International Finance Corporation A Synthesis Evaluation of Four IFC-Supported Small and Medium Enterprise Facilities: Africa Project Development Facility African Management Services Company Mekong Private Sector Development Facility Southeast Europe Enterprise Development Operations Evaluation Group January …, 2005 2004 International Finance Corporation Washington D.C. http://www.ifc.org/oeg OPERATIONS EVALUATION GROUP Contributing to sustainable private sector development through excellence in evaluation The Operations Evaluation Group (OEG) is an independent unit responsible for the operations evaluation function within the International Finance Corporation (IFC); it reports to the Executive Directors of IFC through the Director General, Operations Evaluation. OEG assesses IFC evaluation processes and products to identify those that are working well and those that are not, and it determines the extent to which IFC’s strategies and policies, and programs and projects, are achieving their objectives. The evaluation goals are to learn from experience, to provide an objective basis for assessing the results of IFC’s work, and to provide accountability in the achievement of IFC’s objectives. OEG also improves IFC’s work by identifying and disseminating the lessons learned from experience and by framing recommendations from evaluation findings. Copyright © 2004 International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Telephone: (202) 473-7711 www.ifc.org All rights reserved Manufactured in the United States of America November 2004 The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its member countries through investment in the private sector. It is the world’s largest multilateral organization providing financial assistance directly in the form of loans and equity to private enterprises in developing countries. This volume is a product of IFC’s Operations Evaluation Group, an independent unit responsible for the operations evaluation function within IFC. The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of IFC, its Board of Directors or the World Bank or its Executive Directors, or countries they represent. IFC and the World Bank do not guarantee the accuracy of the data included in this work and accept no responsibility whatsoever for any consequence of their use. Some sources cited in this volume may be informal documents that are not readily available. The material in this publication is copyrighted. Please contact the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, USA, for permission to reprint or reproduce portions of this work. Acknowledgments This report was prepared by Walter Cohn (Consultant and Task Manager) under the general direction of Linda Morra-Imas (Head, Special Studies). It draws from individual facility reports prepared by Nexus and Associates and DFC Limited, also conducted under the same study management. Pelin Aldatmaz and Nisachol Mekharat provided analysis assistance and Saliha Amroune, Yvette Jarencio, and Marylou Kam-Cheong helped to prepare the document. Tyler Biggs (Consultant) prepared a background paper for the study. OEG is grateful to Tom Davenport who reviewed study designs, instrumentation, terms of reference, and draft reports on behalf of the SME Department. OEG also thanks the individual facility managers for their assistance. Director-General, Operations Evaluation: Gregory K. Ingram Director, Operations Evaluation: Bill Stevenson Head, Special Studies: Linda Morra-Imas Task Manager: Walter Cohn Foreword The attached report reviews the operations of IFC’s small- and medium-scale enterprise (SME) facilities, based largely on OEG-directed consultant evaluations of four facilities or similar programs still supported by IFC that are sufficiently mature for evaluation. OEG provided the individual evaluations to the facilities during 2002 and 2003, and the facilities report that they have already acted on some of their recommendations. Since 1999, support for the development of SMEs has been one of the core objectives in IFC’s corporate strategy. IFC relies heavily on SME facilities to provide technical assistance and advisory services (TAAS) designed to serve this objective. The $0.4 billion that IFC and other donors committed to the facilities through mid-2003 accounted for nearly half of IFC’s cumulative donor-supported TAAS spending and 80% of its TAAS spending for SMEs. The report finds that notwithstanding the difficult context in which they operate, the facilities achieved a great deal. Nonetheless, while the facilities have energetically pursued their founding purposes, their strategic focus has been inadequate. The facilities have pursued a range of approaches without clearly articulating what market failures they sought to address, estimating the expected benefits and costs, or identifying their own capabilities and disadvantages. For some approaches, the facilities undertook a wide range of programs without giving adequate attention to priorities and the most economic use of their resources. In some cases, the facilities accepted clients and granted subsidies without due concern about displacing private service providers. The facilities’ willingness to experiment accounts for some but not all of these shortfalls. Main Findings • Helping individual entrepreneurs assess ideas for investment projects, prepare business plans, and raise financing reaches few companies, mobilizes only modest sums, is costly and, though it may possibly generate satisfactory economic returns, is unlikely to generate outstanding returns. • The provision of consulting services reaches few companies and is costly but can generate outstanding economic returns—well over 100% per year—essentially by increasing client SME profits without the need for their making major new investments. • A program that provides expatriate managers together with company-specific training in Africa generates poor economic returns because many of its clients do not really need its services, but accept them to benefit from tax exemptions and subsidies. • Training programs for business owners and their employees reach larger numbers and can yield outstanding economic returns—well over 100% per year, exceeding even the returns on the consultancy services. • Programs to build the capacity of local consultants, financial institutions, and business associations and to improve the business climate can indirectly reach larger numbers and are conceptually quite attractive, but the available information provided no basis for judgments on whether the benefits justified the costs. Recommendations • Improving the strategic focus of the facilities’ efforts with respect to approaches, programs, and clients’ subsidies; • Taking advantage of the opportunities arising from the facilities’ recent integration into IFC’s regional investment departments, while expanding the SME Department’s role in encouraging cross-facility collaboration and good-practice standards, and ensuring that the donors’ concerns are adequately reflected in the facilities’ policies and strategies; • Continuing IFC’s efforts to encourage collaboration between the facilities’ and the rest of the WBG by accessing training, coordinating on investment climate advice, and co- locating in field offices; and • Bringing the facilities handling of environmental, health/safety and social issues into line with IFC’s policies. Gregory K. Ingram Director-General, Operations Evaluation ABBREVIATIONS & ACRONYMS AMSCO African Management Services Company APDF African Project Development Facility ATMS UNDP’s African Training and Management Services Project, a channel for donor funding for the AMSCO program BAS EBRD’s Business Advisory Service BEE Business Enabling Environment, i.e. business climate BTC MPDF’s Bank Training Center CCBAS Caribbean and Central American Business Advisory Service (formerly Caribbean Project Development Facility) CBF IFC’s Capacity Building Facility CPDF China Project Development Facility EBRD European Bank for Reconstruction & Development EHS Environmental, health, safety, and social FY Financial year FYR Former Yugoslav Republic [of Macedonia] IBRD International Bank for Reconstruction and Development IDA International Development Association IDB Inter-American Development Bank IFC International Finance Corporation ILO International Labor Organization MPDF Mekong Private Sector Development Facility formerly Mekong Project Development Facility NAED North Africa Enterprise Development NGOs Non-governmental organizations OEG Operations Evaluation Group OEU Operations Evaluation Unit, (the predecessor to OEG) PEDF Pacific Enterprise Development Facility (formerly South Pacific Project Facility) PEP Private Enterprise Partnership PENSA Program for Eastern Indonesia SME Assistance SEDF South Asia Enterprise Development Facility SEED Southeast Europe Enterprise Development SME Small- and medium-scale enterprise TA Technical assistance TAAS Technical Assistance and Advisory Services TAM EBRD’s TurnAround Management Program UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development WB World Bank WBG World Bank Group TABLE OF CONTENTS ABBREVIATIONS & ACRONYMS PREFACE EXECUTIVE SUMMARY........................................................................................................................... i I. THE FACILITIES, THEIR RATIONALE & THEIR STRATEGIES....................................... 1 IFC devotes substantial resources to SMEs, and the facilities account for a major share......................... 1 Market failures can provide a rationale for devoting resources to SME development .............................. 4 The facilities have lacked adequate strategic focus.................................................................................... 6 II. FIRM-LEVEL SERVICES ............................................................................................................. 9 The facilities devote substantial resources, but reach relatively few firms ................................................ 9 Market failures justify donor-funded services to some facility clients but not others................................. 10 Financial advisory services have resulted in few additional projects and mobilized only modest sums ............................................................................................................................................................ 11 But firm-level services have had a significant impact and may provide satisfactory returns.................... 12 III. TRAINING OF BUSINESS OWNERS AND THEIR EMPLOYEES ........................................ 18 The traditional facilities spend less on training services, but reach more firms ........................................ 18 Market failures justify donor-subsidized training services to some companies but not others .................. 18 The training services had a significant impact and may provide excellent returns ................................... 20 IV. CAPACITY BUILDING FOR BUSINESS SERVICE PROVIDERS......................................... 23 The facilities spend less on capacity building, but reach far more companies......................................... 23 Developing local business service providers addresses a significant market failure................................. 24 Improvements for business service providers - cannot compare costs and benefits................................... 25 Program sustainability depends on donor support, but organizations assisted to continue ...................... 26 V. IMPROVING THE BUSINESS CLIMATE .................................................................................. 28 Facilities spend little on improving business climates, but can reach many companies ............................ 28 No basis for judgments on whether benefits of business climate efforts justify costs ................................ 29 VI. OTHER APPROACHES FOR PROMOTING SME DEVELOPMENT ................................... 31 Other approaches worth considering but limited information limits conclusions...................................... 31 VII. STRUCTURE AND COLLABORATION..................................................................................... 36 Facilities’ now report to regional departments, but need for cross-facility collaboration remains........... 36 The facilities also face important structural issues internally .................................................................... 38 VIII. ENVIRONMENTAL, HEALTH, SAFETY AND SOCIAL ISSUES .......................................... 41 Facilities’ handling of EHS issues has been unsatisfactory and many clients’ EHS performance poor ............................................................................................................................................................ 41 IX. RECOMMENDATIONS ................................................................................................................. 43 TABLES: Table 2.1: Estimated Impact of Firm-level Services .......................................................................13 Table 2.2: Demonstration Effect of Firm-level Services.................................................................14 Table 2.3: Incremental Pre-tax Profits for Most Recent Complete Year ........................................15 Table 2.4: Cost Recovery for Firm-level Services ..........................................................................17 Table 3.1: Estimated Impact of Training Services on Sales & Employment ..................................21 Table 3.2: Demonstration Effect of Training Services....................................................................21 Table 3.3: Cost Recovery for Training Services .............................................................................22 Boxes: Box 1.1: Mandates for Four Facilities Evaluated ...........................................................................3 Box 2.1 : A Company That Would Not Have Survived ...............................................................12 Box 2.2 : Backward Linkages........................................................................................................14 Box 2.3 : Basis for Estimated Returns ...........................................................................................16 Box 3.1 : MPDF’s Management Training Program.......................................................................20 Box 4.1 : PEP’s Business Centers in Ukraine...............................................................................27 Box 5.1 : PEP’s Efforts to Develop Leasing Market .....................................................................29 Figures: Figure 1: Amounts Budgeted for 03 ................................................................................................2 Figure 2: Allocation of Spending by Traditional Facilities .............................................................4 Annexes: Annex 1.1 : Program Logic Model Annex 1.2 : IFC-Supported SME Facilities & Similar Programs Annex 1.3 : Services Provided by IFC SME Facilities Annex 1.5 : Summary of Research Findings Related to Arguments on the Benefits of SMEs Annex 2.1 : Firm-level Services Annex 2.2 : Size of Companies Receiving Firm-level Services Annex 2.3 : Ownership at Time of First Contact of Firm-level Clients Responding to Survey Annex 2.4 : Results of Efforts to Raise Financing Annex 2.5 : Impact of Firm-level Services Annex 2.6 : Benefits and Cost of Firm-level Services Annex 3.1 : Training Services Annex 3.2 : Size of Companies Receiving Training Services Only Annex 3.3 : Ownership at Time of First Contact of Training Client Enterprises Responding to Survey Annex 3.4 : Impact of Facility Training Services Annex 3.5 : Benefits and Costs of Training Programs Annex 5.1 : Impact of Efforts to Improve Business Climate Annex 8.1 : EHS Performance of Projects Assisted Annex 9.1 : Management Response Annex 10.1 : Chairman’s Summary: Committee on Development Effectiveness (CODE) PREFACE 1. This report summarizes the findings of evaluations of four small- and medium-scale enterprise (SME) facilities sponsored and managed by IFC to support the development of small businesses. It examines five broad issues. First, it considers relevance, i.e., whether the facilities’ efforts are justified by their likely impact on development. Second, it considers efficacy and impact, i.e., the extent to which the facilities are contributing to the development of sustainable SMEs and business service providers and to improvements in the business climate. Third, it considers efficiency, i.e., the facilities’ own efficiency in providing services and the extent to which the benefits generated justify the overall costs and the subsidies provided. Fourth, it considers the sustainability of the services provided by the facilities and by the business service providers the facilities support. Fifth, it considers some structural and administrative issues, including collaboration among the facilities and with other parts of the World Bank Group; management information systems and reporting; and learning from experience. 2. The study is based primarily on OEG-directed evaluations of four facilities still supported by IFC that are sufficiently mature for evaluation—African Project Development Facility (APDF), African Management Services Company (AMSCO), Mekong Private Sector Development Facility (MPDF) and Southeast Europe Enterprise Development (SEED)—but draws also on evaluations and material regarding other programs that pursue similar objectives.1 The study also draws on an OEG- commissioned literature review that investigates the rationales used to justify subsidies to support SME development and the empirical evidence supporting those rationales. (See Annex 1.5 for a summary of the literature review findings and attendant source references.) The study places the findings of the four evaluations in a broader context, draws general conclusions, and makes recommendations. OEG’s predecessor unit (OEU) had issued a study on the facilities in 1995. 3. Independent consultants, working with consultant Walter Cohn (former head of OEG’s predecessor and study Task Manager), prepared the four evaluations under the direction of OEG’s Linda Morra- Imas, Head, Special Studies. The facilities, whose funding agreements require them to provide their donors with periodic independent evaluations, and the WBG’s Small and Medium Enterprises Department, which until January 2004 had direct responsibility for the facilities, covered the bulk of the costs of the underlying evaluations. OEG, however, retained full control, and neither the facilities nor WBG staff were in a position to circumscribe the consultants’ independence or control the work done or conclusions reached. 4. The operating periods covered (and the report dates) differed for the four facilities: January 1999- June 2002 (November 2003) for APDF, 1997-2001 (June 2002) for MPDF, September 2000-September 2002 (October 2003) for SEED, and 1995-2001 (January 2003) for AMSCO. This report does not cover developments since completion of these reports, including actions taken in line with their recommendations. As a result of supplementary analyses, comparisons among facilities, and review of additional material, this report’s findings and conclusions differ from the individual reports on some issues. 1 AMSCO differs significantly from the other facilities. APDF, MPDF, and SEED all provide financial advisory services and consulting services and non-company-specific training, and all seek to develop the capabilities of business service providers and improve the business climate. In contrast, AMSCO provides temporary expatriate managers and company-specific training. APDF, MPDF, and SEED were designed to serve SMEs. AMSCO was not initially, but in response to evolving donor priorities, it redefined its mission and, in late 1997, articulated the objective that two-thirds of its future portfolio would consist of SMEs. OEG has not evaluated IFC’s Private Enterprise Partnership or other technical assistance activities supporting SME development, but the report refers briefly to some of these other activities. 5. The evaluations were based on program documents; facility records; interviews with facility and other WBG staff, government officials, representatives of quasi-governmental organizations, business associations, training institutions, banks, and other business service providers; and facility client surveys and interviews. The individual evaluation reports, which outline the methodologies used, are available on OEG’s website (www.ifc.org/oeg).2 2 Nexus Associates, Inc., “Evaluation of the Mekong Project Development Facility: Final Report,” June 2002; DFC Ltd., “Evaluation of the African Management Services Company,” Jan. 2003; Nexus Associates, Inc., “Evaluation of Southeast Europe Enterprise Development,” Oct. 2003; Nexus Associates, Inc., “Evaluation of African Project Development Facility,” Nov. 2003. __________________________________________________________________________________________ SME Facility Study Operations Evaluation Group EXECUTIVE SUMMARY IFC devotes 1. Since 1999, the development of small- and medium-scale enterprises substantial (SMEs) has been one of the core objectives in IFC’s corporate strategy. IFC resources to its relies heavily on SME facilities to provide technical assistance (TA) designed SME facilities to serve this objective. The $0.4 billion that IFC and other donors committed to the facilities through mid-2003 accounted for nearly half of IFC’s cumulative donor-supported TA spending and 80% of its TA spending for SMEs. The facilities’ 2. Initially, based on its concern with its limited investment volume in services have certain regions, IFC set up facilities aimed mainly at providing locally based evolved based on advisory services to help entrepreneurs develop project ideas into bankable the needs investment proposals and raise financing; this traditionally primary activity is identified by the referred to hereinafter as “financial advisory services.” IFC also developed at facilities … an early stage a program to provide a combination of temporary expatriate managers and company-specific training in Africa. Subsequently, as the facilities became aware of broader needs in the countries where they were operating, they began to arrange for consulting services and for training … and new programs open to multiple companies. More recently, reflecting new thinking thinking in the in the development community, the facilities have undertaken to develop the development capabilities of local financial institutions, consultants, training institutions and community business associations to serve the needs of SMEs and have sought to improve the business climate for SMEs. The range of services offered and the relative importance of these services have varied from facility to facility and over time. Among other things, as the facilities have expanded their range of services and recognized the limitations of their initial approach, they have cut back the importance of their financial advisory services. This study is 3. This study is based primarily on OEG-directed evaluations of four based on facilities that were sufficiently mature for evaluation—African Project evaluations of Development Facility (APDF), African Management Services Company four mature (AMSCO), Mekong Private Sector Development Facility (MPDF) and facilities Southeast Europe Enterprise Development (SEED)—but draws also on information available regarding other programs that pursue similar objectives. The study does not cover changes made since completion of the reports on the four facilities (June 2002 for MPDF, January 2003 for AMSCO, October 2003 for SEED, and November 2003 for APDF) and, thus, reflects the situation when these evaluations were completed. The four facilities accounted for 61% of the $43 million combined FY03 budgets of all the facilities. The facilities can 4. Devoting resources to fostering SME development can help overcome help overcome market failures that interfere with an efficient allocation of resources and, market failures hence, hinder economic development. Market failures arise, e.g., when that hinder business owners have only imperfect information, businesses cannot capture development the external benefits that arise from expenditures on training, or individual firms have inadequate incentives or capacity to spend money on encouraging improvements in the business climate. The facilities have 5. Although the facilities have been concerned with strategic issues, their lacked adequate choices of approaches, programs, and clients suggest an inadequate strategic strategic focus focus. The facilities have adopted a range of approaches without clearly articulating what market failures they sought to address, estimating the expected benefits and costs to help guide priority-setting, or identifying their own capabilities (e.g. access to the WBG’s extensive experience in financial market development) and disadvantages (e.g., their high cost structure). For some approaches (e.g. training and capacity building), the facilities undertook a wide range of programs without giving adequate attention to strategic priorities and the most economic use of their resources. And, in some cases, the facilities accepted clients and granted subsidies without adequate concern about displacing private service providers. The facilities’ willingness to experiment accounts for some but not all of their shortfalls in strategic focus. Programs that 6. The facilities devote a substantial though declining portion of their provide firm-level resources to serving individual companies, helping them to raise financing for services without investment projects, providing them with consultancy services, seconding requiring managers, and providing company-specific training. The firm-level services substantial provided by the four facilities evaluated for this study reach some 200 investments reach companies per year, a tiny percentage of the enterprises that may need relatively few assistance. Their financial advisory services have mobilized only modest companies but sums. And firm-level services are costly. can provide outstanding 7. These services, however, have contributed to incremental sales estimated returns at $125 million per year and incremental employment for an estimated 7,400 workers. Comparisons of economic benefits and costs suggest: • The facilities’ financial advisory services may possibly generate satisfactory economic returns, but are unlikely to generate outstanding returns; • The AMSCO program, which provides expatriate managers together with company-specific training in Africa, generates poor economic returns because many of its clients do not really need its services but rather accept them to benefit from tax exemptions and subsidies; • The facilities’ consultancy services can generate outstanding economic returns—well above 100% per year. 8. The high payoff from consulting services is not surprising. X- efficiency—the effectiveness with which a given set of inputs is used to produce outputs—is typically low in developing economies. Programs that successfully address the sources of these inefficiencies and increase profits without the need for major new investments can provide excellent returns. Training 9. The facilities’ training programs for business owners and their employees programs reach absorb a small to modest share of the facilities’ resources, but reach more companies substantially more SMEs—over 1,000 per year. Although the training and can generate programs generate lesser results per company, the total impacts are substantial even higher because of reaching more companies. Leaving aside AMSCO (already returns covered by the previous paragraph), survey data indicate that the facilities’ training programs have contributed to incremental sales estimated at $140 million per year, compared with $80 million for the firm-level services, and __________________________________________________________________________________________ ii SME Facility Study Operations Evaluation Group incremental employment for an estimated 3,400 workers, compared with 5,500 for the firm-level services. And, because the training programs generate benefits presumably without calling for additional investments, the estimated returns are outstanding—well over 100% per year, exceeding even the returns on the consultancy services. Programs for 10. A new paradigm aims at the development of markets in which self- capacity building sustaining consultants, business associations, financial institutions, and other and improving the service providers can reach and have an impact on more enterprises than can business climate be reached directly by donor-funded programs. The concept is quite can reach even appealing, and the facilities have devoted a small to modest—but increasing— more companies share of their resources to this approach. Their programs for building the … capacity of local service providers have strengthened many providers and through them have probably reached more than 2,000 SMEs per year. 11. Programs to improve the business climate for SMEs can potentially help even more companies. The facilities have devoted a small share of their … but the resources to these programs. Their efforts have contributed to some changes available in leasing regulations and, thus, to improved availability of leasing finance. information does Moreover, they may have had some influence on attitudes and, thus, may have not permit cost- indirectly contributed to broader improvements in the business climate. No benefit information, however, is available on the number of SMEs benefiting from comparisons these efforts or the magnitude of the benefits. 