Monday, June 13, 2011

e-Vouchers: Transforming Local Economies

A woman and her malnourished child walk to their local grocery shop to redeem a food voucher she received at the nearby government clinic. The grocer exchanges the voucher for a food basket containing locally produced and milled maize meal, the country’s staple food. The small-scale farmers who grew the maize bought their seeds and fertilizer from rural retailers, who were, in turn, subsidized by a local organization promoting sustainable agriculture. And all the seamless transactions in this localized economic ecosystem were made possible by a simple but transformational technology – electronic vouchers.

Zambia is a country of 12 million people in the heart of southern Africa. It is characterized by low population density, high poverty rates, and political stability. 70% of Zambians live in rural areas, 60% are engaged in agriculture, and 15% are affected by HIV/AIDS. Zambia is by all accounts one of the poorest countries in the world, ranking 150 out of 169 on the 2010 UN Human Development Index.

As such, Zambia is on the receiving end of millions of dollars of aid, and vouchers are becoming the preferred method of delivering it. Vouchers allow beneficiaries to become customers, giving them the power to choose and demand what they need from local retailers instead of receiving items that are shipped from half a world away. The idea behind vouchers works well in theory, but it has had problems on the ground. Paper vouchers result in long, bureaucratic paper trails. Retailers complain of delayed payments and donors of forgery, fraud, and a general lack of accountability.

Mobile Transactions Zambia Limited (MTZ) pioneered an e-voucher product in September 2009 as a cost-effective way for both development sector and government clients to deliver traceable subsidies to their intended recipients. The technology is simple: A scratch card with a unique serial number is given to a targeted beneficiary by a local institution, such as a clinic or farmer group.To ensure security, the vouchers are linked to individuals by their National Registration Card number. Once linked, they can be redeemed at retail agents chosen by the client. The agent processes the voucher by accessing MTZ’s online platform using a mobile phone, triggering an instant electronic payment into the agent’s MTZ account for the value of the goods given out, with a profit margin reflecting prevailing market prices. The agent can then use this electronic credit to order from suppliers, sell airtime, send money transfers, send it to a designated bank account, or access mobile banking services that MTZ’s other business units offer.

The e-voucher business model is driven by a set fee charged per e-voucher redeemed. This means that the e-voucher system is not economic at small volumes because of the management and system development costs of its delivery. Thus, MTZ has focused on improving the efficiency of its e-voucher delivery to reduce overhead costs per e-voucher and allow the company to effectively scale with more clients thus increasing total e-voucher numbers. The e-voucher business unit will be financially viable when it serves enough beneficiaries to cover costs and provide a stable profit margin.

To date, MTZ has redeemed 280,000 e-vouchers for almost 60,000 beneficiaries in Zambia. Our clients include the World Food Programme (WFP), the Food and Agriculture Organization (FAO), the Conservation Farming Unit, and CARE International. Our partners include government clinics and the Ministry of Agriculture and Cooperatives. The e-voucher system has already been replicated across sectors – both food and agricultural inputs – with future expansion planned into health (delivery of subsidized drugs, such as anti-retroviral treatment for HIV/AIDS patients) and welfare (social cash transfers targeted at the poorest 10% of the population). It has also scaled regionally, with food vouchers redeemed in Zimbabwe since June 2010 and Mozambique since March 2011.

The social and economic impact of this product is enormous. Firstly, e-vouchers irrefutably improve the cost-effectiveness of current aid projects. One of our customers has reported 40% cost savings over conventional methods of distributing aid with greatly reduced inventory reconciliation issues. At a time when aid is under fire for being ineffective and inefficient this is great news and it has been recognized as such by donors, small businesses, and beneficiaries alike.

Secondly – and most significantly - e-vouchers create a series of positive knock-on effects in the local economy and community. Aid agencies disappear into the background as local businesses become the face of product and service delivery. MTZ works almost exclusively with small businesses that are stalwart members of the community in order to ensure confidence and trust in the e-voucher. Relationships are strengthened between farmers, millers, retailers, government agencies, and the end customers as much-needed welfare is delivered to the community by the community itself. Instead of being undermined by conventional methods of development, the local economy thrives.

E-vouchers are a winning product in Zambia, but introducing them has not been without its challenges. Pricing the vouchers has been difficult from the beginning as clients did not immediately understand the size of the management and system development costs required to make the e-voucher system work. It was also difficult to maintain a steady stream of clients because of the transient nature of donor projects. It has taken time for MTZ to develop management processes that can scale-up and scale-down quickly and efficiently as voucher numbers fluctuate. However, with several proof-of-concept projects under their belt, MTZ is now developing a standard package, complete with flexible and customizable system features and back-end management practices, to take this to scale.

e-Vouchers enable aid agencies to drastically improve health, welfare, environmental, and livelihood outcomes in marginalized communities; they stimulate localized economic activity by working with local businesses and through local channels; and, they generate revenue for a company that is extending mobile banking services to those who need them most – the unbanked and unconnected. They are a cutting-edge product that will transform economies all over Africa.

This blog was submitted for the BOP competition and made it to the final round. It was written by: Thulasy Balasubramaniam and Graham Lettner