National as well as international policymakers, funders and organizations working with poverty alleviation and development tend to ignore the urban poor. In fact, the majority of social enterprises in India are basing their business models on rural areas and consumers.

In South Asia’s cities, there is a huge population in the lower income bracket that needs goods and services. Economic logic dictates that urban businesses should be more attractive as a business and as an investment than its rural counterparts because of reduced transaction costs: customers and suppliers of urban businesses are in close proximity to one another, and the market opportunity is usually bigger. However, in reality there are very few inclusive urban business models in the for-profit sector that provide access to basic services such as health, water, sanitation, waste management and education. There are even more limited cases of the public and private sectors coming together to co-create or manage business models that would address these issues effectively and sustainably.

The support ecosystem of social enterprise catering to both rural and urban customers is generally based in urban areas — in India, they are located in the major metropolitan areas. Though a support ecosystem for social enterprise is present in urban areas, it is important to note that this support exists mostly as the head office of rural-focused business models and investment. Because most Indians live in rural areas, there has been an outpouring of innovation that caters to this demographic. Examples of this level of rural innovation includes cost-effective rural hospitals such as Vaatsalya, and how consumer goods companies have introduced the idea of “sachetization,” or the way many consumer goods are available in small, cheap sachets allowing consumers to pay a smaller up-front price for what they need now rather than pay more for a larger quantity to be used over an extended period of time.

Urban Business Challenges

On April 12, 2012, a panel discussion was held at the Sankalp Summit in Mumbai to address the urban business model conundrum. Hosted by India-based investment and knowledge advisory Intellecap, the Summit is an annual event that connects social enterprises and impact investors from around the globe. Samit Ghosh of Ujjivan, an urban-based microfinance organization, moderated “The Urban Business Model Conundrum” panel. The panel included Geeta Goel of the Michael and Susan Dell Foundation, who has worked extensively on urban models, Paul Sathianathan of sanitation and water financier Guardian MFI and Anil Mehta of India Shelter Finance Corporation.

One clear challenge for the urban poor is their invisibility. The urban middle class tends not to see the urban poor even though they are everywhere, living in informal settlements built up along major thoroughfares and around apartment complexes. They do not have a voice or even documentation, which in fact renders them de facto invisible to many state and national initiatives and programs. This is in part due to the high level of bureaucracy and opportunity for graft, which disproportionally hits the poor. Even foreign donor agencies and foundations tend to prefer working with the rural poor: it was suggested in the panel discussion that this may be because rural poverty is “starker” than urban poverty and, therefore, may automatically appear more “social.” However, according to Deepak Saksena of Unilever, “the urban poor are in fact in relative terms poorer than the rural poor because they must pay for a host of services and goods that the rural poor may not have to pay [as much] for, such as housing, electricity, food.”

Despite their seeming invisibility, the urban poor are very aspirational — and much more so than the rural poor since they have better access to information about products and services. One way in which aspirations manifest itself is in the focus on education. The urban poor are more likely, and willing, to pay for private schooling. They are a lot more likely to see the education of their children as a true investment and the long-term way out of poverty.

Said Mr Ghosh: “The urban slums are full of activity and full of people running around trying to make money, so there is a great deal of creativity and innovation.” The challenge for development practitioners, funders and financiers, though, is how to evaluate the value of those potential business opportunities and existing urban businesses because they are often different from rural business models. There is also need for better understanding of the needs and preferences of urban consumers. Today, low-income or base-of-the-pyramid consumers are generally grouped together, whether urban or rural. As with urban businesses, there is not enough understanding of the urban consumer.

Opportunities and Challenges

From the panel discussion, the most talked about scalable opportunities in India’s urban business models seem to center on education. As a poverty game-changer, education is seen as a way to shift current social patterns. Since state education in India is of poor quality, families are willing to spend a considerable amount of income on education, even taking on loans. There is room, then, for business models to find solutions that overcome urban education challenges.

In addition, water and sanitation is another area where there are many possibilities for new business models. Here, the main challenges and barriers are cultural or social. Sanitation as a field of enterprise has to dually combat the social stigma attached to sanitation work, as well as attitudes towards changing age-old sanitation practices. It was highlighted in the panel discussion that men especially do not often want to adopt toilet-based sanitation practices.

On the business side, there are a number of challenges for urban businesses, namely higher costs. Real estate costs are a high barrier to overcome if a business wants to set up shop in a city. If that challenge can be overcome, the next concern is that city wages tend to be higher than in the countryside. Urban areas also come with increased social and political risks associated with local political parties and ‘strongmen,’ local trade unions and other organized crime. These risks can hurt the poor by, for example, forcing default on repayment of microfinance loans by groups of urban poor, as has allegedly taken place in India.

From an investor point of view, there are currently new opportunities in urban areas that previously were not there. Nevertheless, there is need for “patient capital” in the urban sector. These investments need to be long-term so that there is enough time to better understand the urban customer: what they require, and how they themselves prioritize needs and evaluate opportunities both as business owners and as consumers. A major current issue is that investors simply do not understand how to invest in urban businesses or how to evaluate their potential.

Conclusion

The panelists found that there needs to be a stronger focus on business and entrepreneurship promoting better products and basic services to urban low-income consumers. With increasing urbanization, this is an issue that will only escalate with time. For more economic activity to take place in this sector, it must be seen as a great opportunity in a growing market. That is especially true of South Asia with its megacities and continuous migration to urban areas.

While the urban space has many advantages for entrepreneurs — better educated and larger availability of skilled workers, being geographically closer to suppliers and large markets — there is also a real issue in managing the higher costs of doing business in the city. This challenge is particularly important in the context of serving the urban poor. New business models must be developed that can work with these real estate and space constraints, in areas where the Internet is growing but is certainly not accessible to the majority of low-income urban residents.

While the focus of the moment is very much on a select group of social enterprises that often come from higher income segments, it is likely a real opportunity for development practitioners to look beyond these well-educated and English-speaking entrepreneurs to the grassroots-level entrepreneur who knows her local community well and may therefore be in a better position to provide suitable goods and services for the community. With better ways of evaluating urban business models, there is potential to move beyond microfinance and micro entrepreneurs to a higher level of combined investment and support for local entrepreneurs looking to grow and scale their businesses. Perhaps here the new impact investing organizations and the old microfinance organizations can work together to come up with new financial and non-financial packages that go beyond what each has provided on their own.

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