12. Assessing the impact of the capacity building and business climate programs is difficult. The underlying ideas are attractive and have significant support in the development community, but the available information provides no basis for judgments on whether the benefits from these programs justify the costs. The facilities 13. The facilities charge fees for some of their services, but the fees cover remain dependent only a small portion of their costs. Although the facilities should be able to on donor increase some fees, pushing them towards high cost recovery can undermine contributions the justification for their existence, since pressure for financial sustainability typically leads to facilities devoting their efforts to activities or clients that do not need subsidized assistance. As recognized at the outset for most of the facilities, continuing subsidies are needed for the facilities to carry out their mandates. The facilities have developed substantial knowledge about what is needed to foster SME development and how to carry out SME development efforts and, thus, provide a platform that can be used for a range of donor- supported SME programs. The restructuring 14. New reporting arrangements for the SME facilities, effective January of the facilities’ 2004, seek to make IFC’s regional investment departments recognize the reporting lines facilities’ potential for making IFC more effective and proactive in support of opens new the private sector—particularly in frontier countries, where SMEs typically opportunities…. account for the largest share of private sector activity—and to have the facilities contribute to the development and execution of an IFC-wide strategy. The new arrangements call for the facilities to report to the regional investment department, but retain a dotted-line relationship with the SME Department, ___________________________________________________________________________________________ SME Facility Study iii Operations Evaluation Group …but calls for a which promotes cross-facility knowledge sharing and common management continuing role information, internal control, monitoring, evaluation, and reporting systems. for the SME The evaluations, carried out during 2002-03, identified several shortfalls and Department and suggested that IFC and the SME Department could be more effective in continuing dealing with these issues. Moreover, the SME Department could help the respect for donor facilities draw on WBG experience, e.g. on IFC’s financial market expertise interests for use in the facilities’ capacity building and business climate efforts. And, regardless of the value that IFC sees in integration of the facilities with its core operations, IFC needs to ensure that the facilities respect the views, interests, and concerns of the donors. The facilities also 15. Each facility operates in multiple countries and uses multiple approaches, face important and each, thus, has to grapple with the issue of organizing along regional or structural issues product lines. Similarly, each has to balance the costs and benefits of establishing and maintaining regional offices. And each has to decide on the location of its offices. Interestingly, where collaboration was good between the facility and the Bank, their offices were in the same location; where collaboration was poor, their offices were not in the same location. The facilities’ 16. IFC and the other donors expected the facilities to bring to bear handling of EHS environmental, health, safety, and social (EHS) standards on their firm-level issues has fallen clients. Although some of the facilities had hired EHS advisors and called for short of improvements in EHS performance, all fell short in some respects in following expectations their mandates, at least partly because they considered the standards to be unrealistic. Less than half of the facility SME clients visited were meeting acceptable standards. Recommendations 17. OEG’s recommendations are set out in chapter IX of the report and summarized here. They have four objectives. Improve strategic 18. First, to improve the strategic focus of the facilities’ efforts with respect and client to approaches, programs, and client subsidies, the facilities should consider:3 targeting focus • Identifying the market failures they seek to address in the region or countries served and specifying why they have selected the specific approaches and programs proposed to address these issues, rather than others; • Continuing to reduce the share of their resource devoted to financial advisory services; • Expanding their consultancy services and their training services; • Continuing the AMSCO program for a limited period to see whether it can achieve financial sustainability without straying from its development mandate; • Focusing their capacity building programs on the specific sources of market failures and on financial institutions that serve SMEs; • Focusing their SME business climate programs on the most critical issues; 3 IFC’s current strategic initiative on donor funded operations also calls for improved strategic management of IFC’s TAAS activities. __________________________________________________________________________________________ iv SME Facility Study Operations Evaluation Group • Issuing explicit guidelines on subsidies to improve the efficiency of their targeting, conform to IFC’s non-displacement principle, ensure transparency and fairness, and make clients aware of what they would have to pay for unsubsidized services. Integrate facility 19. Second, IFC and the facilities should take advantage of the opportunities activities with IFC that may arise from the facilities’ January 2004 integration into IFC’s regional regional investment departments. At the same time, IFC should maintain and expand departments’ the SME Department’s role in encouraging cross-facility collaboration, strategic knowledge sharing, and good-practice standards, and should ensure that the priorities, but donors’ concerns are adequately reflected in the facilities’ policies and maintain central strategies. functional • IFC should encourage the regional investment departments to treat the management facilities as an integral instrument in their work and encouraging the facilities to contribute to the development of an IFC-wide strategy in support of the local private sector; • The SME Department and the Financial Controller’s Department should continue their efforts to improve the facilities’ systems and processes for project selection, planning, monitoring, and evaluation, and for management information, internal control, and reporting; and • The facilities should take adequately into consideration the views, concerns and interests of their donors. Integrate with 20. Third, IFC should continue its efforts to encourage collaboration between WBG skills, policy the facilities and the rest of the WBG by: guidance, and • Calling on the facilities to access WBG expertise for strengthening their local presence capacity building programs for financial institutions, their efforts to develop capital markets, and their methodologies for evaluating their training activities; • Requiring the facilities to consult with IFC and the Bank before undertaking business climate activities; before expressing, directly or indirectly, views on legislative or regulatory issues; and regarding the rules of engagement for supporting business associations;4 and • Locating facility offices at the same site as the Bank and IFC offices (subject to taking into account the facilities’ own needs and constraints). 4 Since the facilities cannot control the views expressed by business associations they support, IFC should in each case have an opportunity to consider whether it is willing to bear the reputational risk of a facility-supported association’s calling for government actions that would run counter to WBG views on appropriate economic policies. ___________________________________________________________________________________________ SME Facility Study v Operations Evaluation Group Bring to bear 21. Fourth, the facilities should bring their handling of EHS issues in line IFC’s with IFC’s policies and should increase their ability to influence client environmental behavior on these issues by: and social • Issuing policy statements and operating guidelines, approved by IFC and sustainability the other donors, calling for compliance with IFC’s EHS safeguard standards policies; 5 and • Taking steps to improve the efficacy of their efforts on EHS issues in their firm-level activities. 5 IFC’s type 1 requirements, which should apply to the facilities (other than AMSCO), would call, among other things, for these facilities to require that clients comply with host country EHS laws and regulations. IFC’s type 2 requirements, which should apply to AMSCO, would call for its clients to meet IFC’s own EHS requirements, rather than just the host country requirements. __________________________________________________________________________________________ vi SME Facility Study Operations Evaluation Group I. THE FACILITIES, THEIR RATIONALE, & THEIR STRATEGIES IFC devotes substantial resources to SMEs, and the facilities account for a major share SME 1. IFC assists SMEs by providing financing through intermediaries and by providing development is technical assistance (TA). In 1999, IFC made SME development one of the four core one of IFC’s objectives of its corporate strategy.1 In view of the importance of SMEs in developing core objectives countries, the WBG created a joint SME Department in 2000 to coordinate and spearhead their efforts.2 The SME Department defines small enterprises as enterprises with 10 to 50 employees, total assets of $100,000 to $3 million, and total annual sales of $100,000 to $3 million; it defines medium enterprises as enterprises with 50 to 300 employees, total assets of $3 million to $15 million and total annual sales of $3 million to $15 million.3 2. Many others share the WBG’s interest in SMEs. Other multilateral institutions— including all the multilateral development banks, UNDP (United Nations Development Programme), UNIDO (United Nations Industrial Development Organization), ILO (International Labor Organization), and the EU (European Union)--bilateral programs (including aid programs and development finance institutions), national governments (in developed as well as developing countries), and non-governmental organizations have programs to encourage SME development. These programs use a wide range of approaches (Chapter VI). Many of these donor agencies also fund IFC-managed TA programs. The facilities 3. IFC’s primary approach for using TA to foster SME development has been to account for create and support donor-funded SME facilities (until recently known as project 80% of IFC’s development facilities). Initially driven by its concern with its limited investment total donor- volume in certain regions, IFC set up facilities to help entrepreneurs develop project supported TA ideas into bankable investment proposals and raise financing (financial advisory spending for services). IFC also developed at an early stage a program to provide a combination of SMEs temporary expatriate managers and company-specific training in Africa. Subsequently, as they recognized broader needs, the facilities began to arrange for consulting services and for training programs serving multiple companies. More recently, reflecting new thinking in the development community, the facilities have undertaken to develop the capabilities of local financial institutions, consultants, training institutions, and business associations to serve the needs of SMEs and have sought to improve the business climate. The range of services offered and the relative importance of these services have varied from facility to facility and over time. Among other things, as the facilities have expanded their range of services and recognized the limitations of their initial approach, they have cut back on the relative importance of their financial advisory services.4 Annex 1.1 provides a program logic model showing what the facilities do and the expected results. 4. IFC, together with donors, has established 12 SME facilities, mostly serving frontier markets, where incomes are low and risks are high. The facilities serve not only manufacturing companies, but also agricultural, mining, and service enterprises. Annex 1.2 summarizes the mandates and other basic information on the facilities, and Annex 1.3 summarizes the services each provides. In addition to the facilities, IFC _______________________________________________________________________________________________ SME Facility Study Operations Evaluation Group uses its Private Enterprise Partnership to foster SME development in the former Soviet countries and assists SME development through a range of other TA activities.5 5. Between 1981, when IFC created the first facility, and mid-2003, IFC and other donors committed $0.4 billion to the facilities. On a cumulative basis, the facilities have accounted for around 80% of IFC’s TA spending for SMEs and nearly half of its total donor-supported TA spending.6 6. IFC has significantly expanded its support of SME facilities in recent years. It established six facilities during the 19 years through 1999 but then opened six new ones in the four years following the establishment of the WBG’s SME Department in March 2000. 7. This report focuses primarily on the services provided by four IFC-supported This study facilities that were evaluated for this study—African Project Development Facility examines (APDF), Mekong Private Sector Development Facility (MPDF), Southeast Europe IFC’s Enterprises Development (SEED), and African Management Services Company experience (AMSCO).7 These four facilities were the only ones still active (aside from Pacific with four Enterprises Development Facility, a very small facility that had been subject to several facilities— recent evaluations) that had been operating sufficiently long to permit meaningful APFD, evaluations.8 The four facilities accounted for 61% of the $43 million combined FY03 MPDF, SEED budgets of all SME facilities. See Figure 1 and Annex 1.2.9 and AMSCO Figure 1 - Amounts Budgeted for FY03 (% ) CPDF SEDF NAED 6% 14% 7% PEDF PENSA 4% 8% AMSCO APDF 22% 16% SEED MPDF 13% 10% 8. For the most recent years covered by the evaluations, donor funding covered 82% of APDF’s total expenditures, about 95% of MPDF’s and SEED’s, and 77% of AMSCO’s. 9. AMSCO differs significantly from the other facilities. APDF, MPDF, and SEED all provide financial advisory services and consulting services and non-company- specific training, and all seek to develop the capabilities of business service providers and improve the business climate. In contrast, AMSCO provides temporary expatriate managers and company-specific training. This report distinguishes APDF, MPDF, SEED, and similar facilities from AMSCO by referring to them as the traditional facilities.10 The report refers to the traditional facilities’ financial advisory services and consulting services and AMSCO’s provision of temporary expatriate managers and company-specific training as firm-level services.11 Box 1.1 (page 3) cites the mandates for the four facilities, and Figure 2 shows the allocation of the traditional facilities’ spending for the years covered. (Annex 1.2 outlines the instruments used.) Both reflect the declining importance of firm-level services and the increased emphasis on _______________________________________________________________________________________________ 2 SME Facility Study Operations Evaluation Group training, capacity building, and business climate activities in the newer facilities.12 Box 1.1 – Mandates for Four Facilities Evaluated APDF “…to accelerate the development of productive enterprises sponsored by private African entrepreneurs, as a means of generating self sustained economic growth and productive employment…” Africa Project Development Facility, Nov., 1985. “…to work with entrepreneurs in an advisory capacity throughout the project preparation cycle until funding is secured and thereafter if post-financing support is needed to strengthen the project, and to help ensure the proper implementation of the project.” Proposed extension of the Africa Project Development Facility, Mar., 2000. AMSCO “…to provide qualified, experienced professional management and management services to selected indigenous African private companies and/or new joint ventures and commercially operated public enterprises, particularly those targeted for privatization…to leave behind locally managed businesses that are competitive, self-sufficient and integrated into the international business community.” Regional project document, African Training and Management Services Project, Apr. 1989. “The successful development and training of professional management teams at each client company…” UNDP, project document, African Training and Management Services, Phase II, Jan. 1999. MPDF “…to promote the establishment and expansion of commercially viable SMEs…by both working with individual SMEs, and by collaborating with and supporting domestic and donor agencies involved with this sector, with a view to strengthening local capacity to support the local private sector.” Proposed IFC participation in and contribution to the Mekong Project Development Facility, Apr. 1996. “…will shift from providing assistance to a select number of private enterprises and institutions, to generally developing the demand and supply of essential business support services…will focus on the following…(i) continue direct advisory assistance to private enterprises, but with a view to developing the capacity of and market for local providers of business development services…and gradually phasing out direct service delivery, except where clearly justified by ‘public good’ or external benefits; (ii) further expand the capacity building of essential local support institutions…and (iii) continue and expand its work in the area of private sector research and business enabling environment work…” Proposed IFC participation in and contribution to the extension of the Mekong Project Development Facility, Oct., 2002. SEED “…to help support the development of the private sector…which is predominantly comprised of small and medium sized enterprises…[SEED] would have several core…programs…(a) support for private sector companies to structure and implement investment projects and support for financial agencies to monitor and supervise private sector loans and investments; (b) inputs to address continuing constraints in the business enabling environment; (c) training and education programs aimed at upgrading the management and professional skills of personnel in companies, financial agencies and domestic consulting organizations; and (d) inputs to generate, collect analyze and disseminate information and knowledge relevant to the private sector.” Proposed IFC participation in and contribution to the Balkans Enterprise Facility, Dec., 1999. “SEED will support the development of Small and Medium Enterprises…as well as individuals and institutions that serve the needs of SMEs and will enhance the broader enabling environment in which all of these stakeholders operate. SEED will implement its mandate through tailored, enterprise- and organization-specific technical assistance, capacity building programs, training courses and research/policy interventions.” SEED, start-up report, Fall 2000. _______________________________________________________________________________________________ SME Facility Study 3 Operations Evaluation Group Figure 2 - Allocation of Spending by Traditional Facilities (% ) APDF MPDF Training Firm-level Firm-level 17% services services 94% Other 55% Capacity 6% building BEE 12% 16% SEED Training Firm-level services 22% 27% Capacity BEE 14% building 37% 10. The report examines five broad issues. First, it considers relevance, i.e., whether the facilities’ efforts are justified by their likely impact on development. Second, it considers efficacy and impact, i.e., the extent to which the facilities are contributing to the development of sustainable SMEs and business service providers and to improvements in the business climate. Third, it considers efficiency, i.e., the facilities’ own efficiency in providing services and the extent to which the benefits generated justify the overall costs and the subsidies provided. Fourth, it considers the sustainability of the services provided by the facilities and by the business service providers the facilities support. Fifth, it considers some structural and administrative issues, including collaboration among the facilities and with other parts of the WBG, management information systems and reporting, and learning from experience. Market failures can provide a rationale for devoting targeted, subsidized resources to SME development TAAS can 11. While programs assisting SMEs are widely supported and endorsed, the issue of help overcome whether subsidized assistance to SMEs is justified has generated a research literature. market The research centers on three lines of reasoning. The first is that among all private failures that firms, SMEs make particularly or uniquely important contributions to private sector hinder development and poverty reduction. The second is that assisting the private sector in development developing countries means assisting and subsidizing SMEs. The third is that subsidizing SMEs is justified because of market failures. The literature review commissioned for this study (See Annex 1.5.) indicates that sometimes the findings differ for SMEs in developed countries versus those in developing countries. But for SMEs in developing countries as well as developed countries, the research supports the last argument for providing subsidies to SMEs. The research findings are briefly summarized below. 12. Under conventional wisdom, subsidies to SME programs are justified because small businesses make particularly important contributions to poverty reduction, job _______________________________________________________________________________________________ 4 SME Facility Study Operations Evaluation Group creation, entrepreneurship development, innovation, export development, competition, dynamism and flexibility in the economy, and social and political objectives. The research literature indicates SMEs in developing countries clearly do contribute to many of these ends, but their ability to do so appears to be no greater than that of larger firms. Therefore the evidence does not support this line of reasoning as a basis for subsidized or targeted assistance to SMEs in developing countries. 13. The second line of reasoning is that the emerging private sector in many poor countries consists essentially of SMEs and, therefore, that assisting the private sector calls for assisting SMEs. It is true that in many developing countries, the private sector consists largely of SMEs. Still, this does not suggest that SMEs are more desirable in development impact reach and/or quality than larger enterprises and, hence, does not call for giving special preference to SMEs or directing subsidies specifically to SMEs. 14. The third line of reasoning does justify specific targeting of SMEs in developing as well as developed countries in some situations. The research evidence suggests that devoting resources specifically to fostering SME development may indeed be warranted where there are market or institutional failures.13,14 Markets may fail to allocate resources efficiently because, among other things, decision-makers may have only imperfect information, firms cannot capture the external benefits that may arise from some types of expenditures, or individual firms have inadequate incentives or capacity to spend money on public goods.15 As discussed in the following paragraphs, efforts to address such market failures can help remove barriers to the development of SMEs and, hence, allow them the opportunity to contribute to growth and poverty reduction. Donor 15. Efficient markets depend, among other things, on firms’ making informed assistance decisions. Firms, however, cannot make informed decisions on securing assistance may be from consultants, training institutions, or other service providers if they lack the justified information and experience needed to identify their needs, locate potential sources of because assistance, assess their capabilities, and evaluate the costs and potential benefits. Even imperfect in the best circumstances, judging the value of these services before purchasing them is information difficult. Large companies and companies in well developed markets may be able to hinders use of make judgments based on their own experience or the reputation of particular service business providers. In developing countries, however, enterprises—particularly SMEs, which services often lack prior experience with service providers—find it particularly difficult to cope with these challenges. Without donor-funded encouragement (e.g. by making available information on service providers, providing services backed by the reputation of an institution such as the WBG, or lowering costs through subsidies), they may not seek assistance to develop project ideas into bankable investment proposals, raise financing, or improve their on-going business operations. Donor 16. Individual firms cannot count on retaining the benefits that result, e.g. from assistance training expenditures. Even when the social benefits of training workers exceed the may be social costs, companies may not invest in training their employees (among other justified reasons) because of fearing that employees trained with portable skills would leave to because of join other companies. (In addition, workers may not invest their own time and money externalities in training because they lack the resources, job security, or the necessary longer term perspective.) In these circumstances, the training carried out may be less than desirable based on the social costs and benefits. This observation applies particularly to SMEs, which are less able to absorb the costs of training employees who _______________________________________________________________________________________________ SME Facility Study 5 Operations Evaluation Group subsequently leave and to developing countries, where employees are less able to invest in training.16 Donor 17. The benefits of an improved business climate generally accrue to many firms. assistance Individual firms can seldom expect sufficient benefits to justify their devoting may be resources to encourage improvements. Large enterprises, however, can more readily justified to bear the costs of trying to influence the business climate or, alternatively, taking steps promote to protect their interests despite the continuing problems. Moreover, SMEs suffer to a public goods greater extent from many business climate problems, e.g., with respect to legislation and regulations (biases in legislation or regulations, lesser access to information on changes under consideration), deficiencies in the legal system (unpredictability, corruption, crime), constraints on the availability of financing (collateral requirements, availability of information on credit records, the need for special connections, corruption, unavailability of leasing and export finance, paperwork, and bureaucracy), and anti-competitive practices.17 The facilities have lacked adequate strategic focus The facilities’ 18. In launching the facilities and in subsequent strategic planning efforts, IFC has choices of examined needs and constraints and has been concerned with strategic issues, but it has approaches, not clearly articulated what market failures the facilities should address, explained why programs, and the facilities selected the specific approaches and programs proposed (rather than clients suggest others), identified the facilities’ potential capabilities and disadvantages, and estimated an inadequate the expected economic benefits and costs of the approaches and programs considered, strategic focus as a guide in priority setting.18,19 IFC’s focus on the preparation of business plans and helping entrepreneurs raise financing in the earlier facilities reflected its own project finance orientation, rather than an effort to identify and deal with the crucial factors contributing to market failures. There are many ways to address market failures. For example, the facilities might, as they do now, try to improve the supply of business services through capacity building programs and to increase the demand by helping SMEs assess their needs, preparing terms of reference, identifying and supervising consultants, and covering the bulk of the costs. But, in some circumstances, the facilities might also consider, say, encouraging demand through publicity on how consultants can help SMEs, making information available on the experience and range of services offered by individual consulting firms, or offering subsidies for consultants without playing the active role required by their current approach. Moreover, by virtue of their relationship with the WBG, the facilities have certain advantages, e.g. access to the Bank Group’s extensive experience in financial market development and in credit assessment and the possibility of linking TA with investments in financial institutions. But they also have certain disadvantages, e.g. a high cost structure, which makes it expensive to provide services to individual enterprises. The facilities’ willingness to experiment accounts for some, but not all of their shortfalls in strategic focus. Because of not grounding their strategies on the underlying rationale, their own capabilities and limitations, and some estimate of the expected relative returns, the facilities have not had an adequate basis for deciding what approaches they should use, what programs they should undertake, what clients they should serve, and what clients they should subsidize.20 19. The approaches the facilities have used may not generate the maximum benefits from the resources applied. The facilities cannot do everything, and they cannot do _______________________________________________________________________________________________ 6 SME Facility Study Operations Evaluation Group everything equally well. Nevertheless, they have undertaken a range of approaches. Over the years, they have added new approaches, based on suggestions by IFC, donors or others, but have seldom dropped any. For example, at the behest of some donors, AMSCO has undertaken a program aimed at improving corporate governance in certain countries despite this activity’s not fitting its core strategy. The facilities may have taken on too much and may be using some approaches that are less effective and efficient than others they might use.21 20. The specific programs carried out in the context of these approaches may not generate the maximum benefits from the resources applied. APDF’s training efforts, for example, may pursue a worthwhile objective, but in selecting specific training programs, APDF lacked an adequate strategic focus. In the first 21 months it provided training, it offered 51 different courses in 17 different countries, including courses in financial management and governance for high schools in Ghana, effective business writing, and food handling. Similarly, SEED’s capacity building program had a desirable objective. But in selecting where to direct its efforts, it has, among other things, undertaken to assist a bee keepers’ association and a mushroom growers’ association. The activities cited may be useful, but they nonetheless raise questions about SEED’s strategic focus. 21. Similarly, the facilities have had an inadequate strategic focus in accepting some clients for their firm-level services and allocating subsidies for these services. The facilities provide subsidies to some clients that do not really need them and, thus, do not have sufficient resources for subsidies to potential clients that would need them. Targeting subsidies is always difficult, but the facilities have not developed adequate strategies to focus their efforts on specific sets of clients where subsidies are truly needed. Without adequate selectivity and strategic focus, the facilities’ efforts are likely to stray from their underlying rationale and are likely on occasion to conflict with IFC’s displacement principle (crowding out private sector providers).22 Outline of 22. The next four chapters—covering services provided directly to enterprises, report training of business owners and their employees, capacity building for service providers, and efforts to improve the business climate—examine whether provision of the specific services offered by the facilities is in fact justified, what the facilities have actually done, the impact, the costs, the relationship between the costs and benefits, and sustainability. The report then devotes a chapter to alternative approaches for encouraging SME development, a chapter to structural issues and collaboration, and a chapter to environmental, health, safety and social issues. Based largely on the evaluations of the four facilities, the final chapter makes some suggestions for IFC and the facilities in connection with their efforts to assist SMEs. 23. As in any evaluation, budgetary, and time constraints and constraints on the Caveats availability of information have limited the scope of work and, hence, have limited the study’s ability to arrive at any conclusions on some issues and universally agreed conclusions on others. The budgetary constraints were particularly important in view of the number of facilities to be covered, the large number of approaches and programs used by the facilities, the large number of clients, and the wide geographic dispersion of the clients. Moreover, the evaluations reviewed some activities prematurely and consequently could not adequately identify impacts. And, even leaving aside shortfalls in the work done in each evaluation, this report does not cover developments since completion of the individual evaluations, including steps that IFC and the facilities _______________________________________________________________________________________________ SME Facility Study 7 Operations Evaluation Group have taken in line with the suggestions in the individual reports. _______________________________________________________________________________________________ 8 SME Facility Study Operations Evaluation Group II. FIRM-LEVEL SERVICES The facilities devote substantial resources, but reach relatively few firms Firm-level 24. The traditional facilities provide two types of core firm-level services. First, they services provide financial advisory services to help entrepreneurs assess ideas for investment provided by projects, prepare business plans for presentation to potential investors and lenders, and facilities raise financing. The facilities typically retain outside consultants for executing this work, but facility staff remain responsible for the overall product. Second, the facilities provide consulting services. Although facility staff sometimes provide direct assistance, the typical approach is for them to serve in a project management capacity, linking clients to qualified service providers. The facility staff helps define the company’s needs, formulates an appropriate course of action, marshals resources, and oversees the provision of services. 