing in South-East
Asia and beyond in flooring, press-board, and wood
composites such as MDF. However, establishing reliable
supply chains from sustainably-managed forests is
challenging, presenting an another opportunity for BOP-
orientated Fund involvement.
Manufacturing need not only be focused on export markets.
Differentiation among local brands is increasing and
consumers are becoming more discerning, causing local
producers to move up the value chain in order to compete.
Supply and service chains need strengthening, however, and
particularly in the case of furniture, the potential BOP impact
of investments could be significant as it relates to labour.
10. Packaging and Distribution
The quality of processing, packaging, branding, presentation
and marketing is very poor in Vietnam compared to many
other Asian countries. This puts Vietnamese products at a
disadvantage.
43
7/29/2019 Final ADB IB Report, Beckwith January 2013
44/129
As Vietnamese consumers become increasingly brand-
conscious, demand for good packaging and distribution
systems will increase. Companies can also achieve cost
savings by not having to ship product abroad for packaging.
11. Garments
The garment sector is clearly a significant contributor to GDP
and a very labour-intensive industry. Owing to volatile
demand in Vietnams main export market, the United States,
it is a risky sector.
That said, there may be selected opportunities to invest in
garments. In a $4bn industry of which the import content
accounts for $3.6bn, import substitution is badly needed to
reduce costs and boost competitiveness. Moving up the value
chain is also important in order to compete with China, which
has abundant domestic supply of materials and accessories.
The worst labour conditions and lowest wages in Vietnam are
probably found in its garment factories. Unskilled and semi-
skilled workers, many of whom migrate from rural areas, live
in atrocious conditions in industrial zones, often with little or
no access to affordable housing, clean water and nutritious
food.
On the IB Facilitys theme of improving peoples lives at the
base of the pyramid, there is clearly a win-win to be achieved
by changing the garment manufacturing model somewhat.
One problem for manufacturers is that the work is so tedious
that staff tend to move on after one year. If firms are serious
about moving up the value chain, they need to invest intraining and retain staff, which can translate into higher
wages and better conditions.
Again, investments in the Vietnamese garment sector are by
no means straightforward, but the IB Facility should be on
the lookout for opportunities to work with forward-looking,
44
7/29/2019 Final ADB IB Report, Beckwith January 2013
45/129
innovative management teams who come to recognise the
relationship between loyal, well-treated labour and the ability
to manufacture reliable, good-quality product.
12. Access to finance
As the lax, urban-centric lending which marked the boom has
dried up post-crisis, financial institutions are being forced to
innovate. They have begun to realise the value proposition of
providing tailored to financial products domestically.
The IB Facility could well find, or help to create, opportunities
to invest in MFIs and other financial institutions looking to
penetrate rural areas by developing the following products:
Agricultural finance products, such as factoring,
reverse-factoring, commodity-based finance,
warehouse finance and so on;
Crop insurance, disaster insurance and vulnerability
schemes;
Micro-health insurance; and
Mobile banking and tele-banking.
Vietnam: Proposed Fund Design
Due diligence in Vietnam highlighted the profound impact which the
economic slowdown of 2009-2010 has had on the business culture and
financing landscape. Given the depth of the Vietnamese economy compared
to Cambodia, the size of the population and extent to which domestic
demand for basic goods and services is under-served or entirely unattended
in many parts of the country, there is scope to deploy up to $50m in private
Vietnamese companies in the sectors discussed above. From the perspective
of risk diversification at the IB Facility level, it is fortuitous that openness to
equity is increasing, given that transactions in Cambodia and, possibly Laos,
will be almost entirely debt-based. The key features of suggested Fund
design for Vietnam follow below:
45
7/29/2019 Final ADB IB Report, Beckwith January 2013
46/129
Fund Allocation to Vietnam: The IB Facility will be able to consider a
broad range of transaction sizes in Vietnamroughly between $1m and
$10mwhich presents both an opportunity and a challenge. On the one
hand, sound portfolio management across all of the IB Facilitys target
countries would suggest several larger transactions of $5m-$10m should
be made as a counterbalance to smaller, riskier deals in other Mekong
countries. That said, the acute need for financing and partnership in the
$1m-$5m range should not be overlooked. Clearly, the IB Facility manager
should focus on the most financially viable and thematically-relevant
transactions, so to some extent, the ultimate average deal size in the
Vietnamese portfolio should only be pre-engineered up to a point.
Caution will be required, however, to ensure that the portfolio does not
become unwieldy with too many smaller transactions all requiring
extensive engagement from the manager.
Transaction Profiles:The range of transaction types open to th
Top Related