The Network Enterprises
Approach
Enabling Rural Enterprises
October 28, 2009

Three Prerequisites
for Successful Rural Enterprises
1. Sustained competitive advantage.
2. Strong entrepreneurial capability with ability to manage idiosyncratic risk
locally and adequately covered by equity.
3. Low levels of exposure to systemic risk.
Resulting in good access to local debt finance in adequate amounts and at
reasonable rates.
(a critical assumption here is the existence of good local lenders with the ability
and willingness to go beyond microfinance)

1. Five Potential Sources of
Sustained Competitive Advantage
1. Willingness of rural consumers to pay an absolute premium for essential
services (such as credit, clean drinking water and high quality energy).
2. Willingness of rural producers to supply labour at a low marginal cost in
exchange for at-home work and flexible hours.
3. Proximity of rural producers to large urban consumption centres ensuring
enduring transportation cost advantages.
4. Attractive locales and / or traditional skills and craftsmanship.
5. Low set-up times leading to the ability to produce custom designed
goods for markets of one.
These sustained competitive advantages in rural enterprises come from
being and remaining small and local.
Replication, not scale-up is therefore the growth strategy.

2. Capability to Manage
Local (Idiosyncratic) Risks
• Risks very much in the control of the local entrepreneur.
• Feasible for a local lender to assess and judge capacity of entrepreneur to
deal with them.
• Feasible for local entrepreneur to finance the required equity component.

3. Low Levels
of Systemic Risks
• These are economy wide risks.
• Outside the control of the local entrepreneur.
• Not possible for a local lender to assess adequately.
• Since level of risk is not quantifiable even large injections of equity capital
(or grants) by local entrepreneur does not address the problem.
• Arise from gaps in:
1. Access to Markets, Fair Prices and Advanced Risk Management Tools.
2. Access to Critical Raw Materials.
3. Access to Critical Skills and Training.
4. Access to Technology and Relevant Knowledge Resources.
The Network Enterprises approach seeks to completely eliminate precisely
these risks and to ensure that the local lender or the entrepreneur does
not need to deal with them.

The Network Enterprises (NE) Model
• IFMR Ventures chose specific sectors in which, in its judgement, rural
enterprises have sustained competitive advantages.
• For each sector IFMR Ventures incubated a specific Network Enterprise (NE)
• Each NE was given the ability to partner, finance, build and / or directly
“operate” to solve problems that they saw in their respective sectors.
• Each NE developed a back-end to address critical gaps in access in its
respective sector and only where absolutely necessary also developed a
model village level enterprise that could be easily replicated – the Enterprise
in a Box (EIB).
Success in the NE Model is defined by millions of local enterprises getting
access to local debt finance in adequate quantity and at reasonable terms
and using that to grow their business.

Nine Focus Sectors
Nine Network Enterprises (NEs)
1. Agricultural Terminal Markets (ATM 6. Rural Tourism (RT NE)
NE)
2. Crafts, Apparel and Furnishings 7. Rural Drinking Water (RDW NE)
(CAF NE)
3. Dairy (D NE) 8. Rural Energy (RE NE)
4. Fast Moving Consumer Goods 9. Rural Private Schools (RPS NE)
(FMCG NE)
5. Vocational Training (VT NE)

Case Study
Agricultural Terminal Markets – ATM NE

Focus on Small Rural Farms as Enterprises
• Sources of Sustained Competitive Advantage:
– Willingness of farmer to supply her own labor at a low marginal cost and
to absorb all of the production risks – works only for small farms.
– Over a period of time processing facilities have grown up around these
small farms allowing local producers to avoid long transportation costs
and giving them a competitive advantage over non-local producers even
if they have higher levels of productivity.
– Soil, water types and land values suitable for production of these
particular crops.

Sources of Systemic Risk for Small Farms
1. Access to reliable markets.
2. Access to advanced risk management tools.
3. Access to technology and relevant knowledge platforms.
Unless we solve these, debt to small farms not sustainable

1. Access to Reliable Markets
Challenges Making it possible
• Access points at the • National electronic
village-level that spot markets for
guarantee fair price commodity price
discovery at a discovery
reasonable distance • Numerous village-level
• Ability to trade in small transaction points that
lot sizes can sort/grade for
• Information symmetry quality
about quality • Short-distance
• Transparent grading transport service from
and packaging farm to transaction
point
• Transaction point is
scale-neutral

2. Access to risk management tools
Drivers of risk Mitigation mechanisms
• Rainfall risk • Rainfall insurance or
• Price risk investment in
• Ability to benefit from irrigation depending
price cycles – holding on the underlying crop
power economics
• Development of
products including
commodity futures
and options
• Warehouse receipt
finance

3. Access to technology & knowledge platforms
Driver of risk Platform
• Production risk • Development of a
crop-specific extension
platform at (IFPRI-
ICAAP Centre at
Hyderabad)
• Joint investment of IKP
Trust and ATMNE.

ATMNE: Dharampur Village, Kadi Taluk, Gujarat.
Electronic spot trading made possible for farmers in 125
villages in Kadi – 65 kms from Ahmedabad
• Trading possible for lot sizes as low as 1 bag of castor
• Grading made simple and transparent
• 45% out of 787 trades were under 20 bags – small and marginal farmers
Warehouse receipt loans in villages helped small farmers hold
stock for better prices
• Warehouse receipt loans to small farmers- loan amount as low as Rs. 5400/-
• Documentation and process made simple for farmer WRF
• Castor price increased 30% within 183 days between low and high price
Pilot
• 747 farmers enrolled for trading, 787 trades made
• 1849 MT castor traded, trading volume – Rs. 42.2 million

Way forward
 Replication through partnerships with MFIs, NGOs and other local entities
 ATMNE will provide trading and settlement backend to partners
 Exploring ways to accredit warehouses for storage of commodities in remote
villages
 Taking grading, sorting and packaging services close to farmers
 Short distance commodity transportation pilots to facilitate farm to market
as well as inter-market movement
 Transportation exchange to enhance the scope of trade on electronic
exchanges (contracts that include delivery costs)

Watch ATM NE Video in the next slide

Thank you
1, Cenotaph Road | Teynampet | Chennai - 18
www.ventures.ifmr.co.in

Access to commodity market along with financial
market made possible at KADI
• Clearing & Trading member of NSEL
ATMNE- KADI
4. provide cash / loan
NSEL
3.Trade / Lodge w/h receipt
Farmer / Trader
• 1. Deposits commodity
Finance partner for W/H loans
IFMR
Warehouse / 3rd
Rural
party Collateral
Finance
Manager • 2. Issue warehouse receipt
A choice to farmer to sell spot or to hold for future