25. AMSCO, which differs significantly from the others, provides a package of two types of services. First, it hires experienced expatriate managers (typically already identified by the client) and assigns them to companies in Africa. Second, it designs and subsidizes company-specific training programs for these companies.23 Annex 2.1 describes in greater detail the firm-level services provided by APDF, MPDF, SEED, and AMSCO. The facilities 26. For the periods covered, firm-level services accounted for substantially all of devote a AMSCO’s spending, 94% of APDF’s, 55% of MPDF’s, and 27% of SEED’s. The newer substantial facilities, however, are spending relatively less on firm-level services than the older ones, portion of and each of the traditional facilities reviewed has been reducing the share of these resources to services in its overall spending. APDF cut firm-level services from 97% of FY00 firm-level spending to 89% of FY03 spending. MPDF cut firm-level spending from 70% for 1997 services to 50% for 2001. And SEED cut firm-level spending from 38% in FY01 to 20% in the first half of FY03. For APDF, the only facility able to disaggregate the sums spent on firm-level services, spending on financial advisory services fell from 77% of the total for FY00 to 62% for FY03 while spending on consultancy services increased from 21% to 27%. These 27. For the periods covered, APDF averaged 115 new firm-level assignments per year, services MPDF 34, SEED 42, and AMSCO 30, or a total of 221 per year. The facilities serve only reached a tiny percentage of the enterprises that may need assistance in the countries covered by relatively few their mandates (nearly 50 for APDF and AMSCO, three for MPDF and four for SEED). companies The high costs of these services and the limited availability of donor funding limit the number of companies the facilities can reach. Indeed, neither IFC nor the donors had expected that these services would reach a significant percentage of the enterprises that might need assistance. _______________________________________________________________________________________________ SME Facility Study 9 Operations Evaluation Group Market failures justify donor-funded services to some facility clients, but not others Some clients 28. Some clients would have purchased similar services without the facilities. Indeed, would have 19% to32% of the traditional facilities’ clients responding to the surveys had previously purchased used outside consulting services. similar services 29. Not surprisingly, companies with substantial foreign shareholdings (25% or more) without the were more likely to have used outside consulting services. Between 30% and 59% of facilities, these firms had done so previously, compared with only 15% to28% for the firms without others not significant foreign shareholdings.24 30. Not all facility clients, however, would have hired private consultants on their own. A substantial portion considered that this option was not available. More than 30% of APDF’s financial advisory service clients and more than 40% of its consulting clients indicated that no other companies or organizations could have provided similar services. Close to 50% of SEED’s clients expressed similar views. And 77% of MPDF’s clients said that no other options were available. 31. Even where services are available, however, some SMEs may not draw on them because they cannot identify their needs, do not know that there may be consultants who could address their needs, or cannot assess the capabilities of particular firms. These problems definitely exist, but the evaluations did not provide a clear indication of their prevalence. Facility clients, who had already secured services through the facilities, attributed little importance to these problems. In contrast, consulting firms, that found it difficult to attract SMEs as clients considered these problems to be important.25 32. Some other companies may not have hired private consultants even in the absence of market failures because of being unwilling or unable to pay the fees. For a very small business, the potential benefits from using consulting services may be less than the cost, and use of donor subsidies to provide services to such companies would not be justified. The facilities’ ability to direct their assistance to clients who truly need assistance and can benefit adequately from it depends on the adequacy of their targeting. The vast 33. Median annual sales when the facilities accepted companies as clients ranged from majority of $0.3 million (APDF’s Enterprise Support Services, i.e. its consultancy program) to $2.7 the facilities’ million (AMSCO), in all cases well below the $15 million ceiling set by the WBG clients were guidelines, and median employment ranged from 43 (SEED) to 118 (MPDF), well below SMEs… the limit of 300 set by the guidelines. (See Annex 2.2.) …but the 34. Nevertheless, some clients far exceeded the WBG guidelines.26 For example, 15% large size of of MPDF’s clients had more than 300 employees, including 3% with 1,000-5,000. some raises Similarly, 25% of AMSCO’s clients had 300 or more employees, including 7% with more questions than 1,000 employees. Some clients, moreover, were affiliated with large business about the groups. Ten AMSCO clients were affiliated with groups that had more than 5,000 justification employees and three with groups that had more than 20,000 employees. AMSCO, in for subsidies contrast, to the traditional SMEs was not initially designed to serve SMEs. In response to evolving donor priorities, however, it redefined its mission and, in late 1997, articulated the objective that two-thirds of its future portfolio would consist of SMEs. Nevertheless, the large size of some facility clients raises questions about the justification for providing subsidized services, i.e. about whether these companies would have engaged private _______________________________________________________________________________________________ 10 SME Facility Study Operations Evaluation Group service providers or hired expatriate managers without donor-funded subsidies. Most clients 35. Local investors owned the majority of the equity in most client companies, but were locally foreign investors held significant, even majority, stakes in some. Local private investors owned and owned all the equity in 70-85% of the APDF, MPDF, and SEED clients surveyed. managed but Foreign investors held equity stakes in 10-20% and majority stakes in 5-10%. In contrast, high foreign local private investors owned all the equity in only 36% of AMSCO’s clients. Foreign ownership in investors had some stake in over half its clients, a majority in 37%, and all the equity in others raises 18% (Annex 2.3). Since companies with substantial foreign ownership are less likely to questions be hindered by market failure, e.g., because of being unable to identify their needs, about unaware that there may be consultants who could address their needs, or unable to assess justification the capabilities of particular firms, the justification for subsidized services is weak.27 for subsides 36. Almost all the chief executives of MPDF’s and SEED’s clients are local residents. The proportion falls to roughly 85% for APDF and 63% for AMSCO (where the study asked whether the chief executive was an African national, rather than a permanent resident). The lower percentages for the African facilities reflect a shortage of business managers and, in the case of AMSCO, the larger scale of its clients, the foreign control of many and, most importantly, AMSCO’s secondment of managers to these companies.28 Financial advisory services have resulted in few additional projects and mobilized only modest sums 37. Although APDF, MPDF, and SEED together reported that they had arranged The number financing for an average of 65 projects annually, the results on the ground were of projects significantly lower.29 Even if a financial institution has indicated that it may be willing to and finance a project, the proposal may be dropped before funds are actually disbursed. For investments the clients surveyed, only 62% of the projects reported as financed actually obtained realized have financing, or an average of 40 per year for the three institutions.30 (See Annex 2.4.) fallen far short of the 38. Moreover, the sponsors of 64% of the projects that actually obtained financing numbers claimed that they could have raised the financing and carried out their projects without the reported facilities. If these claims are correct, only 13 projects per year can be attributed to the facilities. The projects attributable to the facilities would then be equivalent to between 15% (APDF) and 32% (MPDF) of the projects reported as financed.31 39. The three facilities reported having arranged more than $30 million per year of financing but, after adjusting for plans that did not materialize, the facilities raised only $19 million per year.32 These funds helped to finance investments of about $37 million per year. If only 12 of the 65 projects reported as financed can truly be attributable to the facilities, the facilities’ record would be even weaker. Collateral 40. Several factors contributed to the facilities’ disappointing record in mobilizing requirements financing, but one stands out—collateral. The APDF, MPDF, and SEED evaluations all contributed attributed clients’ unsuccessful efforts to raise financing to their inability to meet lenders’ to the collateral requirements. The facilities could do little to raise financing for companies that shortfalls could not meet these requirements.33 None of the facilities, however, addressed one of the key underlying issues—improving the legal infrastructure for creating and enforcing security—in its business climate programs. _______________________________________________________________________________________________ SME Facility Study 11 Operations Evaluation Group But firm-level services have had a significant impact and may provide satisfactory returns Financial 41. The bulk of the companies visited reported that they had made at least one change in advisory and their business as a result of the facilities’ services, that these changes had resulted in consultancy improvements in their business, and that the facility assistance had increased their ability services had to compete. A small but notable portion (12% to 21% for the two African facilities and a significant 5% to 6% for the two others) expressed the view that, without assistance from the facility, impact their company could not have survived (Box 2.1). And most clients responding indicated that sales and profits were higher Box 2.1 – A Company That Would Not Have Survived than they would have been without An AMSCO-seconded manager helped convert a fruit farm that was losing money into a profitable flower producer. The company, the facility. which now has a turnover of nearly $5 million per year and employs Indeed, leaving around 800 workers, believes that it would not have survived aside SEED, which without AMSCO. had very few clients that had sufficient time to increase their sales and profits after receiving services, 50 to 60% of the companies surveyed considered that their sales, profits or both were greater than they would have been without the facilities’ assistance. Annex 2.5 provides the relevant survey findings for each facility, the number of companies in the population, the number surveyed, and the number responding for each of these questions. 42. Efforts to quantify the impacts yielded some significant results.34 First, when asked to compare actual sales, profits and employment for the most recently completed year with what they would have been without assistance from the facilities (the counterfactual approach), the clients willing to make estimates provided figures indicating increases in sales in excess of $60 million, increases in after-tax profits (AMSCO clients only) of $9.5 million, and increases in employment of nearly 3,000. See Table 2.1. _______________________________________________________________________________________________ 12 SME Facility Study Operations Evaluation Group Table 2.1 – Estimated Impact of Firm-Level Services APDF MPDF SEED AMSCO Incremental sales ($ millions) Total 24.7 9.8 3.3 24.4 Mean 0.9 0.2 0.14 0.5 Median 0.03 0 0 0.1 Standard deviation 2.3 0.4 0.5 1.1 n 26 30 23 51 n/No. of firms surveyed 23% 29% 70% 48% n/No. of firms in pop. 11% 10% 33% 20% Incremental profits ($’000) Total n.a. n.a. n.a. 9,455 Mean n.a. n.a. n.a. 295 Median n.a. n.a. n.a. 51 Standard deviation n.a. n.a. n.a. 35 n n.a. n.a. n.a. 32 n/No. of firms surveyed n.a. n.a. n.a. 30% n/No. of firms in pop. n.a. n.a. n.a. 13% Incremental employment Total 1042 1040 89 788 Mean 22 20 3 16 Median 5 0 0 2 Standard deviation 49 43 10 3 n 48 51 29 49 n/No. of firms surveyed 42% 50% 88% 46% n/No. of firms in pop. 21% 16% 41% 19% N.B. Population from which samples drawn based on completed projects for APDF, assignments initiated for MPDF and SEED, and clients served by AMSCO. AMSCO impacts reflect combination of providing managers and training. 43. Assuming that the companies not covered by the survey are similar to the surveyed companies, incremental sales would be estimated roughly at $125 million, incremental after-tax profits (AMSCO only) at $32 million, and incremental employment at 7,400. 44. Second, regression analysis, comparing the actual performance of companies for years after they had begun receiving services with the performance of similar client companies that had not yet begun receiving services, found statistically significant impacts for MPDF and AMSCO but not APDF.35 In the case of MPDF, the study found that each thousand dollars spent on consulting services boosted annual sales on average by 10%, or a total of $23.5 million for the 37 companies providing data.36 In the case of AMSCO, the study found, among other things, that the provision of expatriate managers and training boosted sales on average by about 40%, or a total of $260 million for the 80 companies providing data.37 As would be 45. As would be expected of any program providing assistance to private firms, the expected, benefits were highly concentrated.38 Ten to 15 percent of the companies responding to benefits the counterfactual questions accounted for 80 to 96% of the incremental sales for the highly firm-level clients of the three traditional facilities, and 25% of the companies responding concentrated accounted for 79% of the incremental sales of AMSCO’s clients. At least half the companies responding reported no, or virtually no, incremental sales due to AMSCO. 46. This observation, however, does not mean that the programs simply helped successful companies become more successful. Ten of the 23 AMSCO clients that _______________________________________________________________________________________________ SME Facility Study 13 Operations Evaluation Group reported incremental profits said that they would have lost money or broken even without AMSCO. These 10 companies accounted for 59% of the incremental profits attributed to AMSCO, and six of the 10 companies reported that AMSCO’s assistance had allowed them to reduce their losses or break even but not yet to generate profits. Important 47. The facilities’ firm-level services Box 2.2 – Backward Linkages indirect have also made other contributions to impacts development. They have generated An embroidery company in Vietnam relies on backward linkages, as reflected in the a network of rural women who do embroidery client companies’ purchasing 37% to at home when not needed for farm work, 66% of their raw materials, supplies using materials provided by a company and services locally and as reflected assisted by MPDF. The consultancy services by the example in Box 2.2. They provided by MPDF enabled the company to have contributed to the development broaden its product line and enter a new export market. As a result, the company of local business service markets. increased the number of women working as And, as shown in Table 2.2, they have independent contractors from 4,000 to 5,000. exercised a demonstration effect on other firms. Table 2.2 – Demonstration Effect of Firm-Level Services (% responding “Yes”) Do you know other companies that have APDF AMSCO MPDF SEED followed your lead with respect to: • Making changes in business strategies 48% 30% 64% 35% or operations? • Making or planning new investments 49% n.a. 60% 28% in the country? • Providing or arranging training for 37% n.a. 52% 21% managers, employees, or workers? • Seeking assistance from outside 49% n.a. n.a. 17% providers of consulting and training services? Firm-level 48. Over the periods reviewed, the facilities spent about $90,000 to $140,000 per services are investment project reported as financed. Unit costs have fallen for all the facilities, but costly they still came to roughly $50,000 to 100,000 per project for the most recent years reviewed.39 As indicated in paras. 37-38, however, some projects reported as completed end up not raising the expected financing, and some do not go ahead. Thus, for the periods reviewed, the average facility costs per project that actually raised financing was $140,000 to $250,000, and the average facility costs per implemented project was $120,000 to $320,000.40 These costs were equivalent to 25% to 100% of the financing actually raised by the facilities and 20% to 25% of the amounts invested in projects that actually went ahead. The high percentages reflect the small average size of the projects assisted—smaller indeed than in OEU’s 1995 study. Clearly, the costs of the facilities’ financial advisory services are high in relation to the funds mobilized and investments realized. 49. Consultancy assignments, on the average, cost about half the amounts spent on financial advisory assignments for APDF and 66% for SEED, and the cost of APDF’s consultancy assignments has fallen in recent years. This decline may reflect APDF’s adoption of a diagnostic tool developed by FUNDES International to focus its efforts in _______________________________________________________________________________________________ 14 SME Facility Study Operations Evaluation Group providing consultancy services to individual companies. 50. The costs of the AMSCO program (including seconded managers, administrative costs, and management and training subsidies) averaged $174,000 per active client. AMSCO’s administrative costs alone cost $25,000 per active client, or 14% of the total costs. But some may 51. The facilities’ financial advisory services may possibly generate satisfactory generate economic returns, but are unlikely to generate outstanding returns; the AMSCO program good returns generates poor economic returns, essentially because many of its clients do not really need its services, but accept them to benefit from tax exemptions and subsidies; yet consultancy services can generate outstanding economic returns. Table 2.3 suggests rough estimates of the non-time-adjusted returns from the firm-level services. Due to the short gestation periods, returns of 16% to 18% or higher would be likely to yield satisfactory economic rates of return (assuming benefits continue for 10 years). (See Box 2.3.) Table 2.3 – Incremental Pre-Tax Profits for Most Recent Completed Year as Percentage of Incremental Costsa (& Number of Companies Retained for Estimates) APDF MPDF b SEED AMSCO Financial advisory services 22% (6) 14% (3) 16% (4) n.a. Consultancy services 179% (4) Negl. (13) 4% (6) n.a. Provision of expatriate managers & Case Ac Case Bd company-specific training • Based on counterfactual incremental n.a. n.a. n.a. 12% (8) 2% (2) sales • Based on counterfactual incremental n.a. n.a. n.a. 68% (8) 5% (2) profits a These figures do not represent internal rates of return. Also, the table excludes the returns based on the regression analysis, since companies in the categories cited in the second bullet para. of Box 2.3 could not be excluded in this analysis. b For MPDF, financial advisory service clients that did not carry out investment projects are included with consultancy services, rather than financial advisory services. c Excluding companies unlikely to be financially viable after departure of the AMSCO-seconded managers, companies that may not have needed facility assistance (companies owned 25% or more by private foreign investors and companies that already employed one or more of the AMSCO-seconded managers before seeking assistance from AMSCO). d Same as Case A, but also excluding companies that had already identified one or more of the managers before seeking assistance from AMSCO. _______________________________________________________________________________________________ SME Facility Study 15 Operations Evaluation Group Box 2.3 – Basis for Estimated Returns The estimated returns suggested by Table 2.3 are based on data from a small number of companies that responded to the survey questions. The standard deviations are high, the distributions skewed, and the mean values not statistically significant. The resulting estimates should be considered only as rough approximations. • The estimates start with incremental annual sales and, in the case of AMSCO, incremental profits attributable to the facilities’ assistance. As indicated in Table 2.1, the response rates ranged from 23% to 70%. • OEG then adjusted these estimates to eliminate (a) companies that may not have needed facility assistance (companies saying that they would have gone ahead with their investment projects even without the facility, companies owned 25% or more by private foreign investors, companies that already employed one or more of the AMSCO- seconded managers before seeking assistance from AMSCO and, in a second iteration, companies that had already identified one or more of the AMSCO-seconded managers before seeking assistance from AMSCO), (b) companies that received services too recently to be able to estimate incremental sales or profits, (c) financial advisory service clients that did not provide information both on incremental sales and on incremental investments, and (d) in the case of AMSCO, companies the evaluation team considered unlikely to be financially viable once the AMSCO managers leave. Dropping these companies from the analysis reduced aggregate incremental sales by 6% for SEED, 33% for APDF, 53% for MPDF, and 78% to 96% for AMSCO and reduced the number of firms providing usable data for individual facilities to between 2 and 17. • After dropping these companies, OEG extrapolated the incremental sales (and, in the case of AMSCO, profits) to the companies not covered by the surveys, based on the ratio of the number of firms surveyed to the number of firms in the population. • OEG then estimated the incremental profits, based on the assumption that incremental pre-tax profits would be equivalent to 10% of incremental sales for investment projects and 20% of incremental sales for other clients. These percentages (derived from the responses on incremental sales and incremental profits provided by AMSCO clients and by clients of another, non-IFC, TA program) are undoubtedly higher than average profits/sales but are probably conservative for incremental profits/sales. • Next, OEG estimated the costs (based on current cost levels) for the services provided to companies sufficiently mature to report benefits, the costs incurred by the clients included in the analysis and, in the case of AMSCO, the income taxes on expatriate salaries foregone by the host governments. These estimates do not include any incremental investments that may have been made by clients that did not carry out projects based on the facilities’ services, but they do include facility costs for companies dropped from the analysis for the reasons given in (a), (c) and (d) of the second bullet in this box. • Finally, OEG calculated the non-time-adjusted returns. These estimates did not take into consideration the linkages, externalities and other economic benefits that typically increase the economic returns above the financial returns. Annex 2.6 provides further details. 52. The potentially excellent returns for the consultancy services are not surprising. X- efficiency—the effectiveness with which a given set of inputs is used to produce outputs—is typically low in developing and transition economies. Consultancy services can increase efficiency and profits significantly without requiring substantial investments and consequently can generate extremely high returns. _______________________________________________________________________________________________ 16 SME Facility Study Operations Evaluation Group Clients cover 53. Although IFC and the donors have generally not expected the facilities to be self small share sustaining, they have encouraged them to recover a greater proportion of their costs and of costs made it necessary for three facilities to seek full self sufficiency. Donor support for the Caribbean and Central American Business Advisory Service (CCBAS) dwindled by the mid-1990s, and CCBAS had to try (unsuccessfully) to generate enough fees to allow it to survive. Although the AMSCO program benefits from donor funding of certain activities, AMSCO itself is intended to be financially self sustaining. And a business plan prepared for SEED called for the facility to have a five-year life, implying the need for fees to cover the full cost of any firm-level services to be provided (either within or outside the SEED framework) after the five-year period.41 54. The facilities have increased their fees, but fee income remains lower than envisaged and cost recovery remains low (Table 2.4). Table 2.4 – Cost Recovery for Firm-level Services APDF MPDF SEED AMSCO Fees minus total costs ($ millions) -5.5 -2.0 -0.5 -3.9, or -8.1 Fees as % of total costs 18% 5% 14% 77%, or 54% N.B. Based on data for most recent year covered by evaluation of each facility. 55. APDF, the oldest of the traditional facilities, received fees equivalent to 18% of its FY03 costs, up from 6% in 1994, but still needed $5.5 million to cover its deficit on firm- level services. SEED, established in 2000, recovered 14% of its January-June 2002 costs. But MPDF, established in 1997, recovered only 5% of its 2001 costs.42 SEED’s donors had set as a goal that SEED “price its services at commercially viable rates according to local market conditions….with the ultimate goal of 100% cost recovery…against local costs.”43 In fact, the SEED evaluation reported that SEED had charged fees ranging from zero to more than 100% of its direct costs for its firm-level services. Even for companies that, without SEED, would have had more than 100 employees in 2002, fees ranged from 10% to 71% of its direct costs.44 56. Judging from APDF’s experience, consultancy assignments permit a higher level of cost recovery than financial advisory assignments. APDF’s fees covered 28% of the full cost of its consultancy assignments (88% of direct costs), compared with 14% (45% of direct costs) for financial advisory assignments. Still, even for consultancy assignments, APDF remains far from recovering its costs. 57. The AMSCO program covered 77% of its overall 2001 costs from client fees. Its clients’ willingness to pay, however, reflected the subsidies and tax exemptions they received as AMSCO clients. Absent these benefits, fees would have had to be lower, and AMSCO would probably have recovered only 54% of its costs. 45 Firm-level 58. The facilities may be able to improve their cost recovery, but not sufficiently to services cover full costs. Indeed, a facility that, due to donor pressure, must try to cover full costs depend on is likely to stray from its underlying objectives. Faced with waning donor support, donor CCBAS pursued larger clients in an attempt to increase its fee income. Similarly, to subsidies permit its survival, AMSCO increased its revenues by serving clients that had little or no need of its subsidized services.46 Aside from these two cases, this problem does not seem to have materialized for the IFC-supported facilities, presumably because IFC and the donors have recognized the danger and have been willing to provide continuing support. _______________________________________________________________________________________________ SME Facility Study 17 Operations Evaluation Group III. TRAINING OF BUSINESS OWNERS AND THEIR EMPLOYEES Training 59. Aside from the training they provide to their own staff, the facilities have provided by developed a range of training programs for business owners and their employees. facilities MPDF has focused its efforts on a management training program, covering marketing, human resources, production and operation management, and finance and accounting. MPDF provides the material it develops to local training institutions that deliver the training and has converted some of its material into self-study workbooks. 60. APDF and SEED also address general management issues, but their training programs lack focus. They have devoted substantial efforts to specialized courses. SEED has offered courses, for example, on winning bids on construction contracts. APDF has offered even more specialized courses, for example, on financial management, governance and control for private schools in Ghana, and on food handling.47 APDF and SEED develop and deliver some courses themselves and engage outsiders for others. Annex 3.1 summarizes the training services provided. The traditional facilities spend less on training services but reach more firms The facilities 61. For the periods covered by the individual evaluations, training accounted for 17% devote modest of MDPF’s spending, 22% of SEED’s, and some portion of the 6% of APDF’s resources spending not allocated to firm-level services. But they 62. APDF, MPDF, and SEED have provided training services to an average of more reach far than 1,200 companies per year, compared with roughly 200 per year for their firm- more level services. companies 63. In addition, the publishers of MPDF’s self-study workbooks sold about 39,000 than firm- copies, with sales of individual titles ranging up to 2,700 in Vietnam and 1,250 in level services Cambodia. Estimates suggest that students purchased 50% to 70% of the workbooks and company owners and employees 30% to 50%. 64. AMSCO, which provides a combination of managers and staff training to all its clients, served 168 companies during 1997-2001 and provided training to an average of 18 employees per company, or more than 3,000 employees. Market failures justify donor-subsidized training services to some companies but not others Some 65. The facilities have based their training efforts on the recognition that companies competitiveness depends heavily on management capabilities and the belief that would have training needs were not being adequately met. In fact, 60% to 70% of the companies arranged for responding in the APDF, AMSCO, and SEED surveys and 46% in the MPDF survey training considered that no other local organizations could have designed training plans similar without to what the facilities offered. facilities, others not 66. Many, however, considered that others could have provided similar services. These companies selected the facilities because they believed they would provide higher quality training (52% to 71%), arrange training more rapidly (39% to 67%), or provide training at a lower cost (30% to 71%). To the extent that the facilities used their own staff to serve companies that could have acquired training services without _______________________________________________________________________________________________ 18 SME Facility Study Operations Evaluation Group assistance, they competed with local training institutions or consulting firms. The facilities, however, mostly limited themselves to identifying training needs, selecting and supervising consultants to develop course materials, selecting and training trainers and subsidizing the programs. As a result, they competed with local institutions and consulting firms that develop and deliver training courses to only a limited extent and, on the contrary, probably stimulated demand for the services of these local organizations.48 67. Some companies would not have used training services, even where they were available. Some may not have known what types of training were needed and what types were available, some may have lacked confidence in their ability to assess the quality of training programs, and some may have felt they could not afford unsubsidized training courses because of the risk that trained employees might seek new jobs. By providing confidence in the quality of the training and subsidies to lower the costs, the facilities increased the amount of training delivered. To the extent that trained employees actually moved to new companies, the facility-assisted training programs resulted in benefits external to the companies sending the employees for training. Most trainees 68. The vast majority of the companies whose employees participated in facility were from training programs were SMEs when the facilities first provided training to their SMEs employees. Indeed, median annual sales ranged from $0.2 million (SEED) to $2.0 million (MPDF), well below the $15 million ceiling set by the guidelines, and median employment ranged from 15 to 100, well below the limit of 300 set by the guidelines. (See Annex 3.2.) Large size of 69. Nevertheless, some companies far exceeded the ceilings. For example, 29% of some raises the companies sending employees to MDPF training programs had more than 300 questions employees at the outset, including 12% with 1,000-4,000 employees, and 14% had about sales in excess of $15 million, including 9% with sales more than $50 million. justification MPDF’s training programs served large firms more than its firm-level services, but this for subsidized pattern did not apply to APDF and SEED. services 70. The large size of some companies participating in the facilities’ training programs leads to questions about the market failure justification for providing subsidized services. Large companies are more likely to recognize the need for training, be capable of arranging training on their own, and be able to bear the risk of trained employees leaving. Most 71. Based on the survey results, local private investors owned all the equity in 50% to employers of 75% of the companies benefiting from APDF, MPDF, and SEED training, and almost trainees were all the chief executives were local residents. Foreign investors held equity stakes in locally owned, 3% to 15% of these companies and majority stakes in 3% to 8%, a bit lower than for but others firm-level service clients. Governments held minor stakes in APDF’s and SEED’s were largely training clients but had some stake in 41% of the companies benefiting from MPDF foreign training and owned 100% of 34% of these companies, well above the levels for owned… MPDF’s firm-level clients.49 (See Annex 3.3.) _______________________________________________________________________________________________ SME Facility Study 19 Operations Evaluation Group …raising 72. Questions can be raised about the appropriateness of the facilities providing questions subsidized services to companies controlled by foreign investors, since these about enterprises are less likely to be hindered by market failure. Nevertheless, providing justification training to employees of foreign-controlled companies or employees of large for subsidies companies is less of a concern than for the firm-level services. First, to the extent the facilities provide training through independent training institutions, as is entirely the case for MPDF and partly the case for the others, they have little control on the intake into the courses. Second, regardless of the size of the companies, the benefits go to a substantial extent to the individual employees, who may demand higher salaries or else leave to join other companies. The training services had a significant impact and may provide excellent returns 50 Training 73. Between 82% and 98% of the companies responding reported that they had made services have at least one change in their business as a result of the training received, 73% to 83% had that these changes had resulted in improvements in their business, and 55% to 79% significant that the training had increased their ability to compete. About 2% to 12% (compared impact with 5% to 23% for the firm-level services) expressed the view that without assistance from the facility, their company could not have survived. As in the case of the firm- level services, African companies expressed this view more commonly than others (10% to 12%, compared with 2% to 5% for the others). Annex 3.4 provides the relevant survey findings for each facility, the number of companies in the population, the number surveyed, and the number responding for each of these questions. 74. Many companies indicated that sales and profits were higher than they would have been without the facilities. About 80% of the companies sending managers and employees to MPDF training programs responded positively to the questions on whether sales and profits were higher, compared with about 50% for MPDF’s firm- level services. For APDF, about half responded positively, roughly the same as for its firm-level services. Box 3.1 comments on MPDF’s highly successful management training program. Box 3.1 – MPDF’s Management Training Program MPDF, the first of the traditional facilities to provide training to business owners and their employees, introduced a participatory teaching method built around discussion of cases drawn from local business situations. It developed training materials in collaboration with local universities and international consultants, and used local institutions to deliver the training courses. Local institutions had not previously provided training for SMEs, but 16 had already offered MPDF-based management training courses by the time of the evaluation, and other institutions had developed their own business training courses, independently of MPDF. The success of MPDF’s management training program is reflected in its direct impact (paras.72-75), its high rate of return (para. 81), and its indirect impact (paras. 77-78). 75. When asked to compare actual sales and employment with what they would have been without facility assistance, the companies willing to make estimates provided figures suggesting total, mean, and median increases lower than for the firm-level services (Tables 2.1 and 3.1 and Annex 3.4.)51 _______________________________________________________________________________________________ 20 SME Facility Study Operations Evaluation Group 76. Assuming that the companies not covered by the survey are similar to the surveyed companies, APDF’s and MPDF’s training programs probably generated more than $140 million of incremental sales, compared with an estimated $80 million for their firm-level services and their training programs probably generated nearly 3,400 incremental jobs, compared with 5,500 jobs from their firm-level services.52 Table 3.1 – Estimated Impact of Training Services APDF MPDF Incremental sales ($’000) Total 748 6,757 Mean 68 375 Median 2 0 Standard deviation 139 1,584 n 11 18 n/Number of firms surveyed 38% 25% n/Number of firms in population 1% 2% Incremental employment Total 33 67 Mean 2.5 2.9 Median 0 0 Standard deviation 6.1 26.6 n 13 23 n/Number of firms surveyed 45% 35% n/Number of firms in population 1% 2% 77. As in the case of the firm-level services, the benefits were highly concentrated. A small percentage of the companies responding accounted for the bulk of the incremental sales. The degree of concentration was broadly the same as for the firm- level services. Important 78. By introducing new teaching methods and drawing existing institutions into indirect providing management training (Box 3.1), MPDF has had an impact well beyond the impacts training provided based on its training materials. In addition, as shown in Table 3.2, the facilities have exercised a demonstration effect on SMEs that have not participated. Not surprisingly, the training programs generally had less influence than the firm-level services on other companies’ strategies, operations, or investment plans. Table 3.2 – Demonstration Effect of Training Services (% responding “Yes”) Do you know other companies that have followed your APDF MPDF SEED lead with respect to: • Making changes in business strategies or operations? 36% 64% 27% • Making or planning new investments in the country? 25% 42% 22% • Providing or arranging training for managers, 29% 66% 24% employees or workers? • Seeking assistance from outside providers of 29% n.a. 47% consulting and training services? _______________________________________________________________________________________________ SME Facility Study 21 Operations Evaluation Group 79. Aside from these indirect impacts, not reflected in the improved operating results of the companies sending employees for training, the facilities’ training efforts have presumably benefited companies that subsequently hired facility-trained staff and the facility-trained staff themselves (including the facilities’ own staff members). Costs could be 80. The costs of the training programs might have been lower had the facilities taken lower greater advantage of materials already developed by other facilities and by IFC. APDF drew on some IFC training materials, and SEED drew on some MPDF materials. But the facilities did not use existing training materials as much as might have been possible. The facilities, thus, had to bear the higher costs arising from IFC’s being responsible for management without taking advantage of the opportunities for sharing knowledge and training materials. 81. Because of major differences in the facilities’ training programs, comparisons of average unit costs have limited significance. Noting, for example, that SEED’s costs averaged $52,000 per training session, $13,000 per company served, and $1,300 per training participant, compared with $12,000, $1,600, and $500 respectively for MPDF, does not necessarily mean that SEED is less efficient than MPDF. The differences may reflect SEED’s having started its training programs more recently and, thus, having to amortize the front-end costs over a small number of sessions, companies, and trainees; differences in the facilities’ approach to developing training materials and delivering training; the nature of the training provided; or other factors. But the 82. The facilities’ training services can generate excellent economic returns-even facilities’ higher than the returns on their consultancy services. The rate of return on APDF’s training training programs is likely to exceed 300% and the return on MPDF’s is likely to services can exceed 1,300%. As in the case of the firm-level services (Box 2.3), these estimates are generate based on data from a small number of companies that responded to the survey excellent questions, the standard deviations are high, the distributions skewed, and the mean returns values are not statistically significant. Consequently, the estimates should be considered only as rough approximations. (See Annex 3.5.) 83. Again, as in the case of the consultancy services, the high returns on training are not surprising. Effective training programs can greatly increase X-efficiency, yet the cost of providing training is typically lower than the cost of consulting services.53 Facilities 84. Although IFC and the donors have not expected the facilities to be entirely self recover only sustaining, they have encouraged them to recover a greater proportion of their costs. small share of The facilities have increased their charges but remain heavily dependent on donor training funding. Except for APDF, they depend to a greater extent on donor funding for their expenditures training activities than for their firm-level services. See Table 3.3. Table 3.3 – Cost Recovery for Training Services APDF MPDF SEED Fees minus total costs ($ millions) -1.4 -1.5 -2.5 Fees as % of total costs 21% 4% 4% 85. Although the facilities would be unlikely to offer training services without any donor funding, they may be able to increase the extent of their cost recovery. _______________________________________________________________________________________________ 22 SME Facility Study Operations Evaluation Group IV. CAPACITY BUILDING FOR BUSINESS SERVICE PROVIDERS The facilities spend less on capacity building, but reach far more companies Facilities seek 86. In addition to providing services direct to individual companies, their managers to develop and employees, the traditional facilities seek to build the capacity of local capabilities of organizations that serve SMEs. From the outset, the facilities have sought to develop consultants, the capabilities of local consultants by using them on assignments for client banks and companies.54 More recently, the facilities have developed programs aimed specifically business at providing training for consultants, financial institutions, and business associations.55 associations 87. APDF’s capacity building efforts involve the provision of training to consultants, financial institutions, and business associations.56 In addition, it seeks to enhance the capabilities of local consultants through its Associated Expert Program, which provides training and coaching, APDF accreditation, quality control, monitoring, and evaluation. 88. MPDF, despite having provided some assistance to two business associations, focuses its efforts on training of bank staff. After supplying training to banks through its own courses, MPDF established a Bank Training Center (BTC), owned by 10 local banks, that has taken over the training responsibilities. Although the pre-BTC training dealt mainly with loan analysis, more recent courses have focused on marketing and management issues, which may be of interest to the banks, but have no apparent relationship to the market failures that justify subsidized facility assistance. 89. SEED, which has given greater emphasis to capacity building than the other two facilities, focuses on consultants and business associations. It provides training to consulting firms to help them manage their operations and to prepare them to deliver standardized training programs. In addition, it is developing a Consultancy Network, a group of local consultants selected to work with SEED on its firm-level assignments. SEED provides training and some technical assistance to business associations. The facilities 90. The facilities’ capacity building programs absorbed 38% of SEED’s total spend limited spending for the period reviewed, 12% of MPDF’s and some portion of the 6% of amounts APDF’s spending not allocated to firm-level services. But reach far 91. These efforts have helped many business service providers and, through them, more have reached more SMEs than the facilities reached through their firm-level services. companies The facilities have provided capacity building services to 94 consulting firms (APDF than firm- and SEED),57 179 financial institutions (APDF and MPDF), and 39 business level services associations (APDF and SEED), or a total of 312 business service providers.58 92. The consulting firms responding to the surveys had used facility materials or techniques to serve about 700 SMEs, or an average per consulting firm of 52 for APDF and 10 for SEED. If the firms responding are typical, APDF and SEED may have served more than 2,000 SMEs through their assistance to 94 local consulting firms during the past couple of years—far more than the roughly 200 per year served by the traditional facilities’ firm-level activities. _______________________________________________________________________________________________ SME Facility Study 23 Operations Evaluation Group 93. Still, these numbers are modest.59 More than 80% of the SEED-assisted consultants consider that the unwillingness or inability of SMEs to pay for services limits the growth of their operations with SMEs. But other factors may also contribute. Indeed, an EBRD-managed program for consulting services in the same region has found no shortage of demand despite serving smaller enterprises than SEED and despite limiting its subsidies to the lower of €9,000 or 50% of cost.60 94. Interviews with a small sample of financial institutions participating in APDF training courses suggested that most participating banks had increased their lending to SMEs, but gave no indication that the APDF training had contributed to these increases. Interviews with a sample of financial institutions participating in MPDF training courses provided no information on increased lending to SMEs. 95. Visits to four of the six business associations now being assisted by SEED indicated that membership had increased by about 100 companies since beginning to work with SEED, bringing the total for the four associations to nearly 500. OEG has no information on the number of companies served by the business associations assisted by APDF, but several hundred have attended planning conferences for one association that APDF is helping promote. Developing local business service providers addresses a significant market failure SMEs lack 96. Developing economies typically lack the wide range of business services available access to in developed economies. SMEs can normally access accounting, information business technology, and some other services, but they find it more difficult to access, say, services consulting, financial, or marketing services. Active markets for these services have not emerged because of a lack of local service providers, shortfalls in their skills or experience, or the SMEs’ lack of knowledge and experience in identifying needs, locating assistance, assessing alternatives, and evaluating costs and potential benefits. A new 97. IFC and others have sought to address these problems by providing subsidized paradigm firm-level services. These efforts, however, have typically reached only a small calls for percentage of the companies needing assistance, have often yielded disappointing developing results (particularly in the case of government programs), have had to rely on business continuing donor subsidies and, to the extent they compete with existing or potential service private service providers, have discouraged the development of local suppliers of providers business services. 98. Because of these concerns, the development community has elaborated a new paradigm calling for business services to be provided by private firms, rather than governments or donors, and for users to pay for these services, rather than relying on subsidies. The new paradigm aims at developing markets in which self-sustaining business service providers can reach and have a positive impact on more enterprises than can be reached directly by donor-funded programs. Development agencies can contribute to the creation and expansion of markets in business services, among other things, by helping to improve the capabilities of local business service providers, issuing vouchers for the purchase of consulting services or improving the availability of information.61 _______________________________________________________________________________________________ 24 SME Facility Study Operations Evaluation Group Improvements for business service providers - cannot compare costs and benefits Facilities’ 99. The vast majority of the consulting firms participating in APDF’s and SEED’s efforts have capacity building efforts have been satisfied or very satisfied with the services that had impact on these facilities provided. Most reported that, as a result of the facilities’ efforts, they business had gained greater knowledge of the needs of SMEs, introduced new products service designed specifically for SMEs, and increased their capacity to provide quality services providers to SMEs. As already indicated, they have drawn on facility materials or techniques to serve many SMEs. More than 40% reported higher sales and 45% higher profits. The reported increases in sales, however, totaled less than $0.2 million or, extrapolating based on the ratio of the number of firms surveyed to the number of firms in the population, nearly $0.3 million. These amounts are negligible. 100. The four SEED-assisted business associations visited have been satisfied or very satisfied with the services provided. All reported that SEED’s contributions had helped in attracting new members,62 two reported that SEED had helped in defining their strategies, two had introduced newsletters to their members, one cited improved financial management, and one mentioned improved advocacy work. The SEED evaluation, however, took place when SEED had just completed the initial planning exercises with these associations, so little could be said about improvements in the services provided to members. 101. Despite some dissatisfaction with MPDF’s initial credit training program, 10 Vietnamese banks expressed their confidence in MPDF by investing in its BTC and sending staff for courses there. SMEs 102. SMEs presumably benefited from the facilities’ assistance to business service presumably providers, but the evaluations provide no information on the nature or extent of the benefited benefits.63 Available 103. Through December 2002, SEED had spent $2.6 million on its consultant information development program, equivalent to $41,000 per consulting firm served up to that does not time. The respondents to the survey of SEED-assisted consulting firms reported permit incremental annual sales totaling only €78,000 (€122,500 if extrapolated to all the comparisons SEED-assisted consulting firms), equivalent to only €2,800 per consulting firm, far too of costs and little to yield an adequate returns on SEED’s expenditures. To justify SEED’s benefits expenditures, the future increases in the consulting firms’ sales and profits would have to be much larger or else the benefits to the consulting firms’ clients (and possibly others) would have to be many times larger than the fees. One or both of these possibilities could certainly materialize—particularly because SEED’s consultant development program was still young—but the information available does not permit a judgment now. 104. The information on the facilities’ other capacity building programs is even more limited, so no judgments are possible. The new paradigm is conceptually attractive, but OEG cannot compare costs and benefits, as in the earlier chapters. _______________________________________________________________________________________________ SME Facility Study 25 Operations Evaluation Group Program sustainability depends on donor support, but organizations assisted to continue Fees from 105. The facilities recover a negligible share of their capacity building expenditures capacity and, thus, the sustainability of their efforts depends on continuing donor support. building are SEED has recovered only 3% of its capacity building costs from consultants and minimal nothing from the business associations it is assisting. (APDF and MPDF could not provide data.) Most 106. Most of the consulting firms and training institutions participating in APDF’s and organizations SEED’s capacity building programs are likely to be sustainable and to continue serving assisted are SMEs. Virtually all these organizations plan to continue offering consulting or likely to be training services to SMEs in the future, and more than 80% plan to use the content or sustainable techniques taught by the facilities in this work. More than 40% consider that the and to facilities’ activities have resulted in a permanent expansion of the supply of consulting continue and training services for SMEs, and about half consider that these activities have serving SMEs resulted in a permanent expansion of the demand by SMEs. 107. Still, as has happened elsewhere, some consulting firms may not survive, and 64 others may find that they need to move towards serving larger enterprises to survive. Two private firms set up to continue CCBAS’ work went out of business because they could not generate adequate fees despite seeking to serve larger enterprises. Similarly, two of the 11 business centers established by PEP in Ukraine have gone out of operation, and two others remain dependent on donor support (Box 4.1, on p. 27). The consulting firms that turned out not to be sustainable were all created by the facilities or PEP. In contrast, the consulting firms assisted by the facilities’ capacity building programs all existed before receiving facility support. 108. The banks participating in MPDF’s BTC are likely to continue in operation and to continue serving SMEs, and BTC is aiming at self-sufficiency for its own operations. For 2003, BTC’s second full year of operations, MPDF covered 73% of the total expenses. The participating banks should be able to pay enough to permit BTC to continue after MPDF stops providing support. _______________________________________________________________________________________________ 26 SME Facility Study Operations Evaluation Group Box 4.1 – PEP’s Business Centers in Ukraine PEP created a network of 11 privately owned consulting and training centers in Ukraine. Although this program has not been subject to independent evaluation, an evaluation report by two PEP staff members indicates that, through 2001, the centers had served 2,200 consulting clients and provided training to 10,000 persons— substantially more than the numbers served by the three traditional facilities reviewed for this study and more than the 700-2,000 SMEs assisted through the 179 consulting firms participating in the facilities’ capacity building programs. Nearly two-thirds of the clients surveyed considered their firms to be more competitive due to the centers’ assistance (in the same range as the 41% to 78% for the traditional facilities’ clients), but only 27% reported higher sales (lower than the 30% to 53% for the traditional facilities), and only 17% reported higher profits (well below the 36% to 53% for the traditional facilities). Although the 2001 PEP report considered the business centers to be sustainable, two of the 11 had gone out of operation by 2004. The six centers that responded to a questionnaire still serve SMEs, but two of the six recognized that they could not sustain their operations on a continuing basis without donor support. PEP’s approach to establishing the centers may have had some influence on these results. Initially, PEP did not envisage the centers becoming self-sustaining and provided free services to SMEs through the centers. In 1996, it began moving towards operating the centers on a commercial basis and, by 1999, sought to ensure from the outset that the centers would be self sustaining after the first few years. Of the four business centers established under the initial, subsidy-based model, one has gone out of business and two admit that their profits are insufficient to allow them to sustain their operations on a continuing basis without outside support. In contrast, all three of the centers established during the final phase, calling for development of self-sustaining consulting firms, are still operating and believe that they can maintain their operations on a continuing basis without donor support. One of the centers reported a number of changes in its practices in its search for viability—shifting its attention to larger enterprises, dropping unprofitable services, cutting costs, and establishing a flexible remuneration system. _______________________________________________________________________________________________ SME Facility Study 27 Operations Evaluation Group V. IMPROVING THE BUSINESS CLIMATE Facilities spend little on improving business climates but can reach many companies Facilities seek 109. APDF, MPDF, and SEED all make some efforts to improve the business climate to improve for SMEs and for the private sector more generally. APDF aims to strengthen business business associations that can serve as advocates for the interests of their members, though its climate. efforts have focused so far on just one association. MPDF has devoted its efforts mainly to discussion reports that seek to engender informed debate, typically based on information derived, at least in part, from surveys of private companies. SEED, which has the most extensive business climate program of the facilities reviewed, undertakes research to define the nature of the problems confronting businesses and outline potential reforms, makes efforts to convince policy makers to adopt needed reforms, assists governments in drafting legislation and regulations, and helps with implementation. It has focused its efforts on specific niches where it can draw on its own and IFC’s expertise, particularly with respect to financial intermediation, SME strategy, and legal and regulatory reform. In addition to these efforts aimed specifically at the business environment, SEED seeks to improve the business climate through its assistance to business associations and municipal economic development organizations.65 Facilities have 110. Efforts to improve the business climate accounted for 16% of MPDF’s spending, devoted small 14% of SEED’s, and some portion of the 6% of APDF’s spending not allocated to share of firm-level services. All the recently established facilities envisage business climate resources to programs, including two that anticipate devoting 20% to 25% of their resources to the this end business climate. Can improve 111. A favorable business climate is important for private sector development in prospects for general and for SME development in particular. Indeed, OEG has found that outcomes many were better in countries that improved their risk ratings (from high to low or medium companies, risk), compared with countries that suffered a deterioration in their risk ratings and, including hence, the business climate.66 Similarly, based on cross-country regressions, recent SMEs WBG research found “evidence that an effective business environment is not just a characteristic of successful economies but also plays an important part in their success.”67 Firms of all sizes suffer from problems in the business climate, but small businesses face particular difficulties because of governmental policies and regulations that favor larger enterprises and because of the limited resources that SMEs can devote to addressing their needs. Large businesses often have the means of influencing governments or, alternatively, of protecting their own interests even if the overall problems cannot be overcome. Small businesses do not. Because of the importance of the business climate, the inherent constraints on small businesses’ ability to identify and defend their interests, and SMEs inability to capture enough benefits from reform to justify their efforts acting alone, donor support is justified. Risks of conflicts 112. Although no problems appear to have arisen, facility involvement in the policy with WBG policies arena inevitably involves the risk of being seen as encouraging ideas that conflict with or beliefs WBG policies or beliefs. By relying heavily on outside consultants and working with independent associations in their business climate work, the facilities run the risk that the consultants will make recommendations that run counter to WBG policies or beliefs, or that the associations will lobby for action that runs counter to these policies _______________________________________________________________________________________________ 28 SME Facility Study Operations Evaluation Group or beliefs. The facilities can exert substantial control over the work of consultants they engage, but they cannot censor the positions taken by business associations they support. To OEG’s knowledge, no problems have materialized, but the risk nonetheless exists. For example, at the time of the evaluation, a SEED-supported mushroom growers’ association in FYR Macedonia had been lobbying against imports of low quality mushrooms labeled as local. Clearly, calling for truth in labeling poses no problem. But IFC has no way of ensuring that an association would not go further and call for protection against imports, even if labeled accurately. No basis for judgments on whether benefits of business climate efforts justify costs Found little 113. MPDF and SEED may have contributed to changed attitudes on a range of issues evidence of affecting SMEs and to changes in some legislation and regulations, but the evaluations material carried out for this study found little evidence of material impacts on business activity. impacts on (See Annex 5.1.) The limited evidence does not necessarily mean that these efforts business have failed. In particular, the timing of the evaluations may have been too early to activity identify results. Indeed, subsequent to the MPDF evaluation, IFC’s 2003 Annual Review on Small Business Activities reported that MPDF’s efforts in Vietnam had led to streamlining of licensing and other approvals, reduced taxes and fees, and other reforms. Similarly, a brief web search in May 2004 (subsequent to the SEED evaluation), identified several European financial institutions that had initiated leasing activities in Serbia (but not in FYR Macedonia) following the legislative changes that SEED had encouraged. The lack of evidence may also reflect the facilities not having devoted sufficient resources to have an impact, difficulties in attribution of outcomes and impacts, or the facilities not having done an adequate job of articulating the desired outcomes and impacts at the outset and tracking and reporting on them subsequently. PEP has done a better job of reporting on its results, particularly in developing leasing markets, but its activities have not yet been subject to independent evaluation.68 (See Box. 5.1.) Box 5.1 – PEP’s Efforts to Develop Leasing Markets PEP appears to have made a significant contribution in Russia to the development of leasing, typically a good source of financing for SMEs. OEG's 2002 IFC Country Impact Review on Russia noted that PEP had collected and disseminated information on leasing, organized seminars, drafted legislation, advised legislative committees, and provided advisory services. These efforts helped promote an improved legislative and regulatory environment, led to the creation of several leasing companies (including four backed by IFC investments), and, based on recent information published by PEP, contributed to a major increase in leasing activity in Russia. The leasing market in Russia now exceeds $2 billion, six times its level at the time of the 1998 financial crisis. SMEs account for nearly 90% of the leasing companies’ clients. Based on PEP’s experience in Russia, PEP has extended its efforts to Azerbaijan, Georgia and Central Asia, and SEED has undertaken similar efforts in FYR Macedonia and the Republic of Serbia. SEED’s efforts have led to the establishment of eight leasing companies and to the signing of €30 million of leases in 2003. _______________________________________________________________________________________________ SME Facility Study 29 Operations Evaluation Group Information 114. MPDF has spent about $2.4 million on its efforts to improve the business climate, available does including $1.2 million on its discussion reports, or an average of $100,000 per report. not permit SEED has spent $1.7 million on its business climate work, ranging from less than comparisons $100,000 for legal and regulatory reform in Bosnia and Herzegovina to $400,000 for of benefits and new financial services, including leasing. costs 115. The study, however, could not identify benefits that could be compared with the costs. The expenditures may well be worthwhile. Certainly, the importance that the Bank and IFC have been giving to investment climate issues in recent years demonstrates strongly held beliefs about the importance of these issues. The present study, however, provided no evidence on the returns on expenditures to improve the business climate. Activities 116. Whatever the benefits, the facilities’ efforts to improve the business climate are depend on unlikely to generate meaningful fees, and no one expects them to do so. MPDF has donor funding charged no fees, and SEED has charged only negligible amounts. _______________________________________________________________________________________________ 30 SME Facility Study Operations Evaluation Group VI. OTHER APPROACHES FOR PROMOTING SME DEVELOPMENT Other approaches worth considering but limited information limits conclusions 117. The approaches described in Chapters II through V are not the only ways to contribute to SME development. Many other interesting approaches and programs have been tried, both within and outside the WBG, including a wide range of activities supported by the SME Department’s Capacity Building Facility.69, 70 Based on a brief review of readily available material, this study has identified several alternative approaches or programs.71 Some appear to have generated good results. But, absent adequate and reliable information, based on independent evaluations, OEG cannot express firm conclusions. Still, these approaches (as well as others not covered here) may be worth considering when the facilities develop their strategies for addressing the market failures that constrain SME development and private sector development more broadly. A program that 118. An EBRD-managed program based on retired business executives has yielded uses retired excellent results. EBRD’s TurnAround Management Programme (TAM) assigns executives as teams of senior (typically retired), high-level business executives to advise SMEs advisors has and some larger enterprises. To develop the capabilities and self-confidence of local yielded excellent management, the TAM team members serve as advisors, not managers. Typically, results they make six to eight brief visits over 1-½ years. The advisors receive fees well below the market rate for managers of their caliber. A recent evaluation concluded that the program is generating a high rate of return.72 119. Most developed countries have similar programs that draw on the skills of retired managers and even technicians. These programs typically target SMEs but some also serve business service organizations and others. Most of these programs pay no fees to the retired managers and, hence, their costs are even lower than TAM’s.73 Efforts to 120. Efforts to develop linkages have yielded mixed results. One PEP project has develop linkages been a major success. By helping to develop a reliable local supply of raw milk, have yielded PEP made it possible for a $50 million yogurt project near Moscow to move ahead mixed results, and, according to PEP, for the 18 dairy farms supplying the plant to double their but no earnings. This effort cost $1.2 million. information comparing 121. Based on this experience, PEP has undertaken other projects in Russia to benefits and develop local suppliers for a mining company in a remote area, IKEA furniture costs stores, and foreign owned automotive assembly plants, and in Ukraine to develop suppliers for agricultural processing firms. PEP has reported little in the way of results from these projects, and OEG has seen no information on the costs. 122. An APDF linkage program has yielded disappointing results. The evaluation reviewed APDF’s efforts to develop suppliers for the expansion of an aluminum smelter in Mozambique. It found that the prime contractor had awarded sub- contracts amounting to $4.5 million to 14 SMEs and that the SMEs had met their commitments on time and within budget. But it also found that some of these SMEs (three of the four randomly selected for interviews) might have arranged the sub- _______________________________________________________________________________________________ SME Facility Study 31 Operations Evaluation Group contracts without the program, that the SMEs were finding it difficult to secure further work following completion of the investment phase, and that the costs were high. For each of the SMEs benefiting, IFC spent more than $14,000, essentially for training and monitoring SME performance, and the aluminum smelter spent $36,000. The total cost of $50,000 was equivalent to 16% of the value of the sub- contracts with the SMEs.74 123. IFC has reported other linkage projects, including efforts to develop suppliers for the Chad-Cameroon Oil Pipeline and Development and Shell Oil Company in Nigeria, both in collaboration with APDF, efforts to assist a Coca Cola bottling company to develop local distributors in Kenya in collaboration with APDF, and efforts to help a Michelin Tire affiliate to develop franchised dealers in Serbia in collaboration with SEED. In FY03, IFC established a Linkages Unit that seeks to help larger IFC clients develop linkage programs with local SMEs and the local community. By early 2004, this unit had initiated 49 programs, with 14 active projects, and 35 in the pipeline.75 124. A program developed and financed by the Confederation of Zimbabwe Industries appears to have yielded good results (though it has not been subject to independent evaluation). During its 2-½ year pilot phase, this program developed 139 ongoing business relationships to supply companies engaged in forestry, horticulture, tourism, and furniture manufacture. The program focused on identification of linkage opportunities through buyer open houses for potential suppliers, supplier capacity audits, feasibility studies to examine the merits of specific proposals, and workshops for buyers and suppliers. The program generally left supplier capacity-building to the buyers but in some cases arranged for outside assistance and even shared in the cost of the assistance. The program cost $1,360 per linkage established (excluding the costs to the buyers), well below the $14,000 spent by IFC in Mozambique. In contrast to the high cost approach typically used by IFC, the Zimbabwe program specifically sought to provide only the minimum assistance necessary and to emphasize “buyer mentoring” as “the most effective and sustainable approach to developing supplier capacity.”76 125. A UNIDO program has led to the creation of 54 private, non-profit exchanges to promote subcontracting and partnership relations between SMEs and large enterprises and among SMEs. The cumulative TA expenditures on this program totaled $7.5 million, an average of $167,000 for the 45 surviving exchanges. Based on its experience, UNIDO estimates that an exchange can be expected to generate 75-150 contracts per year, worth $5 to $13 million per year. These figures imply cumulative TA expenditures of $1,000 to $2,000 per annual contract, equivalent to 1% to 3% of the value of the contracts. And the figures provided for an exemplary UNIDO exchange in Peru imply average TA expenditures of $106 per contract, equivalent to 0.25% of the value of the contracts, during a nine-year period.77 _______________________________________________________________________________________________ 32 SME Facility Study Operations Evaluation Group Some cluster 126. Clearly, the reported costs of the Zimbabwe and the UNIDO programs have programs have been well below the reported costs of IFC’s linkage programs for the yogurt project reported good in Russia and the aluminum project in Mozambique. Assuming that the reported results, no costs are reasonably accurate, the lower costs presumably reflect the different information approaches taken to fostering linkages. The IFC programs have devoted comparing considerable efforts to developing the capabilities of SMEs to meet the needs of the benefits and large companies they were to serve. In contrast, the other programs have focused on costs facilitating access to information on large company needs and local supplier capabilities. Without adequate, reliable data on the overall benefits and costs of these other approaches, however, no conclusions are possible. 127. Serving clusters of clients can potentially provide good results because of making it possible to bring specialized experience to bear, permitting economies of scale, or both. 128. IDB’s Multilateral Development Fund has financed a center in Argentina that designs programs addressing the needs of groups of companies in a specific region and then engages consultants to carry out the programs. A typical program serves five to seven participating companies, but some serve 30 or more. The reported results are positive, although they fall short of the results from the same center’s one-on-one projects and, in some respects, the results from the IFC facilities’ firm- level services.78 129. PEP has been providing services to groups of wood harvesting companies in northwestern Russia, information and communications technology firms in Russia, and farms in Russia, Ukraine and Tajikistan. PEP reports that these efforts have resulted in $26 million of foreign direct investment in Russian logging companies and improved profitability for Ukrainian farmers. PEP also reports that cotton yields and gross profit per hectare increased more for farmers participating in its program in Tajikistan than for other farmers in the same region. The percentage increases for the participating farmers, however, were lower. Moreover, PEP’s report gives no indication of whether the differences were statistically significant. 130. Aside from these PEP efforts, AMSCO has begun to experiment with a cluster approach for smaller clients, and IFC’s new facility for Latin America intends to work with clusters. In addition, IFC has sought to foster clusters through its investment activities. A FY72 investment in a shoe company successfully helped develop local distributors. But a FY95 investment in a franchise equity fund achieved little.79 IFC’s SME 131. IFC has developed an SME Toolkit that offers a range of business tools, Department has software applications, and online training materials. It has added some links that developed a web- may be useful and introduced the interactive Web site in the Caribbean. Similarly, based training PEP has added information on local business service providers, e.g. consulting site but too early firms, training firms, banks, and other financial service providers, and introduced the to assess impact Web site in Ukraine. The links to business service providers is a particularly interesting feature, since it directly addresses (albeit only partially) the market imperfection that calls for efforts to assist SMEs. _______________________________________________________________________________________________ SME Facility Study 33 Operations Evaluation Group Subsidies can 132. Subsidies can encourage unremunerative activities. AMSCO’s donors provide encourage a subsidy to cover the costs of an unremunerative corporate governance program. unremunerative Similarly, to provide an incentive for USAID-supported business centers in Ukraine activities to serve smaller clients who cannot pay full costs, USAID issues work orders for up to $25,000 per assignment.80 Voucher & 133. Voucher and matching grant programs have received mixed reviews. EBRD’s matching grant donor-funded Business Advisory Service (BAS) program, which seeks to assist programs have SMEs and develop the capabilities of local consultants by covering up to 50% of the received mixed cost of consultants (subject to a maximum contribution of €9,000 per assignment), reviews received a favorable assessment in a recent evaluation. The SMEs select the consultants, but BAS independently screens them to satisfy itself that they are qualified. During 1995-2002, BAS shared in the funding of 2,350 assignments at an average cost (including overhead) of €13,100 per assignment.81 BAS has used many local consultants, and local consultants have carried out the bulk of BAS assignments. The companies assisted have been pleased with the results and have reported improved performance. The reported improvements, however, reflect before-after comparisons, rather than with-without comparisons. Moreover, the evaluation did not compare the costs and benefits.82 134. A rigorous evaluation of a WB matching grant program to support technological development in Mauritius was critical of the program. The program allowed the beneficiary companies to select what technology transfer services made best sense for them and to select their own service providers. The project provided grants averaging $9,500 each to 224 companies. The evaluation criticized the program on three grounds. First, the program made only three grants for the use of local consultants. Local consultants had limited ability and experience and were not willing to invest to build up their capabilities to serve a market dependent on a temporary program to subsidize the use of consulting services. Second, additionality was low. Eighty percent of the firms surveyed said they would have undertaken their projects without the grant (92% for companies with 200 employees or more; 61% for companies with fewer than 100 employees). Third, the program’s impact on sales per employee was not statistically significant when compared with a control group, which actually spent more on technological development than the companies assisted by the program.83 135. A WB matching grant program in Kenya has generated a substantial supply response. More than 100 master craft-workers, consultants, training institutions, suppliers, and financial institutions provided services in the program’s first phase.84 OEG has seen no information, however, on the impact or costs. Credit 136. Credit information registries or bureaus facilitate access to credit. A recent, information well researched WBG report found a statistically significant relationship between the registries existence of institutions to share credit information, i.e. public registries and private facilitate access bureaus, and the availability of credit to private firms. More importantly, the report to credit, found “Smaller firms in poor countries, for which information is scarce or of poor particularly for quality, gain the most.”85 Although IFC has invested in credit rating agencies with a SMEs view to developing corporate bond markets,86 it has not invested in credit bureaus that would make it possible to share credit information on SMEs. SEED, however, has helped establish a credit bureau in Bosnia and Herzegovina, the proposal for IFC’s contribution to North Africa Enterprise Development called for the new _______________________________________________________________________________________________ 34 SME Facility Study Operations Evaluation Group facility to support the introduction of credit bureaus, and IFC is now exploring investment opportunities with leading international credit bureaus through its Global Credit Bureau Program.87 _______________________________________________________________________________________________ SME Facility Study 35 Operations Evaluation Group VII. STRUCTURE AND COLLABORATION Facilities now report to regional departments but need for cross-facility collaboration remains Facilities now 137. Collaboration—between IFC’s regional investment departments and the report to facilities and among the facilities—has been a continuing issue. Historically, top regional management supported the facilities, but the incentive structure led to the regional investment investment departments seeing little value in the facilities, which they felt did not department contribute to their fulfilling their investment programs and supervising their investments. As a result, they generally devoted little attention to the facilities’ operations or to the possibilities of collaboration. Similarly, the facilities often did little to draw on the experience of the other facilities and on IFC’s experience.88 And neither the regional investment departments, nor the facilities sought to develop synergy between: (a) IFC’s credit lines to assist SMEs and the facilities’ firm-level services or their capacity building programs for financial institutions; (b) the facilities’ capacity building programs for financial institutions and IFC’s extensive experience with financial institutions; or (b) the needs of IFC’s larger clients for local suppliers and distributors, and the facilities’ potential ability to help SMEs meet these needs. To deal with these “silo” problems, IFC has shifted the facilities’ primary reporting lines several times during the past two decades. Initially, the regions took the initiative in establishing facilities and retained responsibility for them. IFC transferred primary responsibility for the facilities to a central vice president in 1985, to the regions in 1995, and to the SME Department in 2000. Then, pursuant to a broader IFC reorganization, calling for the regions to focus on strategic issues, IFC transferred primary responsibility to the regions again in January 2004. 138. The new arrangements encourage the regional investment departments to recognize the facilities’ potential for making IFC more effective and proactive in support of the local private sector and to have the facilities contribute to the development and execution of an IFC-wide strategy, especially in IFC’s frontier markets. The regional investment departments’ scorecards do not yet call for reporting on TA activities, and the facilities’ scorecards do not yet call for reporting on their contribution to the IFC’s overall strategies. Inclusion of these activities in the scorecards should greatly increase the regions’ interest in the facilities and the facilities’ interest in IFC’s strategies. SME 139. The new arrangements also call for the facilities to maintain a dotted-line Department still relationship to the SME Department. The SME Department has played a useful role, has a vitally but much remains to be done. important role 140. Knowledge sharing. The SME Department has taken steps to accumulate and disseminate information on what has worked, what has not, and promising new ideas, many of which have been adopted. It has arranged semi-annual meetings that facilitated exchanges of information, both at the meetings themselves and in subsequent bilateral exchanges. It has arranged for the facilities to post information on an internal Web-site and to send potentially useful materials to each other. It has disseminated information about the on-line SME ToolKit. And it has encouraged facility staff with specialized expertise to visit other facilities to transfer their knowledge. These initiatives have borne some fruit. SEED, for example, drew on MPDF in developing a training course, MPDF and PEDF in assisting individual companies, and PEP in its efforts to develop leasing markets. _______________________________________________________________________________________________ 36 SME Facility Study Operations Evaluation Group 141. The SME Department, however, needs to do more to expand knowledge sharing. For example, although there has been some progress, the facilities generally developed material for their training courses independently, without drawing on work done previously by other facilities or by IFC. Similarly, at the time of the evaluation, SEED had been developing its own information system because of the absence of a system that could be used by all the facilities. 142. Management information systems, internal controls, reporting, and evaluation. When the evaluations were being carried out, IFC was in the process of improving the overall control environment and systems infrastructure for the facilities and, more broadly, for all donor funded operations. These efforts included creation of an independent Facilities Financial Control Unit in the Controller’s and Budgeting Department, the establishment of a central Finance and Control function in the SME Department, the development of new business processes and systems for budgeting, costing, and reporting, and development of common approaches for self- evaluation.89 Nevertheless, certain components of this infrastructure remained to be developed to address issues that the study identified in the course of the individual evaluations carried out during 2002-03.90,91 • The facilities’ management information systems did not allow the facilities to assess their operations and make decisions based on the actual costs, revenues, and benefits from specific services or specific sets of clients.92 The facilities, thus, lacked information needed to monitor their efficiency, make sound decisions on focusing their efforts and establishing fees, and meeting data requests from donors or evaluators. The lack of this information hindered efforts to compare facility performance, productivity, and costs across facilities. These shortfalls mainly reflected inadequate systems but also arose from shortfalls in collecting, recording, and maintaining data. Among the specific problems identified were difficulties in putting together complete, reliable lists of companies served and employees trained, a lack of information on client size and ownership, deficiencies in time reporting systems, the lack of cost accounting systems and, more generally, incomplete and inconsistent data. Judging from the frequent changes in data provided to the evaluation teams, the reliability of the facilities’ data and, hence, the facilities’ scorecards was subject to doubt. • Some facilities lacked adequate systems of internal control.93 The facilities did not have firm policies on fees and, hence, subsidies. Facility management and staff retained substantial discretion. This discretion together with the decentralization of the facilities’ operations called for greater attention to internal controls.94 • The facilities’ reports to IFC and the other donors continued to describe completed assignments as “completed projects,” even though this designation suggested that the investment projects had actually been carried out (paras. 37- 38). Moreover, the facilities’ reports provided no information on the extent to which the facilities had or had not reached the types of companies targeted. • Problems had arisen with respect to annual financial statements. Several facilities had not issued audited financial statements for two years.95 The unaudited financial statements that MPDF provided for two years reflected projections for the final months, rather than the actual amounts for the year as a whole. And the AMSCO program issued separate financial statements for AMSCO B.V. and the foundation that serves as a conduit for donor funds _______________________________________________________________________________________________ SME Facility Study 37 Operations Evaluation Group without providing sufficient information to understand the flows between the two and the program’s overall costs. • The facilities had not developed adequate arrangements for the self-evaluation of their operations, particularly for training, capacity building, and business climate programs. During the period when the four evaluations were being carried out, the SME Department developed a monitoring and evaluation system to be used by all the facilities. This system introduced a number of improvements and should produce some useful findings. Nevertheless, further improvements would be desirable. Moreover, judging from reports issued by four facilities during the second half of 2003, there was still a good deal of diversity in evaluation practice.96 The facilities had carried out some but not all the recommendations of the 1995 OEU evaluation and separate evaluations of the individual facilities. Among other things, some of the facilities still reported on projects for which offers of financing have been arranged, rather than projects actually carried out; had not installed adequate management information systems; and did not charge fees covering full costs and providing some profit for clients beyond their maximum size limits. • The facilities had carried out some, but not all the recommendations of the 1995 OEU evaluation and separate evaluations of the individual facilities. Among other things, some of the facilities still reported on projects for which offers of financing have been arranged, rather than projects actually carried out; had not installed adequate management information systems; and did not charge fees covering full costs and providing some profit for clients beyond their maximum size limits. Need to 143. Although IFC may wish to integrate the facilities with its regional strategies and recognize that operations, the other donors, who provide the bulk of the funding, may have different facilities are views. They may see the facilities as IFC-managed donor facilities, rather than donor funded donor-funded IFC facilities.97 And they may consider that IFC’s priorities may not remains critical always be consistent with what they consider to be the priorities for encouraging SME development. The donors certainly play a more active role in guiding the traditional facilities than they did prior to the 1995 evaluation. Pursuant to the 1995 recommendations, the facilities’ boards must now concur with major facility policy decisions. But two other recommendations relating to donor support require continuing attention—ensuring adequate institutional oversight and managing potential conflicts of interest arising from IFC’s management of the facilities.98 With the facilities reporting to the regional investment departments, the SME Department is now in a better position to exercise independent oversight and, thus, to watch over issues of concern to the donors. The facilities also face important structural issues internally Organizing 144. Since each facility operates in multiple countries and offers multiple services, along regional each has had to grapple with the issue of organizing along regional or product lines. or product lines Regional or country offices can help a facility get to know the local business community, government officials and others; develop an understanding of local conditions and local needs; and serve their clients better. But regionalization is expensive and can make it difficult to provide adequate supervision and ensure respect for facility policies. A product line organization can help a facility to develop specialized capabilities, take advantages of economies of scale and facilitate _______________________________________________________________________________________________ 38 SME Facility Study Operations Evaluation Group cross-country learning. But a product-based structure makes it difficult to take advantage of the benefits of regionalization. All of the facilities reviewed for this study have set up some regional or country offices, and three of the four have set up product teams. Each, however, dealt differently with the issues involved. • Each of APDF’s regional offices operated as a semi-autonomous unit, responsible for developing and providing services as the regional manager and staff deemed appropriate. This approach allowed the regional offices to address local needs more quickly than might otherwise be possible but limited APDF’s ability to take advantage of economies of scale in developing and supplying services and limited its ability to develop specialized capabilities. Moreover, it resulted in some concerns about the adequacy of supervision and compliance with facility policies. • AMSCO’s field offices, though established recently, also operated with a good deal of independence. This independence hindered AMSCO’s efforts to improve its management information system and ensure respect for organizational policies. • SEED structured its operations around teams dealing with firm-level services, capacity building, and improving the business climate. It set up offices in each country, but the operating staff reported to the central team head, rather than the country managers. This approach enabled SEED to address common problems and opportunities across the region and to develop products that could be offered in multiple markets. But it did not facilitate working relationships and knowledge sharing among different teams within country offices. • MPDF set up country offices and product teams but, in reaction to a recommendation in an earlier evaluation, took steps to foster cooperation at the country level. It arranged for new capacity building and business climate programs to be discussed and agreed with the regional manager and for regular meetings of regional and product staff to exchange information and discuss new ideas. Further progress may be possible, but MPDF has already done quite a bit to realize the benefits of both a regional and a product orientation. Multiple offices 145. The benefits of regional offices tend to be limited to the country or, for large countries, the region where they are located. APDF’s eight offices in Africa, for example, have provided little help in delivering services in the remaining countries. Similarly, half of the AMSCO clients responding to the survey in the countries with regional offices said that regionalization had strengthened AMSCO’s contributions to their companies, but these benefits have not extended to countries without offices, where 83% considered that regionalization had not strengthened AMSCO’s contributions. 146. The facilities serving many countries, however, cannot possibly afford to maintain offices in all of them. MPDF spent $0.9 million in 2001 to maintain offices in Cambodia and Laos. And AMSCO needed $2 million of donor funding for the initial costs of setting up seven offices in Africa. MPDF and SEED could afford to set up offices in each country served, but APDF and AMSCO, which have nearly 50 countries in their region, cannot.99 147. Some facilities seek to overcome this constraint by developing a network of consultants that can generate and serve clients in countries where they do not have _______________________________________________________________________________________________ SME Facility Study 39 Operations Evaluation Group offices. PEDF, which serves more than 10 small countries in the South Pacific, pioneered this approach in the 1990s, and APDF has now adopted it. Co-location of 148. Where the evaluations found examples of good collaboration, the facility and field offices the Bank had offices at the same site. SEED and the Bank, which operate from the same building in Sarajevo, collaborated closely on the WB’s Business Environment Adjustment Credit in Bosnia and Herzegovina. SEED staff participated in the Bank’s project preparation mission, and SEED played an important role in organizing and supporting a working group to consider steps to simplify the business registration process. Similarly, MPDF and the Bank, which operate from the same building in Ho Chi Minh City, exchange information on a regular basis, and the Bank proposed that MPDF’s BTC provide training for a rural credit project. 149. The lack of offices in the same location, in contrast, may have contributed to poor collaboration. APDF, which did not have an office in Mozambique, sought to develop suppliers for the Mozal aluminum project. The Bank had two pre-existing supplier development projects in the country, but no attempts were made to integrate the APDF and Bank efforts. Similarly, SEED assisted a parliamentary committee in the Republic of Serbia to formulate an SME strategy. Yet the Bank, which seems not to have been aware of SEED’s efforts, began advising the Ministry of Economy and Privatization on an SME strategy shortly before SEED’s work was completed. The Belgrade offices of SEED and the Bank were not in the same building.100 _______________________________________________________________________________________________ 40 SME Facility Study Operations Evaluation Group VIII. ENVIRONMENTAL, HEALTH, SAFETY AND SOCIAL ISSUES Facilities’ handling of EHS issues has been unsatisfactory and many clients’ EHS performance poor What IFC and 150. IFC and the other donors expected the facilities to bring to bear EHS standards the other donors on their firm-level clients. IFC 1995 and 2000 APDF board reports stated, “APDF expected projects follow the same environmental guidelines as the World Bank Group.” An MPDF strategic plan, approved by the donors, indicated, “All MPDF projects will comply with IFC’s Environmental Guidelines.” A 1999 UNDP project document for AMSCO specified, “The selected enterprises must be shown to…respect international environmental standards.” And one of SEED’s donor agreements provided, “assisted companies will have to agree to introduce acceptable standards in relation to environment, worker safety and gender issues.” The facilities 151. Some of the facilities sought to address EHS issues (particularly the two more have fallen short recently established facilities), but none fully met expectations. of expectations • APDF had not articulated a policy on EHS issues, no one had overall responsibility, the views of its staff differed widely on what was expected, and APDF did not seriously raise EHS issues with clients. • AMSCO’s 1998 mission statement called for its clients to respect international standards, but AMSCO ignored this requirement. It recently adopted guidelines calling for new clients to adhere to national and local standards, rather than international standards, but these guidelines did not apply to the period covered by the evaluation. • MPDF hired an environmental advisor from the outset and, in 1999, issued environmental procedures, requiring among other things an EHS review of every project. Its procedures, however, called for non-IFC clients to comply with local laws and regulations, rather than IFC’s guidelines, as expected by the donors. • SEED also hired an EHS specialist from the outset and actively seeks to help clients take realistic, cost-effective steps towards regulatory compliance. (The EHS specialist also participates in SEED’s capacity building and business climate efforts.) SEED had not, however, laid down an EHS policy, specifying among other things how “acceptable standards” was to be interpreted. Client performance has 152. Environmental consultants who visited more than 50 facility clients found that been only 41% were meeting IFC’s EHS requirements and only 49% were meeting local disappointing requirements. Nearly 30% had made some important improvements that can be attributed to facility staff, consultants or AMSCO-seconded managers. But many of these firms still did not meet minimally acceptable standards. (See Annex 8.1.) 101 Unsatisfactory 153. APDF’s, AMSCO’s, and MPDF’s shortfalls reflect, in part, the results of results reflect seeking to impose standards that the facilities considered unrealistic. These facilities differing views felt that these standards should not apply to SMEs and that they had little or no on what facilities leverage to require compliance. With small business owners skeptical of using should require… consulting services, the facilities believed that many clients would forego their services rather than undertaking additional costs to deal with EHS issues. These concerns are understandable, particularly since the traditional facilities work with _______________________________________________________________________________________________ SME Facility Study 41 Operations Evaluation Group clients for only a short period and cannot realistically threaten to withdraw services. They are not applicable, however, to AMSCO, which typically seconds managers for two to three years or more and which has the possibility of applying substantial leverage by threatening to withdraw management and training subsidies, discontinuing tax exemptions, or even withdrawing seconded managers. … and lack of 154. These shortfalls also reflect a lack of adequate attention to EHS issues by adequate facility management and by IFC. The facilities have generally not provided EHS attention by training to their staff and to consultants, have generally not called for consultants to facility address EHS issues during site visits, and often have not provided adequate management and guidance to clients on EHS issues. Clients understandably may wish to avoid IFC incurring additional costs to deal with EHS issues, but the facilities have typically done little to develop achievable and affordable plans that can be used to convince clients to make the necessary changes (and, where warranted, to point out the savings that may result from improved EHS practices). A further indication of a lack of attention is that two facilities (MPDF and SEED) have issued or endorsed reports using standard language saying that projects would be designed and operated to meet national environmental requirements, even when such a statement has not been warranted by the facts. _______________________________________________________________________________________________ 42 SME Facility Study Operations Evaluation Group IX. RECOMMENDATIONS 155. OEG has four sets of recommendations, derived from the findings in the previous chapters. The facilities have achieved a great deal, and these recommendations should not be construed as detracting from what they have achieved. IFC and the facilities have been concerned with many of the issues addressed here and, particularly since issuance of the individual evaluations, have begun to address some of them. The facilities should improve the strategic focus of their efforts Paragraphs 17-20 156. The facilities’ decisions on approaches, programs, and client subsidies suggest inadequacies in their strategic focus. The facilities have adopted a range of approaches without clearly articulating what market failures they seek to address, the expected benefits and costs, or identifying their own capabilities and disadvantages. They have undertaken a wide range of programs pursuant to some approaches (e.g. training and capacity building) without giving adequate attention to priorities and the most economic use of their resources. In some cases, they have accepted clients and granted subsidies without adequate concern about using subsidies for clients that do not need them and, thus, not having sufficient funds to subsidize clients who do; the possible displacement of private service providers; and the importance of getting clients accustomed to paying for services. Recommendation 1 157. The facilities should improve the strategic focus of their efforts with respect to approaches, programs, and client subsidies.102 To this end, the facilities should consider: a) Identifying the market failures they seek to address in the region or countries served, and specifying why they have selected the specific approaches and programs proposed to address these issues, rather than others. In considering how to address a market failure, a facility might start out by considering what it can do to reduce the obstacles to an efficient outcome. It might, as it does now, try to improve the supply of business services through capacity building programs and to increase the demand by helping SMEs assess their needs, preparing terms of reference, identifying and supervising consultants, and covering the bulk of the costs. But, in some circumstances, it might also consider, say, encouraging demand through publicity on how consultants can help SMEs, making information available on the experience and range of services offered by individual consulting firms, or offering subsidies for the use of consultants without playing the active role required under its current approach (and, hence, with less risk of displacing private service providers). In selecting approaches and programs, the facilities would need to consider the advantages or disadvantages they would have for each alternative, the expected benefits and costs, and how their proposed strategies relate to IFC’s regional strategies. The SME Department could help the facilities by developing a knowledge base of other approaches and programs that have been used to foster SME development, including information on the results, particularly evaluated results. _______________________________________________________________________________________________ SME Facility Study 43 Operations Evaluation Group b) Reallocating their resources: • Continuing to reduce the share of their resources devoted to financial advisory services (though some retention of these services may be advisable to provide practical insights that can contribute to the facilities’ capacity building and business climate work); • Expanding their consultancy services and their training services, both of which can potentially yield excellent returns; • Continuing the AMSCO program for a limited period to see whether it can achieve financial sustainability without straying from its development mandate, i.e. whether it can generate adequate fees from companies that truly need and can benefit from its services; • Focusing their capacity building programs on the specific issues responsible for market failures and on financial institutions that serve SMEs (where the facilities can and should draw on IFC’s experience and training programs); and • Focusing their SME business climate programs on the most critical issues. c) Issuing explicit guidelines on subsidies to improve the efficiency of their targeting, conform to IFC’s non-displacement principle, ensure transparency and fairness, and make clients aware of what they would have to pay for and subsidized services. The guidelines should start from the principle of charging full costs except where a clear economic or business rationale calls for subsidies. Since the rationale calls for subsidies to be used to overcome market failures and IFC’s policies call for avoiding displacement of private sector providers, the facilities should give subsidies only to firms that would not have purchased firm-level or training services without them. The facilities, of course, cannot be sure whether specific clients really need subsidies, but evidence from this and other studies suggests that companies with substantial foreign ownership, large companies, highly profitable companies, companies with well-established relations with financial institutions, and companies with experience in using consultants (including prior experience with services provided by the facility itself) are less likely to need subsidies. The guidelines should call for the facilities to provide full information to the clients and, to the extent possible, to charge fees in line with local market prices so that the clients develop an accurate idea of the price they would need to pay when they have to secure services without subsidies. The guidelines on subsidies should encourage increased cost recovery but should not create pressures that would lead to the facilities abandoning activities that IFC and the donors may wish to encourage, e.g. to the facilities targeting their firm-level services to large enterprises rather than SMEs. Donor subsidies can be used to maintain value-adding services the facilities might otherwise feel compelled to drop. _______________________________________________________________________________________________ 44 SME Facility Study Operations Evaluation Group Integrate facility activities with country strategies but maintain central functional management Paragraphs 136-143 158. The new arrangements seek to make IFC’s regional investment departments recognize the facilities’ potential for making IFC more effective and proactive in support of the private sector and to have the facilities contribute to the development and execution of an IFC-wide strategy. The new arrangements call for the facilities to retain a dotted-line relationship with the SME Department, which facilitates cross-facility knowledge sharing and common management information, internal control, monitoring, evaluation, and reporting systems. The evaluations, however, identified several shortfalls, and the SME Department could be more effective than it has been in dealing with these issues. In addition, the SME Department could help the facilities to draw on WBG experience, e.g. on IFC’s financial market expertise for use in the facilities’ capacity building and business climate efforts. Recommendation 2 159. IFC and the facilities should take advantage of the opportunities that may arise from the facilities’ January 2004 integration into IFC’s regional investment departments, but should maintain and expand the SME Department’s role in encouraging cross-facility collaboration, knowledge sharing, and good-practice standards and should ensure that the donors’ concerns are adequately reflected in the facilities’ policies and strategies. To this end, consideration should be given: a) By IFC to encouraging the regional investment departments to treat the facilities as an integral instrument in their work and, by the facilities, to contributing to the development of an IFC-wide strategy in support of the local private sector. Among other things, the facilities might collaborate with IFC to address obstacles to investments and to foster linkages that could increase the development impact of existing investments. b) By the SME Department and the Financial Controller’s Department to continuing their efforts to improve the facilities’ systems and processes for project selection, planning, monitoring, and evaluation, and for management information, internal control, and reporting. Among other things, these efforts should include putting in place a results-based monitoring and evaluation framework where there is up-front delineation of program or project objectives, activities for achieving them, and expected outputs, outcomes, and impacts, specified as measurable targets against baseline data. The evaluation system should call for validated project completion reports, outcome and impact assessments for larger activities, scorecards to summarize the results, and comparability across facilities. c) By IFC and the facilities to ensuring that they take adequately into consideration the views, concerns, and interests of the donors. In this regard, IFC Management’s review of the regional investment departments’ annual strategy and budget proposals would provide an opportunity to assess whether the facilities are being appropriately integrated and their resources optimally matched to each country’s SME needs and opportunities and whether their resources are being captured for supporting IFC investment operations unrelated to the facilities’ mandates. 103 _______________________________________________________________________________________________ SME Facility Study 45 Operations Evaluation Group Integrate the facilities with the WBG’s skills, policy guidance, and local presence Paragraphs 108, 160. Although progress has been made, collaboration between the facilities and the 110, 136, 147-148 rest of the WBG has sometimes been inadequate. Moreover, although no problems have materialized, the facilities’ efforts to improve the business climate and their support for business associations expose IFC to significant reputational risks. Recommendation 3 161. IFC should continue its efforts to encourage collaboration between the facilities and the rest of the WBG. To this end, IFC should consider: a) Calling for the facilities to access WBG expertise. The facilities could draw, for example, on IFC’s credit training program in developing their own capacity building programs for financial institutions, IFC’s knowledge of financial institutions to inform their efforts to develop capital markets, WBG research to identify new approaches to fostering SME development, and the World Bank Institute for best-practice approaches to evaluating their training activities. b) Requiring the facilities to consult with IFC and the Bank before undertaking business climate activities; before expressing, directly or indirectly, views on legislative or regulatory issues; and on the roles of engagement for supporting business associations. Since the facilities cannot and should not control the views expressed by business associations they support, IFC needs to consider whether it is willing to bear the reputational risk of a facility-supported association’s calling for government actions that would run counter to WBG views on appropriate economic policies. c) Encouraging the facilities to locate their offices at the same site as the World Bank and IFC offices (subject to taking into account the facilities’ own needs and constraints). The facilities should bring to bear IFC’s EHS standards Paragraphs 149-153 162. IFC and the other donors expected the facilities to bring to bear EHS standards on their firm-level clients. Despite substantial differences among the facilities, all have fallen short in some respects in following this mandate, at least partly because they considered the standards to be unrealistic. Less than half the clients visited were meeting acceptable standards. Recommendation 4 163. The facilities should bring their handling of EHS issues in line with IFC’s policies and should increase their ability to influence client behavior on these issues. To this end, the facilities should consider: a) Issuing policy statements and operating guidelines, approved by IFC and the other donors, calling for compliance with IFC’s EHS policies. To reflect the realities the facilities face and to balance the need to help companies grow into sustainable businesses and the need to ensure that they meet appropriate standards, the traditional facilities should call for the traditional facilities’ firm- level operations to comply with the Type 1 Requirements applicable to IFC’s financial intermediary operations. IFC applies these requirements in situations where it is impractical or infeasible for an intermediary to go beyond host country laws and regulations. _______________________________________________________________________________________________ 46 SME Facility Study Operations Evaluation Group In accordance with the Type 1 Requirements, each traditional facility should (i) establish an EHS management system (policy, procedures, resources) and require that clients comply with host country EHS laws and regulations, (ii) appoint a senior officer with overall responsibility for EHS issues and ensure that he or she attends IFC sponsored or approved training in EHS management, (iii) submit an annual EHS performance report, and (iv) adopt the exclusion list that bars assistance, e.g., to ventures involving harmful child labor or ventures based on forestry products from unmanaged forests. AMSCO, however, should consider adopting IFC’s Type 2 Requirements. AMSCO provides managers for two to three years or even longer, typically deals with companies larger than the traditional facilities’ clients, and can exert leverage by withdrawing management and training subsidies, discontinuing tax exemptions, or even withdrawing seconded managers. The Type 2 Requirements call, among other things, for ventures to meet IFC’s EHS policies, rather than just the host country requirements, and for IFC clearance of high risk (Category A) sub-projects. b) Taking steps to improve the efficacy of their efforts on EHS issues in their firm- level activities. Based on their initial assessments, the facilities should identify potentially serious EHS issues and call for early action on them, linked to their willingness to commit resources to the client. More generally, the facilities should develop a list of specific actions to be taken, responsible parties, and deadlines and should call for clients to agree to the list. Since the traditional facilities have little leverage, they need to outline a step-by-step approach that is achievable and affordable. In addition, the facilities should provide training on EHS issues to their staff and consultants used and should call for consultants visiting client sites to devote some attention to EHS issues. To facilitate EHS reviews by staff and consultants, the facilities should draw on existing checklists that IFC can provide. c) Taking steps to ensure that, contrary to current practice at two of the facilities, facility reports not say that projects assisted will be designed and operated to meet national environmental requirements unless the facility has an adequate basis for such an assertion. Instead, where appropriate, documents should state, for example, that the company needs to take certain actions to comply with local laws and regulations. _______________________________________________________________________________________________ SME Facility Study 47 Operations Evaluation Group Notes 1 Aside from SMEs, IFC’s FY2000 business plan listed as priorities frontier markets, high-impact sectors, and sustainable development. IFC 2004 Strategic Directions lists several strategic directions, including strengthening “the focus on frontier markets with emphasis on the SME sector.” OEG is now conducting a study of IFC’s targeting of SMEs through financial intermediaries in frontier markets. 2 Country circumstances and definitions vary, but micro-enterprises and SMEs typically account for 70% to virtually 100% of private sector employment in developing countries. 3 The SME Department defines micro enterprises as enterprises with 10 or fewer employees, total assets of $100,000 or less, and total annual sales of $100,000 or less. 4 According to IFC staff, the cutback in financial advisory services and expansion of capacity building and business climate activities has accelerated in the past few years. 5 PEP is IFC’s vehicle for a range of technical assistance programs in the former Soviet countries. Like the SME facilities, it undertakes some activities to foster SME development, but it differs from the facilities in three main respects. First, its mandate goes well beyond SMEs. It also seeks to encourage private direct investment, involving larger firms, and to improve the business climate for both large and small firms. Second, it has always been a core component of IFC’s regional investment department. It has benefited from strong support from regional management and has actively contributed to developing synergy between IFC’s investment and TA activities in the region. It works with investment staff to address obstacles to investments by IFC and others and to develop linkages to increase the development impact of existing investments. Third, it has gone further than the traditional facilities in putting people on the ground. It now has 24 offices, including six each in Russia and Belarus, and five in Ukraine. PEP’s operations have not been independently evaluated, but OEG plans to evaluate them in FY06. This report’s citation of PEP experience should not be interpreted as an endorsement of that experience but rather as just drawing on readily available material on comparable activities. 6 In November 2003, IFC launched a review to assess its strategy and its business processes and systems for its overall donor funded operations. 7 The study does not cover changes made since completion of the reports on the four facilities (June 2002 for MPDF, January 2003 for AMSCO, October 2003 for SEED, and November 2003 for APDF) and, thus, reflects the situation when these evaluations were completed. 8 In some respects, the SEED evaluation was premature. 9 These figures include the salaries and benefits paid to managers that AMSCO seconds to its client companies. They do not include PEP. 10 AMSCO differs from the traditional facilities not only in terms of the services it offers but also in its governance structure. The traditional facilities, which are not separate legal entities, are managed by IFC, subject to guidance provided by donor boards. The AMSCO program, in contrast, is carried out through AMSCO BV, a corporation in which IFC holds 16% of the shares, and the UNDP African Training and Management Services (ATMS) project, which serves as a channel for donor funding. Although IFC is the Executing Agent for the UNDP ATMS project, it initially delegated its authority to AMSCO. Since the mid-1990s, however, IFC has taken a series of steps to increase its ability to carry out its responsibilities. In 1997, it seconded one of its own staff members as AMSCO’s managing director. In 1997, it established Stichting ATMS, a non-profit foundation managed by AMSCO BV to channel donor funding. And in 2002, to eliminate inherent conflicts of interest and lack of transparency in AMSCO’s decisions on the allocation of donor funds, it appointed an independent board of trustees for the Stichting, with members representing the donors and other major stakeholders. 11 IFC sometimes refers to firm-level services as retail services and all other services for SME development as wholesale services. 12 The facilities refer to business climate activities as business enabling environment activities, or BEE. 13 See T. Biggs, “Is Small Beautiful and Worthy of Subsidy? Literature Review,” prepared as working paper for this study; M. Schiffer & B. Weder, Firm Size and the Business Environment: Worldwide Survey Results, IFC Discussion Paper No. 43; T. Beck, A. Demirguc-Kunt, & V. Maksimovic, “Financial and Legal Constraints to Firm Growth: Does Size Matter?” Jan. 2002 draft (http://rru.worldbank.org/Hot_Topics.asp); and A. Brunetti, G. Kisunko, B. Weder, “Note on an Institutional Bias Against Small, Local Firms in Less Developed Countries,” April 1999. 14 Use of donor resources may also be justified by equity concerns. Persons with capital or skills are better able to benefit from market opportunities. Donors may wish to use the facilities to improve opportunities for disadvantaged segments of the population. 15 Public goods have two unique properties. First, consumption of a public good by one consumer does not affect the ability of others to benefit from it. Second, no one can be prevented from benefiting from the good, even if unwilling _______________________________________________________________________________________________ 48 SME Facility Study Operations Evaluation Group to pay for it. To the extent that people are expected not to be willing to pay, private supply of the public good may not be profitable and, thus, the market may not supply it. An improved business climate is one example of a public good. 16 This argument would not, of course, apply to training for the owners themselves. 17 One recent study found that public sector corruption in Argentina reduced expected rates of return by 1-2.5 percentage points for large firms, 2-2.5 percentage points for medium-sized firms, and 3-3.6 percentage points for small firms. E. Buscaglia & W. Ratliff, Law and Economics in Developing Countries, Hoover Institution Press, 2000, cited in Wall Street Journal, Feb. 11, 2000, p. A15. 18 This section is based, among other things, on a review of a Mekong Enterprise Facility feasibility study and business plan, 2005; proposed IFC participation in and contribution to the Mekong Project Development Facility, 1996; proposed IFC participation in and contribution to the extension of the Mekong Project Development Facility (MPDF II), 2002; proposed IFC participation in and contribution to the Balkans Enterprise Facility, 1999; Balkans Enterprise Facility: business and implementation plan, 2000; proposed investment in the African Management Services Company, 1987; proposed extension of the African Project Development Facility, 2000; proposed participation in and contribution to China Project Development Facility, June 15, 2000; proposed IFC participation in and contribution to developing enterprises in South Asia SME Facility, 2001; proposed IFC participation in and contribution to North Africa Enterprise Development Facility, 2002; proposed IFC participation in and contribution to the Indonesia Enterprise Development Facility, 2002; and proposed participation in Latin America Small and Medium Enterprise Programs 2003. 19 The facilities are not unique in this respect. Few, if any, proposals for TA estimate the expected economic returns or provide any estimates of the economic benefits and costs. 20 These decisions depend, of course, also on the facilities’ ability to fund the activities, based on donor contributions, client fees, or a combination of the two. 21 OEG’s 2002 Country Impact Review on Russia found that IFC initiated TA activities in Russia in the same way as the facilities. The report suggested that the establishment of IFC’s Private Enterprise Partnership (PEP) in 2000 might facilitate a more systematic approach to establishing TA priorities, but a cursory review of PEP’s current activities suggests that OEG’s 2002 observations remain valid. 22 “…IFC’s mandate and guiding principles have at their core the concept that all of the Corporation’s activities should supplement and not supplant the role and financing of private investors, financial institutions, and advisors. This means that it is collaboration rather than competition that underpins the Corporation’s work with other sources of private capital and advice. [The issue is] whether under the circumstances of each case, the Corporation is achieving, or significantly helping to achieve, a worthwhile objective that would not otherwise be achieved or get done in a timely fashion.” IFC, Collaboration with Private International Financial Institutions: Practices and Policies, Nov. 1995, pp. 1-2. Underlining and bold font in original. 23 Because AMSCO provides its services as a package, this chapter comments on its overall operations and their results. The following chapter comments on AMSCO only to the extent that its training activities can be separately analyzed. 24 59% and 28% for APDF, 30% and 20% for MPDF, and 40% and 15% for SEED. 25 Between 61% and 85% of the consultants participating in APDF and SEED capacity building programs considered that difficulty in identifying their needs limited SMEs’ demand for consulting services to a moderate or great extent, and 78% to 85% considered that a lack of information on the quality of services furnished by particular providers limited SME’s demand to a moderate or great extent. SEED’s SME clients, in contrast, gave much less importance to these issues. Only 3% considered that difficulty in identifying their needs limited their demand for consulting services to a moderate or great extent, and only 21% considered that a lack of information on the quality of services furnished by particular providers limited their demand to a moderate or great extent. 26 The findings of the 1995 evaluation were similar. 27 The findings of the 1995 evaluation were similar. 28 Women account for more than 30% of the chief executives of APDF’s clients (well above the 13% reported in 1995) and more than 20% of MPDF’s clients but only 6% of AMSCO’s clients and 1% of SEED’s. 29 The facilities record projects as completed when a financial institution has indicated that it is willing to provide financing under specified terms and conditions. The facilities’ procedures call for the financial institution’s commitment to be reflected in a letter or other documentation provided by the institution. 30 The 1995 evaluation found that facility clients had actually implemented 80% of the projects reported as financed, or an average of 31 per year for the four institutions reviewed. 31 This paragraph calls for two qualifications. First, several MPDF clients, when asked how they would have raised the necessary financing without MPDF, said that they would have secured it from family members. (The question was _______________________________________________________________________________________________ SME Facility Study 49 Operations Evaluation Group not raised in the other evaluations.) Second, in response to a separate series of questions on whether they could have obtained financing from another source without the facility, 71% of the MPDF clients, 39% of the APDF clients, and 18% of the SEED clients gave affirmative responses, but only 29%, 5%, and 18%, respectively, said that they could have done so on the same or better terms and conditions and in the same or a shorter time frame. 32 These sums are well below the $53 million per year reportedly raised, $42 million per year actually raised, and $69 million per year of investments realized for the four institutions reviewed by OEU in 1995, but the facilities now give relatively less importance to financial advisory services than they did in the 1990s. 33 The importance of this constraint to the availability of financing to SMEs is highlighted in WBG’s Doing Business in 2004: Understanding Regulation, Chapter 5. 34 The estimates provided in this section include incremental sales and profits of companies that may not have needed subsidized services and, in the case of AMSCO, companies that the evaluation team considered unlikely to be financially viable after the departure of the expatriate managers provided by AMSCO. The subsequent comparisons of benefits and costs exclude these companies. 35 This quasi-experimental research design was based on the fact that substantially similar companies became facility clients at different times. The companies that became clients in the more recent years served as control groups for the companies that had become clients earlier. The evaluation’s inability to identify statistically significant impacts for APDF may reflect a combination of data inadequacies, inability to identify when APDF clients first began to receive services, too short a period for the impacts to be felt, or a true lack of statistically significant impacts. The SEED evaluation did not include a regression analysis because of the small sample size. For a more detailed explanation of the methodology, see Nexus Associates Inc., “Evaluation of the Mekong Project Development Facility: Final Report,” June 2002, Appendix F. 36 95% confidence interval 3% to 28%. Statistically significant at the 5% level of significance. Nexus Associates, op. cit., p. 43. 37 Sales of companies with an AMSCO-seconded manager in place would be 36% higher than those without (95% confidence interval 8% to 70%). Sales of companies that received AMSCO training would be 43% higher (95% confidence interval 13% to 83%. Statistically significant at the 1% level of significance. DFC Ltd., “Evaluation of the African Management Services Company (AMSCO), Jan. 2003, p. 38. 38 “Programs involving direct support to private firms in developing countries…are in many ways similar to the activities of venture capitalists. Many of the ventures supported through such programs are high-risk with a relatively low probability of success. A smaller number have high returns, both private and social, often with significant spill- over...The challenge is to design programs in a manner such that there is an adequate number of successful ventures…to justify the resources expanded….” G. Batra and S. Mahmood, “Direct Support to Private Firms: Evidence on Effectiveness,” December 20, 2001, p. 18. 39 For APDF, which was covered by the 1995 OEU report, facility costs per project reported as financed fell from an average of $241,000 for 1986-93 to $182,000 for 1993, an average of $140,000 for FY00-02, and $97,000 for FY02. 40 Some projects went ahead without the financing the facilities tried to arrange. 41 The January 2000 business and implementation plan specified that SEED was to have a five-year life. 42 For the most recent years covered by the 1995 evaluation, fees covered 4% of PEDF’s costs, 9% of PBAS’, and 27% of CCBAS’. 43 SEED, Annual Report, 2001, p. 7. 44 Based on SEED evaluation, Table E-2, and data collected during field work. Information on company size was not available for all companies. 45 Since the AMSCO program provides a package of seconded managers and staff training, analyzing the cost recovery for the two types of services separately would be artificial. 46 This problem is a general one. J. Levitsky (ed.), Business Development Services: A Review of International Experience, London, 2000, pp. 135 and 146, shows similar findings in Latin America and Romania. 47 AMSCO’s company-specific training, of course, is even more specialized. 48 The training institutions benefiting from subsidized training materials provided by MPDF, however, do compete actively among themselves and with other institutions. Moreover, some other institutions that do not participate in the MPDF program receive more substantial subsidies from bilateral sources and offer training at significantly lower prices. 49 Roughly 15% to30% of the chief executives were women. 50 Most of this section ignores SEED, since its training program was too young to yield meaningful results. In particular, the survey generated estimates of incremental sales from only one company that had received training services from SEED prior to 2002, the year for which actual and counterfactual estimates of sales were requested. _______________________________________________________________________________________________ 50 SME Facility Study Operations Evaluation Group 51 Since AMSCO provides both advisory and training services, its impacts were covered in the previous chapter. 52 The regression analysis, comparing the actual performance of companies for years after they had begun receiving services with the performance of similar companies that had not yet begun receiving services, yielded no statistically significant results for APDF. It found that MPDF training boosted export sales by more than 100%, but this finding did not extend to total sales. In the case of AMSCO, the combination of company-specific training services and seconded expatriate managers boosted sales on average by about 40%. No regression analysis was carried out for SEED because of the small sample size. 53 The analysis assumes that the companies benefiting from the facilities’ training services increased their sales without significant incremental investments. 54 APDF, e.g., used 212 local consulting firms for its advisory services during FY99-02, or 75% of the total, compared with 66% in 1995. APDF, however, treats branches of foreign firms as local. 55 APDF and SEED see business associations as vehicles for (a) undertaking group marketing and purchasing efforts, establishing quality standards, and delivering training services, and (b) advocating the interests of members. Chapter 6 deals with the associations’ advocacy role. SEED also treats its work with two municipal economic development organizations as capacity building efforts. This report deals with them in the next chapter, covering business climate programs. 56 APDF’s business association activities have focused on one organization, South African Women Entrepreneurs Network. 57 Half the consulting firms benefiting from APDF’s and SEED’s intensive capacity building efforts had some affiliation with foreign consulting firms, and 16% were partly owned by foreign consulting firms. 58 Separately from the facilities, PEP established and provided capacity building services to 11 business consulting centers in Ukraine, provided capacity building services to eighteen business associations in Belarus, and has arranged for 13 consultants from Uzbekistan to receive training from the PEP-sponsored consulting centers in Ukraine. 59 In contrast, the 11 consulting and training centers that PEP established in Ukraine during 1994-2001 had reportedly provided consulting services to an average of 200 local enterprises each by mid-2001. 60 S. Thompson and M. Dolinsek, “EBRD/TMG Independent Operational Review: Final Report,” Investissement Developpement Conseil, June 2003. 61 A group of forty multilateral, bilateral, and other development agencies has developed this new paradigm, which is embodied in Committee of Donor Agencies for Small Enterprise Development, Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention (2001 Edition), WBG, SME Department, February 2001. See also K. Hallberg, A Market-Oriented Strategy for Small and Medium Scale Enterprises, IFC Discussion Paper No. 40, The World Bank, 2000. 62 The 18 associations being assisted by PEP in Belarus have expanded their membership from 10,600 to 17,100. 63 The terms of reference did not call for assessing these benefits. Estimating the economic benefits from at least some capacity building programs, however, could be done. 64 See Chapter 6, below; A.G. Tabuenca and J.J. Llisterri, “Enterprise Development Centres in Latin America,” in J. Levitsky (ed.), pp. 127 and 135. 65 The previous chapter considered the facilities’ assistance to business associations. 66 In view of the importance of the business climate, OEG is conducting an evaluation of IFC’s investment climate activities. 67 T. Beck and A. Demirguc-Kunt, “SMEs, Growth, and Poverty, “Public Policy for the Private Sector,” WBG, Private Sector Development Vice Presidency, Feb. 2004, p. 4. 68 Difficulties in assessing the impact of efforts to improve the business climate are not limited to the facilities. The team preparing the World Development Report, 2003-2004, which focuses on investment climate issues, found that, despite reports of success, expected reforms were not carried out in most cases and that, even when reforms were carried out, no one had monitored actual outcomes. 69 IFC provides more than $7 million per year to its Capacity Building Facility (CBF), administered by the SME Department, for grants to support innovative small business development projects and models. Through FY03, CBF had provided more than $21 million in grants for roughly 100 projects, roughly on a 4:1 basis. These grants support one-time demonstration projects that can be replicated and scaled up in the future and broader, enduring strategic alliances with on-the-ground, best practice SME institutions that can led to other projects. See IFC, 2003 Annual Review: Small Business Activities, pp. 10-11 and 38-40. 70 For convenience, some specialized SME Facility programs are covered in this chapter. 71 The SME Department does not maintain a readily accessible knowledge base on other programs for fostering SME development. _______________________________________________________________________________________________ SME Facility Study 51 Operations Evaluation Group 72 EBRD, Project Evaluation Department, “Special Study: TurnAround Management Program,” April, 2004. 73 Some of the facilities have used retired managers provided by these programs. 74 Although APDF contributed staff time to help identify training requirements and coordinate the work of outside consultants, IFC’s Capacity Building Facility, managed by the WBG’s SME Department, provided the funding cited here. This program involves a form of firm-level services. It is treated separately here to facilitate comparisons with similar programs. 75 IFC Strategic Directions, April 1, 2004. 76 J. Grierson, D.C. Mead, and E. Kakore, “Business linkages in Zimbabwe: the Manicaland Project,” in J. Levitsky (ed.), op. cit., pp. 187-195. 77 A. de Crombrugghe and J.C. Montes, “Global experience in industrial subcontracting and partnerships,” in J. Levitsky, op. cit., pp. 196-207. 78 E. Oldsman, “Making Business Development Work: Lessons from the Enterprise Development Center in Rafaela, Argentina,” Inter-American Development Bank, April 2000. 79 Along similar lines, EBRD has recently approved an investment to finance Bosch automobile service franchisees in Ukraine. Moreover, a Bank staff member reports that a company he had established before joining the Bank licensed more than 2,000 small entrepreneurs in India to produce cement roofing tiles using technology transmitted by interactive video training. He reports that his company was profitable and that the franchisees generated sales of nearly $50 million per year. 80 Dangler, op. cit., pp. 25-27. 81 EBRD, Technical Cooperation: Helping to Build a Brighter Future, EBRD Report to the Donor and Official Co- financing Community, 2002-03,” p. 80. 82 S. Thompson and M. Dolinsek, “EBRD/TMG Independent Operational Review: Final Report,” Investissement Developpement Conseil, June 2003. 83 T. Biggs, “A Microeconomic Evaluation of the Mauritius Technology Diffusion Scheme (TDS),” World Bank, Regional Program on Enterprise Development, Discussion Papers, Oct. 1999. 84 T.A. Riley and W.F. Steel, in Levitsky (ed.), op. cit., pp. 165-175. 85 World Bank, Doing Business in 2004: Understanding Regulation,” 2004, pp. 55-69. 86 Pakistan Credit Rating Agency, Chengxin International Credit Ratings Ltd. (in China), Thomson Rating Philippines, DCR Lanka, and Thai International Rating Agency). 87 IFC, 2003 Annual Review: Small Business Activities, p. 16. 88 OEG’s predecessor, OEU, observed in 1995, “The degree of institutional oversight exercised has varied depending on the interests of the responsible managers, and IFC’s efforts to encourage the facilities to learn from each other’s experience have been at best sporadic.” 89 The evaluation did not review these developments. 90 Although the terms of reference did not call for the evaluations to examine these issues, the evaluations identified many shortfalls as a by-product of seeking and reviewing needed information. 91 As suggested in footnote 10, AMSCO differs from the traditional facilities. AMSCO does not have to follow instructions from IFC, does not use IFC information technology, and is not subject to IFC financial controls, including oversight by the Facilities Financial Control Unit. 92 The shortfalls in the facilities’ management information systems go beyond what the facilities themselves can do. Broader changes are needed in IFC and even WBG systems. The Donor Funded Operations initiative is addressing these issues. 93 The shortfalls were particularly serious for AMSCO. For example, AMSCO, a private sector company that was intended to charge fees to cover its costs and generate some profits, had full control of the donor funds used for subsidies to its clients. The larger the subsidies, the larger the fees the clients could pay. IFC established a non-profit foundation in 1997 to channel the donor funding, but initially charged AMSCO itself with managing the foundation. It did not really address the inherent conflicts of interest and lack of transparency until it appointed an independent board of trustees, with members representing the donors and other major stakeholders, in 2002. 94 The 1995 evaluation had raised the same issue. 95 According to the Facilities Financial Control Unit, (a) IBRD had suspended issuance of financial statements for donor funded operations pending completion of a Bank review of control matters in connection with these operations, but (b) the financial statements have now been issued to the donors. 96 These issues will presumably be addressed in the uniform project completion measurement system, applicable to all technical assistance and advisory services activities in the Corporation which is now being developed.” _______________________________________________________________________________________________ 52 SME Facility Study Operations Evaluation Group 97 MPDF has adopted the donor viewpoint and, over the past few years, has described itself as “a multi-donor facility managed by IFC.” 98 OEU, op. cit., P.25. 99 Although aimed at improving efficiency, rather than permitting them to open new offices, APDF and AMSCO are co-locating their offices and seeking to increase their collaboration more generally. 100 The buildings were located near each other, but informal interaction is likely to be less frequent among staff members in separate buildings. 101 The differences in client performance among the facilities are not significant. 102 IFC’s strategic initiative for donor funded operations also calls for improved strategic management of IFC’s TAAS activities. 103 The 1995 evaluation had also called for the facilities to be sensitive to the donors’ concerns. _______________________________________________________________________________________________ SME Facility Study 53 Operations Evaluation Group Program Logic Model Seconded Managers Additional Financial capital advisory investment services Improvements in Increased Changes in Changes in throughput, sales, Economic knowledge, business quality and unit profitability & development Consultancy attitudes, & processes cost employment Services behavior Increase in availability of finance and Training financial services Company Training Training managers & institutions employees Development of course material Facilities Changes in Changes in Improvements in knowledge, business Consultants quality & supply of attitudes & processes Technical services behavior assistance Changes in Changes in policies, strategies, Increase in supply Financial knowledge of financing & institution attitudes, & processes & financial instruments financial services behavior Training Business Changes in Establishment & Provision of Association knowledge, development of member services s attitudes & business & advocacy behavior associations Technical Changes in Assistance policies, laws & regulations National & Sub- Changes in Research national knowledge, Changes in Improved business governments attitudes & administrative enabling Annex 1.1 behavior procedures environment Page 1 of 1 Advocacy Change in programs & resource allocation IFC-SUPPORTED SME FACILITIES & SIMILAR PROGRAMS Facilities or Geographic Mandates IFC Managed FY03 FY03 Most Comments Similar Region Budget Staff Recent Programs ($ Evaluation millions) Caribbean & Caribbean & To render project 1981-94 Nil Nil 1995 OEU Originally Central American Central preparation & financing Caribbean Project Business America assistance for smaller Development Advisory Service projects Facility. No longer (CCBAS) in existence. African Project Sub-Saharan To support the 1986- 6.9 55 2003 IFC established Development Africa development of OEG- ESSA in 1994 and Facility (APDF) & competitive African directed closed it in 1/02. Enterprise SMEs, with services that APDF integrated Support Services are needed & affordable, ESSA into its own (ESSA) working mainly through operations in 7/00. local institutions & consultants African Sub-Saharan To assist private sector 1989- 9.6 55 2003 Management Africa companies, particularly OEG- Services SMEs, to become directed Company globally competitive & (AMSCO) sustainable Pacific South Pacific To assist & accelerate 1991- 1.5 12 2000 Hardin Until recently, Enterprises islands the development of & Assoc. known as South Development productive, self- Pacific Project Facility (PEDF) sustaining small- and Facility (SPPF). Annex 1.2 medium-sized private sector enterprises in Page 1 of 3 Pacific island countries. Polish Business Poland To provide financial and 1991-96 Nil Nil 1995 KPMG No longer in Advisory Service technical advisory existence. (PBAS) services to SMEs in Poland Page 2 of 3 Annex 1.2 Facilities or Geographic Mandates IFC Managed FY03 FY03 Most Comments Similar Region Budget Staff Recent Programs ($ Evaluation millions) Business Ukraine To deliver business 1994-2001 Nil Nil 7/01 Self- Part of IFC’s Development development services to evaluation Private Enterprise Project (UBDP) – Ukraine’s emerging Partnership (PEP) Ukraine private sector, in from 5/00. IFC Consulting particular to SMEs. withdrew its Network support in 2001. Mekong Private Vietnam, To foster growth in the 1997- 4.2 82 2002 Until recently, Sector Cambodia, number and size of OEG- known as Mekong Development Laos domestic private firms in directed Project Facility (MPDF) Vietnam, Lao PDR & Development Cambodia Facility Belarus SME Belarus To boost the capacity of 2000- 0.4 n.a. Not Part of IFC’s development Belarusian business evaluated Private Enterprise efforts (not a associations and NGOs Partnership (PEP) separate facility) involved in SME from 5/00. development through joint implementation of informational and educational programs for entrepreneurs and the population. Southeast Europe Albania, To support SME 2000- 5.5 83 2003 Enterprises Bosnia & development & improve OEG- Development Herzegovina, the overall environment directed (SEED) FYR of for SME growth & Macedonia, & competitiveness in the Serbia, region Montenegro & Kosovo Facilities or Geographic Mandates IFC Managed FY03 FY03 Most Comments Similar Region Budget Staff Recent Programs ($ Evaluation millions) China Project Sichuan To help support the 2001- 2.5 27 Too early Development Province, development of private Facility (CPDF) China SMEs in the interior of China, with an initial focus on Sichuan Province South Asia Bangladesh, To alleviate poverty 2002- 6.0 26 Too early Enterprise Nepal, through promotion of Development Bhutan, robust SME sectors that Facility (SEDF) Northeast will employ many more India people than is now the case North Africa Algeria, Egypt, To support the 2003- 3.0 n.a. Too early Enterprise Morocco development of markets Development and institutions that are (NAED) key to SME growth Program for Eastern To promote and support 2003- 3.5 26 Too early Eastern Indonesia Indonesia the development of the SME Assistance SME sector in Indonesia (PENSA) Latin America Initially Bolivia, To promote private sector 2004- n.a. n.a. Too early Not in operation SME Program Honduras, growth through support to during FY03. Nicaragua, SMEs Peru Annex 1.2 Page 3 of 3 SERVICES PROVIDED BY IFC SME FACILITIES (& PRIVATE ENTERPRISE PARTNERSHIP)1 (X = major activity; + = minor activity; * = activity added after facility established) Traditional Facilities AMSCO Private Enterprise Partnership (PEP) CCBAS APDF PEDF PBAS MPDF SEED CPDF SEDF NAED IEDF LAC Firm-level services X X X X X X X X X X X X X Assisting companies in raising financing X X X + X X X X x X Promoting business ideas & seeking + + + X promoters for them Providing, arranging or funding consulting + X + X X X X X X X services Providing temporary managers + X Providing company-specific training X Providing training that is not company- specific • Training courses run by facility +* X X X • Training courses run by others X X X X + X • Books & computer programs for self- X X education Developing linkages to suppliers and +* X X X X X distributors Support to clusters of businesses X Improving corporate governance X* X Networking among clients X* Access to information (incl. computer X based) Capacity building + X + + X X X X X X X Financial institutions + +* X X X X X X X X Consultants + X* +* +* X X X X X X X Training institutions +* X X X X X Business associations +* + X X X X X Local economic dev. organizations X E-commerce platform + Seeking to improve business X X X X X X X enabling environment 2 Research & issuance of reports X X X X* X Drafting legislation and regulations X X Lobbying X X X X X X Help with implementation X X Annex 1.3 Page 1 of 1 1 Includes services previously or currently provided. 2 Corporate governance manuals only. Annex 1.5 Page 1 of 6 Summary of Research Findings Related to Arguments on Subsidizing SMEs While programs assisting SMEs are widely supported and endorsed, the issue of whether subsidized assistance to SMEs is justified is more controversial. The research literature on justifying subsidies to SMEs centers on three basic lines of reasoning: First, SMEs make particularly important contributions to private sector development and poverty reduction when compared with larger firms, therefore subsidies are needed to foster their development. Second, if one wants to work with the private sector in developing countries, that means working with SMEs as there are few large established firms to work with in these countries; assisting the private sector in developing countries means assisting and subsidizing SMEs. Third, subsidizing SMEs is justified because of market failures. The literature review commissioned for this study, summarized below and in the following table, shows that sometimes the findings differ for SMEs in developed countries versus those in developing countries. But for SMEs in developing countries as well as developed countries, the literature supports the last argument as a reason for subsidizing SMEs. The complete literature review can be obtained at www.ifc.org/oeg. Under conventional wisdom, subsidies to SME programs are justified because small businesses make particularly important contributions to poverty reduction, job creation, entrepreneurship development, innovation, export development, competition, dynamism and flexibility in the economy, and social and political objectives. A review of the literature, summarized in the following table, indicates SMEs in developing countries clearly do contribute to many of these ends, but their ability to do so appears to be no greater than that of larger enterprises. Another argument for subsidies is that the emerging private sector in many poor countries consists essentially of SMEs and, therefore, assisting the private sector calls for assisting SMEs. It is again true that in many developing countries, the private sector consists largely of SMEs. However, as indicated by the literature review, this argument does not suggest that SMEs are more desirable than large firms. Therefore it is not a rationale for directing subsidies specifically to SMEs. The third argument does justify specific targeting of SMEs in some situations. The argument, supported by the evidence in the literature, is that devoting subsidized resources specifically to fostering SME development or targeting programs specifically to SMEs may be warranted on economic grounds because of market or institutional failures.i Efforts to address such failures can help remove barriers to the development of SMEs and, hence, allow them to contribute to growth and poverty reduction. The following table summarizes the arguments made and considers the evidence available in the literature with respect to these arguments. Arguments Made Evidence & Comments SMEs are a powerful force for A cross-country study using data for 76 countries found no poverty reduction.ii evidence that SMEs differentially reduce poverty.iii Moreover, SME owners and workers are unlikely to be the poorest of the poor, and SME promotion may not be the most effective poverty reduction instrument.iv Also, see evidence on other arguments, below. Annex 1.5 Page 2 of 6 SMEs create jobs.v Of course SMEs create jobs and the research literature finds that they create more jobs than do larger firms. But the research also finds one must distinguish between gross and net job creation. Small firms are disproportionate creators of new jobs, but they also lose them disproportionally, given their greater instability and much higher observed failure rates. The research evidence finds no systematic relationship between rates of net job creation and firm size that would justify subsidizing SMEs. Gross job creation is indeed higher for SMEs than for large enterprises, but net job creation (after allowing for jobs lost due to companies’ going out of business) is not. These findings are based on data for U.S. and 5 countries in Africa.vi Even if SMEs were more effective than large enterprises in net job creation, subsidizing SME development could shift capital towards firms with lower productivity, lower growth prospects, or both, which would adversely affect longer-term output and sustainable employment.vii SMEs are less capital intensive than This assertion is not supported by evidence. Firm size has not been large-scale enterprises.viii found a reliable predictor of labor intensity.ix SMEs create good jobs.x Evidence from developed and developing countries indicates large firms generally provide higher wages, better benefits, better working conditions, and greater security than SMEs.xi SMEs serve as seedbeds for The available evidence for developed countries supports innovation.xii higher innovation rates for small firms for some industries that are high-technology and skill intensive industries, such as computers and for companies following niche strategies. Large firms appear to be more active in funding university- based research, but SMEs are apparently better able to exploit the research findings to generate marketable innovations. These findings are not, however, transferable to the developing world. In developing countries, while there are exceptions, the research finds technology transfers from abroad into larger firms generally drive technological progress.xiii SMEs serve as seedbeds for A study in the U.K. found that new firm formation was entrepreneurship. greater on the part of employees of smaller firms. But this finding may reflect differences in the capacity of different industries to generate new firm formation. Moreover, no information is available on other countries.xiv Annex 1.5 Page 3 of 6 SMEs serve as seedbeds for export The literature review finds that the seedbed function of small development. firms does not extend to exports in most countries. The propensity of small firms to export is low, particularly in developing countries. There are exceptions in Hong Kong, Taiwan, northern Italy, and a few other regions, but even in these cases, large trading companies generally facilitate the exports of small firms and the SMEs are indirect exporters, supplying intermediate inputs or subcontracting to larger export firms.xv SMEs add dynamism and flexibility The research finds SMEs can add dynamism and flexibility to business activity because of their to business activity and improve economic performance. suppleness in substituting factors of The research shows evidence that size-related irregularities production and their quicker, less in the distribution of firms can influence the health of the costly adjustment to economic economy. Evidence from transition economies suggests shocks.xvi heavy reliance on large enterprises weakened dynamism and flexibility. But excess reliance on SMEs can interfere with economies of scale. Moreover, excessively skewed firm-size distributions are usually due to policy-imposed distortions, and removing these policy distortions is the best way to deal with such problems.xvii SMEs contribute to social or The research shows no systematic evidence on this issue. political objectives, e.g. serving Moreover, assisting SMEs may not be the most effective specific ethnic groups or political way to address these objectives.xix constituencies, contributing to regional development, social stability, political stability, or democracy.xviii The emerging private sector in This argument does not suggest that SMEs have any benefits many poor countries consists over large enterprises and, hence, does not call for giving essentially of SMEs.xx any preference or subsidy to SMEs. Healthy, competitive, sustainable The research finds no systematic evidence on this issue, but SME sectors rarely evolve on their the experience of many countries contradicts this argument. own.xxi Devoting subsidized resources A significant body of literature indicates that markets can fail specifically to fostering SME to yield socially appropriate prices, in terms of their development or targeting programs rationing function and in terms of the incentive signals specifically to SMEs may be provided to enterprises, and that institutional failures can warranted on economic grounds constrain private sector development, the more so in the case because of market or institutional of SMEs. xxiii failures. Markets may fail to Annex 1.5 Page 4 of 6 allocate resources efficiently because, among other things, decision-makers may have only imperfect information, firms cannot capture the external benefits that may arise from some types of expenditures, or individual firms have inadequate incentives to spend money on public goods.xxii Annex 1.5 Page 5 of 6 Notes i Use of donor resources may also be justified by equity concerns. Persons with capital or skills are better able to benefit from market opportunities. Donors may wish to use the facilities to improve opportunities for disadvantaged segments of the population. ii WBG, World Bank Group Review of Small Business Activities, 2001, p. 6. WBG, Annual Review: Small Business Activities, 2003, p. 2. K. Hallberg, A Market-Oriented Strategy for Small and Medium Scale Enterprises, IFC Discussion Paper No. 40, 2000, p. 5. iii T. Beck, A. Demirguc-Kunt, and R. Levine, “SME’s Growth and Poverty: Cross-Country Evidence, Nov. 5, 2003, draft, p. 4. iv K. Hallberg, op. cit., p. 5. v WBG, op. cit., p. 6; WBG, 2003, op. cit., pp. 2 and 4; IFC Strategic Directions (IFC/R2004-0052), April 1, 2004, pp. 5 and 6; Hallberg, op. cit., p. 2; D. Birch, The Job Generation Process,” Final Report to Economic Development Administration, Cambridge, MA 1979; D. Birch, “Who Creates Jobs,” The Public Interest, No. 65, 1981; D. Birch, Job Creation in America: How Our Smallest Companies Put the Most People to Work, New York, 1987 (citations of Birch taken from Biggs, op. cit.). vi T. Biggs, “Is Small Beautiful and Worthy of Subsidy? Literature Review,” prepared as working paper for this study, pp. 3-5 and 18; Hallberg, op. cit., pp. 3-4; Beck, et al., op. cit., p. 7; C. Armington and M. Odle, “Small Business: How Many Jobs?” Brookings Review, 20 (Winter, 1982); Dunne, Roberts and Samuelson (1987); J. Leonard (1986); C. Brown, J. Medoff and J. Hamilton, Employers: Large and Small, Cambridge, MA, 1990; Davis, Haltiwanger and U Schuh (1993); T. Biggs and M. Shah, The Determinants of Enterprise Growth in Sub- Saharan Africa: Evidence from the Regional Program on Enterprise Development, World Bank Discussion Paper, 1998. Some of these sources cited in Biggs, op. cit. without further information. vii Biggs, op. cit., p 19; Bendick and Egan (1987), cited in Biggs, ibid. viii Beck, et al., op. cit., p. 1. ix Biggs, op. cit., p. 6; Hallberg, op.cit., p. 3; Beck et al., op. cit., p. 7; and works cited by Biggs, viz., I.M.D. Little, D. Mazumdar and J. Page, Small Manufacturing Enterprises: A Comparative Analysis of India and Other Economies, Oxford Univ. Press, 1997, and D. Snodgrass and T. Biggs, Industrialization and the Small Firm, International Center for Economic Growth, 1996. x Beck, et al., op.cit., p. 8. xi Biggs, op. cit., pp. 5-6 and 18-19; Hallberg, op. cit., pp. 4-5; Beck et al., op. cit., pp. 7-8; and sources cited by Biggs, viz. Brown, et al., op. cit., Mazumdar, 1999, World Bank, World Development Report: Works in an Integrating World, 1995, and M. Rosenzweig, “Labor Markets in Low-income Countries,” in Chenery and Srinavasan, Handbook of Development Economics, North Holland, 1988. xii Biggs, op. cit., p. 6, citing UK, Bolton Report, “Committee of Inquiry on Small Firms,” CMND 4811, London, HMSO; and Hallberg, op. cit., p. 4. xiii Biggs, op. cit., pp. 6-8; Hallberg, op. cit., p. 4; and works cited by Biggs, viz., Z. Acs and D. Audretsch, “Innovation, Market Structure and Firm Size,” Review of Economics and Statistics, No. 69, Nov. 1987; Link and Rees (1990); Z. Acs, D. Audretsch, (1992, 1994); N. Rosenberg, Perspectives on Technology, Cambridge. U. Press, 1976; N. Rosenberg and L. Birdzell, How the West Grew Rich, Cambridge U. Press, 1986; and W. Baumol, Entrepreneurship, Management and the Structure of Payoffs, MIT Press, 1993; T. Biggs, M. Shah and P. Srivastava, “Technological Capability and Learning in African Firms, World Bank Technical Paper, 1996; A. Rodriguez-Clark, “Multinationals, Linkages and Economic Development, American Economic Review, No. 86, 1996; H. Pack, “Learning and Productivity Change in Developing Countries,” in Trade Policy, Industrialization and Development, Oxford, 1992;and Pack and Westphal, 1986. xiv Biggs, op. cit., pp. 12-13, and papers cited by Biggs, viz., P. Johnson and D. Cathcart, “The Founders of New Manufacturing Firms: A Note on the Size of Their ‘Incubator’s Plants,” The Journal of Industrial Economics, Vol. CCVIII, 1979; P. O’Farrell and R. Crouchley, “An Industrial and Spatial Analysis of New Firm Formation,” Regional Studies, Vol. 18, 1983, and D. Audretsch, Innovation and Industry Evolution, MIT Press, 1995. xv Biggs, op. cit., pp. 8-9, and works cited by Biggs, viz., Bigsten, et al., 1998; Biggs, et al., 1995; Regnier, 1993; Cortes, Berry and Ishaq, 1987; B. Nooteboom, “Firm Size Effects on Transaction Costs,” Small Business Economics, Vol. 5, No. 4, 1993. xvi Biggs, op. cit., p. 12, citing Carlsson (1996). Annex 1.5 Page 6 of 6 xvii Biggs, op. cit., pp. 13-17 and 19-21, and works cited by Biggs, viz., Carlsson, 1996; Acs and Andretsch, 1993; Invernizzi and Revelli, 1993; S. Nguyen and A. Reznek, “Factor Substitution in Large and Small U.S. Manufacturing Establishments: 177-1982” Small Business Economics, 1991; A. Thurik, “Between Economics of Scale and Entrepreneurship, Research Report 9494, EIM, 1994; D. Snodgrass and T. Biggs, Industrialization and the Small Firm, International Center for Economic Growth, 1996; Acs, Carlsson and Thurk, 1996; Hallberg, op. cit.; Acs, 1996; J. Tybout, “Manufacturing Firms in Developing Countries: How Well Do They Do and Why?” World Bank, Policy Research Working Paper, No. 1965; Ho, 1980; Cortes, op. cit.; Little, Mazumdar and Page, op. cit.; Leidholm and Mead, 1987; Fikkert and Hassan, 1996; Tybout and Westbrook, 1995; Aitken and Harrison, 1994, Aw and Hwang, 1995; Biggs, et al, 1995; M. Bendrick and M. Egan, “Transfer Payment Diversion for Small Business Development: British and French Experience,” Industrial and Labor Relations Review, July 1987; Biggs, Oppenheim and Schmitz, 1986. xviii Hallberg, op. cit., p. 5; WBG, 2001, op. cit., p. 6; WBG, 2001, op. cit., p. 2. xix Biggs, op. cit., pp. 28-29 and Brown, et al., cited by Biggs. xx Hallberg, op. cit., p. 5, and (cited by Hallberg) I.M.D. Little, D. Mazumdar and J.M. Page, Jr., Small Manufacturing Enterprises: A Comparative Analysis of India and Other Economies, New York, 1987. xxi WBG, op. cit., p. 6. xxii Public goods have two unique properties. First, consumption of a public good by one consumer does not affect the ability of others to benefit from it. Second, no one can be prevented from benefiting from the good, even if unwilling to pay for it. To the extent that people are expected not to be willing to pay, private supply of the public good may not be profitable and, thus, the market may not supply it. An improved business climate is one example of a public good. xxiii See T. Biggs, “Is Small Beautiful and Worthy of Subsidy? Literature Review,” prepared as working paper for this study; M. Schiffer and B. Weder, Firm Size and the Business Environment: Worldwide Survey Results, IFC Discussion Paper No. 43; T. Beck, A. Demirguc-Kunt, and V. Maksimovic, “Financial and Legal Constraints to Firm Growth: Does Size Matter?” Jan. 2002. draft.(http://rru.worldbank.org/Hot_Topics.asp); and A. Brunetti, G. Kisunko, B. Weder, “Note on an Institutional Bias Against Small, Local Firms in Less Developed Countries,” April 1999. FIRM-LEVEL SERVICES Facility Services Facility’s Role APDF Business Advisory Services. APDF (a) prepares a business plan, APDF Business Development Officer typically works in concert with which serves as a prospectus, for submission to financial institutions, one or more consultants retained by APDF to prepare the business plan. (b) identifies financial institutions that may be interested in the Consultants are called on to analyze particular aspects of the business or proposal, & (c) meets with bank officials to review project documents, prepare the entire plan. The Business Development Officer typically discuss loan applications, and help move the application towards a conducts the financial analysis and is responsible for the final product. commitment. Studies conducted by consultants or investment officers frequently contain recommendations on how the enterprise might improve its operations. Enterprise Support Services. APDF provides consulting services to Typically, Business Development Officers work in a project help companies formulate strategic plans, develop marketing and sales management capacity, linking clients to qualified third-party service strategies, develop organizational structures and human resources, providers. The APDF Business Development Officer helps define the improve productivity and quality assurance, improve purchasing and company’s needs, formulates an appropriate course of action, marshals inventory management systems, improve financial management and resources, and oversees the provision of services. accounting systems, and develop management information systems. Secondment. At times, APDF provides managers to work with client companies on a short-term basis. MPDF Financial Advisory Services. Same as for APDF Business Advisory MPDF investment officers typically work in concert with outside Services. consultants retained by MPDF. Consultants are called on to undertake specific analyses of particular aspects of the business (especially market assessments) that are subsequently summarized in the project document. In all cases, MPDF’s investment officers are responsible for the final product. Technical Assistance. Assistance, not directly tied to raising Although MPDF investment officers sometimes provide direct financing, dealing with marketing, business operations, management assistance, based on their own expertise and experience, the typical information systems, ISO 9000 certification, or other issues of approach is for investment officers to serve in a project management importance to business. capacity, linking clients to qualified third-party service providers. The Annex 2.1 investment officer helps define the company’s needs, formulates an Page 1 of 2 appropriate course of action, marshal resources, and oversees the provision of services. Facility Services Facility’s Role Page 2 of 2 Annex 2.1 SEED Internal Enhancement Plans. SEED typically begins by conducting Although SEED business development analysts sometimes provide an assessment of a client’s current operations to identify critical needs direct assistance, based on their own expertise and experience, the and determine prospects for growth. SEED’s reports typically contain typical approach is for them to serve in a project management capacity, recommendations on improving production, marketing and sales, linking clients to qualified third-party service providers. The business financial controls, and management information systems and on the development analyst helps define the company’s needs, formulates an nature and scale of proposed investments. appropriate course of action, marshal resources, and oversees the Investment Plans. Same as for APDF Business Advisory Services. provision of services. Consulting Services. Companies can call on SEED for assistance related to marketing and sales, financial management, information Consultants are called on to undertake specific analyses of particular systems, or other issues. aspects of the business (especially market assessments) that are subsequently summarized in the project document. In all cases, SEED staff are responsible for the final product. AMSCO Recruitment of Expatriate Managers. AMSCO staff recruits expatriate managers or specialized staff for some of clients. In most cases, client does own recruitment. Secondment of Expatriate Managers. AMSCO hires managers and Handled entirely by AMSCO staff. assigns them to client companies in Africa. In some cases, it subsidizes cost. Company-Specific Training. AMSCO assesses client companies’ AMSCO staff prepares some needs assessments and selects trainers. training needs, assists the companies in preparing training plans and Others need assessments and all training plans and training done by selecting trainers, and subsidizes training. outside consultants. SIZE OF COMPANIES RECEIVING FIRM-LEVEL SERVICES WHEN FACILITIES BEGAN TO PROVIDE SERVICES BASED ON SURVEYS CARRIED OUT FOR EVALUATION APDF MPDF3 SEED4 AMSCO Annual sales (millions of $) BAS ESS • Mean 1.6 0.7 1.6 4.3 11.0 • Median 0.7 0.3 0.6 1.8 2.7 Employment • Mean 82 65 198 117 290 • Median 50 49 118 43 106 Companies not meeting None had sales of > $15 None had sales of > 2 clients out of 25 had 17 of 68 clients providing data had > criteria5 m., but 3 clients out of 87 $15 m., but 11 out of annual sales of > $15 m. & 300 employees, including 5 with > 1000 providing data had > 300 80 providing data had 2 out of 27 had > 300 employees and 2 with > 2000 employees, all within the > 300 employees, employees, including 1 with employees. Many companies were range of 350-500. including 2 with > 1,000. affiliated with large business groups. 36 1,000-1,500 groups had > 300 employees, including employees. 25 with > 1,000, 10 with > 5,000 & 3 with > 3,000. 3 MPDF has been given conflicting guidelines. The original feasibility study defined an SME as an enterprise with annual sales of less than $15 million. The 1996 IFC Board Report indicated that “MPDF would provide assistance to projects with annual revenues of less than US$10 million,” but later indicated that MPDF’s principal target would be “companies with total assets of less than $2.5 million and annual revenues less than $5 million.” Annex 2.2 4 Using figures in euros, assuming that US$ = €1 when facility had first contact with company (during period covered by evaluation). Page 1 of 1 5 The WBG defines small enterprises as enterprises with up to 50 employees, total assets of up to $3 million and total annual sales of up to $3 million, and it defines medium enterprises as enterprises with up to 300 employees, total assets of up to $15 million and total annual sales of u to $15 million. Until the establishment of the SME Department some facilities had used different t broad definitions for SMEs, but none had a narrower focus for its efforts. OWNERSHIP AT TIME OF FIRST CONTACT OF FIRM-LEVEL CLIENTS RESPONDING TO SURVEY APDF MPDF SEED AMSCO BAS ESS Wholly owned by local private investors 75% 71% 85% 73% 36% Foreign ownership • Some 16% 20% 11% 15% 53% • Majority 5% 11% 9% 9% 37% • 100% 2% 4% 4% 1% 18% Government ownership • Some 2% 3% <7% 9% 9% • Majority 0% 2% 0% 0% 1% • 100% 0% 1% 0% 0% 1% Annex 2.3 Page 1 of 1 RESULTS OF EFFORTS TO RAISE FINANCING APDF MPDF SEED Totals % Periods covered 1/1/99-6/30/02 1/1/97-12/31/01 1/1/01-9/30/02 Years covered 3.5 5 2.75 Number of projects reported as "completed" Total for period shown 136 96 20 252 100% Average per year 39 19 7 65 Amounts reported as raised Total for period shown $69 $58 n.a. n.a. Average per year $20 $12 n.a. n.a. Projects that actually raised financing Total for period shown 77 68 10 155 62% Average per year 22 14 4 40 Financing actually arranged Total for period shown $32 $46 $2 $89 Average per year $9 $9 $1 $19 Projects that have gone ahead or are to go ahead Total for period shown 59 82 9 150 59% Average per year 17 16 3 36 Total investment in projects that have gone ahead or are to go ahead Total for period shown $100 $51 $10 $161 Average per year $29 $10 $4 $43 Projects that raised financing & that would not have been able to obtain financing under the same terms & conditions & in the same time frame without the facility Total for period shown 69 44 6 119 47% Average per year 20 9 2 31 Projects that have gone ahead or are to go ahead & that would not have gone ahead without facility Total for period shown 21 31 4 56 22% Average per year 6 6 1 13 Average investment per project that has gone ahead $1.70 $0.63 $1.09 $1.08 Reported as raised/Number of projects completed $0.50 $0.61 n.a. n.a. Annex 2.4 Page 1 of 1 N.B. The facilities record projects as "completed" when a financial institution has indicated that it is willing to provide financing under specified terms and conditions. Annex 2.5 Page 1 of 1 IMPACT OF FIRM-LEVEL SERVICES APDF AMSCO MPDF SEED All clients BAS ESS Number of firms in population 232 134 98 255 311 70 Number of firms surveyed 142 113 49 107 103 33 % of companies that reported at 88 88 96 84 81 82 least one change in their business (n=105) (n=49) (n=44) (n=107) (n=94) (n=33) as a direct result of the facilities’ services % of companies that reported 83 81 93 73 68 59 improvements in at least one (n=103) (n=48) (n=43) (n=100) (n=84) (n=33) area.6 % of companies responding that 66 64 74 697 78 41 the facility assistance increased to (n=104) (n=50) (n=42) (n=107) (n=88) (n=32) a moderate or great extent the establishment’s ability to compete Without facility assistance, the 21 22% 13 12 5 6 company could not have survived (n=113) (n=105) (n=8) (n=107) (n=75) (n=33) and would have been forced to cease operations. (% responding “Yes”) Are the establishment’s annual 53 54 62 52 58 30 sales better than they would have (n=102) (n=48) (n=42) (n=100) (n=84) (n=33) been without the facility’s assistance? (% responding “Yes”) Are the establishment’s net profits 53 54 60 51 59 36 (% responding “Yes”) better than (n=102) (n=48) (n=42) (n=100) (n=83) (n=33) they would have been without the facility’s assistance? Incremental sales attributable to facility (for companies surveyed) ($ millions) • Total 24.7 24.4* 9.8 3.3 • Mean 0.9 0.5 0.2 0.14 • Median 0.03 0.1 0 0 • n 27 (19%) 51 (48%) 30 (29%) 23 (70%) Incremental employment attributable to facility (for companies surveyed) • Total 1042 788 1040 89 • Mean 22 16* 20 3 • Median 5 2 0 0 • n 48 (34%) 49 (46%) 51 (50%) 29 (88%) Statistically significant results of None • Sales of Sales 10% None regression analysis companies higher per with $1000 spent AMSCO on mgr. 36% consultants.* higher.** • Sales 5.7% higher per $1000 of management subsidies.** * Statistically significant at a 5% significance level. ** Statistically significant at a 1% significance level. 6 Capacity utilization, direct labor productivity, order-to-delivery time, on-time delivery rate, compliance with local and/or international quality management regulations and standards related to products and services, customer complaints or rejects, defect rate, employee absenteeism, number of workplace accidents, employee turnover rate, air, water, or ground pollution, energy usage, recycling or resource recovery. 7 Percentage of AMSCO respondents saying that facility had increased the company’s ability to compete (yes/no, rather than to what extent). Annex 2.6 Page 1 of 10 Benefits and Costs of Firm-level Services Traditional SME Facilities Benefits The individual evaluations estimated the incremental sales for the traditional SME facilities using two approaches. First, using a counterfactual approach, they asked clients what their sales would have been without the facility’s services and what they actually were. Second, using regression analysis, they compared the sales of companies that became facility clients at different times. These approaches yielded the following estimates: Table 2.6–1 Incremental Sales – For Companies Providing Information (millions of dollars & number of companies providing information) APDF MPDF SEED (For 2002) (For 2001) (For 2002) Based on counterfactual questions (companies providing information on sales and, Total Mean n Total Mean n Total Mean n where relevant, investments) • Investment projects that have been completed 12.8 1.4 9 8.4 0.3 29 0.15 0.05 3 • Investment project clients without completed projects 1.9 0.2 9 * * * 3.03 0.38 8 • All investment projects 14.7 0.8 18 n.a. n.a. n.a. 3.18 0.29 11 • Consultancy clients with no investment project 9.0 1.3 7 negl. negl. 13 0.09 0.01 12 • Total for companies providing information on both sales & (where relevant) investments 23.7 0.9 25 8.4 0.2 42 3.27 0.15 22 Total for all companies providing information on sales 24.7 0.9 26 9.8 0.2 52 3.27 0.14 23 Based on regression analysis (investment projects that have been completed, n.s.s. 23.5 0.6** 37 n.s.s. investment project clients without completed projects, and consultancy clients with no investment project) “n.s.s.” = Not statistically significant. * Included in consultancy clients with no investment project, since could not separate data on two groups of companies. ** Statistically significant at the 5% level of significance. For purposes of comparing benefits and costs, four adjustments were needed. First, some of the companies that have carried out investment projects said that they would have gone ahead even if they had not received assistance from the facility. These statements may or may not be accurate. Among other things, these statements do not take into consideration the time required to raise financing or the terms of the financing. In the case of APDF, for example, 21% of the companies saying that they would have gone ahead even without assistance from APDF also said that, absent APDF, it would have taken longer to raise the financing, the terms would have been worse, or both. To be conservative, however, OEG has excluded the incremental sales for all companies saying that they would have gone ahead with their investments without the facilities. Second, some other companies may not have needed facility services. This analysis assumes that companies owned 25% or more by foreigners did not need facility assistance. Third, companies that received services too short a time before the survey cannot be expected to report meaningful increases in sales. Since the MPDF survey asked for actual and counterfactual sales for 2001, the benefits and related facility costs taken into consideration for this analysis exclude projects that did not begin to generate sales from the project assisted before the beginning of 2001. Similarly, since the APDF and SEED surveys asked for actual and counterfactual sales for 2002, the benefits and Annex 2.6 Page 2 of 10 related facility costs taken into consideration for this analysis exclude projects the facilities did not begin to serve before the beginning of 2002. (The APDF and SEED surveys did not ask for the year the projects assisted began to generate sales.) Fourth, some companies provided information on incremental sales, but not incremental investments. Others provided information on incremental investments but not incremental sales. To match benefits and costs, companies that did not provide information on both have been excluded. The adjusted incremental sales are as follows: Table 2.6–2 Incremental Sales Based on Counterfactual Questions For Companies Providing Required Information on both Incremental Sales & Incremental Investments But Excluding Companies Not Needing Facility Assistance & Companies that Received Services Recently (millions of dollars & number of companies providing information) APDF MPDF SEED Total Mean n Total Mean n Total Mean n Investment projects that have been completed 7.47 3.74 2 5.17 1.72 3 0.00 0.00 0 Investment project clients without completed projects 0.07 0.02 4 * * * 3.03 0.76 4 All investment projects 7.54 1.26 6 n.a. n.a. n.a. 3.03 0.76 4 Consultancy clients with no investment project 8.97 2.24 4 negl. negl. 13 0.05 0.01 6 Total for companies providing information on both sales & (where relevant) 16.51 1.65 10 5.17 1.72 16 3.08 0.31 10 investments Total for all companies providing information on sales 24.67 0.95 26 9.79 0.19 52 3.27 0.14 23 * Included in consultancy clients with no investment project, since could not separate data on two groups of companies. OEG could not exclude from the regression analysis the types of companies mentioned in the previous paragraphs because the number of companies remaining would be too small to show any relationship. Thus, the results from the regression analysis are not comparable with the adjusted results from the counterfactual questions. The estimates came from a small proportion of the companies served and surveyed: Table 2.6–3 Proportion of Companies Providing Data APDF MPDF SEED Number of completed assignments in population • Investment project clients 134 96 20 • Consultancy clients with no investment project 98 13 30 • Total 232 109 50 Number of started assignments in population • Investment project clients n.a. 169 25 • Consultancy clients with no investment project n.a. 142 45 • Total n.a. 311 70 Number of firms surveyed • Investment project clients 64 n.a. 17 • Consultancy clients with no investment project 49 n.a. 16 • Total 113 103 33 Number of firms providing counterfactual sales estimates and (if relevant) information on investments • Investment project clients 18 n.a. 11 Annex 2.6 Page 3 of 10 APDF MPDF SEED • Consultancy clients with no investment project 7 n.a. 12 • Total 25 42 23 Number of firms providing data for regression analysis n.a. 37 n.a. Number of firms surveyed/Number of completed assignments (APDF) or number of projects started (MPDF & SEED) • Investment project clients 48% n.a. 68% • Consultancy clients with no investment project 50% n.a. 36% • Total 49% 33%. 47% Number of firms providing counterfactual sales estimates and (if relevant) information on investments/Number of firms surveyed • Investment project clients 28% n.a. 65% • Consultancy clients with no investment project 14% n.a. 75% • Total 22% 41% 70% Number of firms providing counterfactual sales estimates and (if relevant) information on investments/Number completed assignments (APDF) or number of projects started (MPDF & SEED) • Investment project clients 13% n.a. 44% • Consultancy clients with no investment project 7% n.a. 27% • Total 11% 14% 33% Number of firms providing data for regression analysis/Number of firms surveyed n.a. 36% n.a. Number of firms providing data for regression analysis/Number of completed assignments in n.a. 34% n.a. population n.a. = not applicable or not available N.B. APDF evaluation drew sample from companies with at least one completed assignment. MPDF and SEED evaluations drew samples from companies that had received assistance, i.e., from assignments started. Assuming that the companies not covered by the survey are similar to the surveyed companies, the incremental sales can be estimated roughly as follows: Table 2.6–4 Incremental Sales – Extrapolated (millions of dollars) APDF MPDF SEED Based on counterfactual questions (for companies Sample % Pop. Sample % Pop. Sample % Pop. providing information on both sales and Total Surveyed Total Total Surveyed Total Total Surveyed Total investments) • All investment projects 7.54 48% 15.71 5.17 33% 15.66 3.03 68% 4.46 • Consultancy clients with no investment 8.97 50% 17.94 Negl. 33% Negl. 0.05 36% 0.14 project . Based on regression analysis (investment projects n.s.s. 23.5 36% 65.3 n.s.s. that have been completed, investment project clients without completed projects, and consultancy clients with no investment project) “n.s.s.” = Not statistically significant. N.B. For MPDF, the amounts shown for investment projects relate only to projects that have been implemented, and the amounts shown for consultancy projects include investment project clients without implemented projects. To relate benefits and costs, this analysis assumes that incremental pre-tax profits would be equivalent to 10% of incremental sales for investment projects and 20% of incremental sales for pure consultancy assignments. These estimates would be inappropriate for the relationship between average profits before interest and taxes and average sales. They may be conservative, however, for the relationship between incremental profits and incremental sales. Indeed, the mean incremental profits for the AMSCO clients providing information on both incremental profits and incremental sales were Annex 2.6 Page 4 of 10 equivalent to 53% of incremental sales and the median was 16%. On a similar basis in a study of a non-IFC TA program private firms, mean profits were equivalent to 27% of sales and median profits 25%. OEG has used a lower rate of incremental profit for investment projects because more costs are likely to change in conjunction with an investment project than in conjunction with a pure consultancy project. Applying these percentages to the figures in Table 2.6-3 yields the following estimates of incremental profits attributable to the facilities: Table 2.6–5 Incremental Profits Assuming Incremental Profits Equivalent to 10% of Incremental Sales for Investment Projects & 20% of Incremental Sales for Pure Consultancy Projects (Millions of dollars) APDF MPDF SEED Based on counterfactual questions (for companies providing information on both sales and investments) • All investment projects 1.57 1.57 0.45 • Technical assistance clients with no investment project 3.58 Negl. 0.03 N.B. “n.s.s.” = Not statistically significant. N.B. For MPDF, the amounts shown for investment projects relate only to projects that have been implemented, and the amounts shown for consultancy projects include investment project clients without implemented projects. Costs Two types of costs need to be related to these benefits. First are the costs incurred by the facilities themselves. Second are the costs incurred by clients that carried out investment projects. Facility costs. Two preliminary comments are necessary on the facility cost estimates. First, since the purpose of this exercise is to assess whether the facilities can generate adequate returns in the future, the cost estimates are based on average unit costs for the most recent year, reflecting reductions due to increased volume and increased productivity. Second, as in the case of the benefits, the facility costs exclude the costs for projects too immature to provide benefits. Table 2.6–6 Fully-loaded Costs Facility & Service Provided $ millions APDF • BAS 5.39 • ESS 2.00 • Total 7.39. MPDF • Financial advisory 4.03 • Consultancy 0.07 • Total 4.10 SEED • IEP & IP 0.71 • IEP only 0.79 • Total 1.50 Annex 2.6 Page 5 of 10 Costs incurred by clients for investment projects. For the counterfactual approach, OEG can take the amounts invested by the specific companies that carried out investment projects that were not excluded because of having said that they would have gone ahead without the facility and that provided information on both the amounts invested and on incremental sales. As in the case of the facility costs, OEG excluded assignments too recent to offer prospects of a meaningful increase in sales for the year covered by the counterfactual question. (We included, however, one SEED project that had not yet been 100% completed but was already in operation and generating substantial incremental sales.) The resulting estimates of incremental investments are $1.6 million for APDF, $8.8 million for MPDF, and $2.1 million for SEED. For the regression analysis (MPDF only), the number of respondents was too small to allow separation of the incremental sales attributable to investment projects that have been completed, financial advisory service clients without completed projects, and consultancy clients without investment projects. Hence, estimating the costs incurred by clients for investment projects would not contribute to an analysis of the benefits and costs of these activities. Benefits and costs The incremental profits and costs based on the counterfactual approach are summarized as follows: Table 2.6-7 Incremental Profits and Costs - Based on Counterfactual Approach (millions of $) APDF MPDF* SEED Incremental profits • Investment projects 1.57 1.57 0.45 • Consultancy clients without investment projects 3.58 Negl. 0.03 • Overall 5.15 1.57 0.48 Incremental Costs • Investment projects o Investment costs for projects for which sales estimates available 1.65 7.09 2.14 o Facility Costs 5.39 4.03 0.71 o Total incremental costs for investment projects 7.04 11.12 2.85 • Consultancy clients without investment projects (facility costs) 2.00 0.07 0.79 • Overall 9.04 11.19 3.64 Incremental profits/Incremental costs (not time-adjusted) ** • Investment projects 22% 14% 16% • Consultancy clients without investment projects 179% Negl.* 4% • Overall 57% 14% 13% * For MPDF, the incremental projects shown for investment projects relate only to projects that have been implemented, and the amounts shown for consultancy assignments include investment assignments without completed projects. Thus, the returns on its investment assignments are likely to be overstated, and the returns on its consultancy assignments understated. ** The available data do not permit estimates of time-adjusted returns. Since (based on the data provided) gestation periods are unlikely to exceed 1-2 years, however, non-time-adjusted returns of 16-18% or more are likely to yield satisfactory internal rates of return. Annex 2.6 Page 6 of 10 These result calls for several qualifications: • The estimates for the counterfactual approach assume zero incremental sales for all clients surveyed that did not provide information both on incremental sales and, for completed investment projects, on incremental investments. • The estimates for the counterfactual approach exclude the incremental sales and profits for companies that said that they would have gone ahead with their investments even if they had received no services from the facility. As indicated earlier, 21% of these companies acknowledged that, without the facility, they would have required additional time to raise the financing or would have had to accept more onerous terms. • The estimates exclude the incremental sales of companies owned 25% or more by foreigners. • The estimates assume that incremental profits before interest and taxes are equivalent to only 10% of incremental sales for investment projects and 20% of incremental sales for consultancy assignments. • The estimates ignore the linkages, externalities and other economic benefits that typically increase the economic returns above the financial returns.8 • A small number of companies account for the bulk of the benefits. Had these companies not provided information, the results would have appeared worse. But some companies with good results may not have provided information. Had they done so, the results would have looked better. Nevertheless, some tentative conclusions are possible. First, the estimates vary greatly from facility to facility. It is not clear to what extent the differences can be attributed to country conditions, the way the facilities deliver services, experience and timing, the assumptions adopted for this analysis, or chance. Second, financial advisory services might possibly generate satisfactory economic returns, but the returns are unlikely to be outstanding. Third, straight consultancy services can generate outstanding economic returns, well above the returns available from financial advisory services. This finding is not surprising, since straight consultancy assignments do not call for material incremental investments. AMSCO Benefits The AMSCO evaluation estimated the incremental sales and profits using two approaches. First, using a counterfactual approach, it asked clients how much sales and profits would have been without AMSCO’s services and how much they actually were. Second, it used regression analysis, comparing the sales and profits of companies that became AMSCO clients at different times. These approaches yielded the following estimates: 8 OEG’s Annual Reviews have consistently found that economic returns typically exceed the financial returns. Annex 2.6 Page 7 of 10 Table 2.6–8 Incremental Sales & Profits – For Companies Providing Information (millions of dollars & number of companies providing basis for estimates) Total Mean n Incremental sales • Counterfactual question 24.4 0.5 51 • Regression analysis 260.0 3.3 80 Incremental profits • Counterfactual questions 9.5 0.3 32 For purposes of comparing benefits and costs, using the counterfactual approach, OEG has excluded the incremental sales and profits for: • Companies that may not have needed AMSCO’s assistance. OEG has looked at two alternatives: o Alternative A. AMSCO’s assistance was not needed by companies owned 25% or more by private foreign investors and companies that already employed any of the AMSCO-seconded managers before initially seeking assistance from AMSCO. o Alternative B. AMSCO’s assistance was not needed by companies covered by the first alternative and by companies that had already identified any of the AMSCO-seconded managers before initially seeking assistance from AMSCO. • Companies unlikely to be sustainable once the expatriate managers leave. The core evaluation team assigned 38% of the companies visited to this category. It was unable to rate companies visited by outside survey firms. • Companies that first received assistance in 2001 or 2002. Expecting these companies to report improved sales and profits for 2001 would be unrealistic. Indeed, in the aggregate, these companies reported that sales were lower by $2.2 million and profits lower by $0.3 million than they would have been without AMSCO. OEG could not exclude from the regression analysis the companies in these categories because the number of companies remaining would be too small to show any relationship. Thus, the results from the regression analysis are not comparable with the adjusted results from the counterfactual questions. For the companies remaining after these adjustments, the incremental sales and profits, based on the responses to the counterfactual questions, were as follows: Table 2.6–9 - Incremental Sales & Profits for 2001 For Companies Responding to Counterfactual Questions After Excluding Companies Not Needing AMSCO Assistance, Companies Unlikely to be Sustainable, and Clients that Received Assistance Recently (millions of dollars & number of companies providing basis for estimates) Total Mean n Incremental sales • Alternative A 5.3 0.7 8 • Alternative B 1.0 0.5 2 Incremental profits • Alternative A 4.0 0.5 8 • Alternative B 0.4 0.2 2 Annex 2.6 Page 8 of 10 The various estimates came from a small proportion of the companies served and visited: Table 2.6–10 Proportion of Companies Providing Data for AMSCO Number of clients 255 Number of firms surveyed 107 Number of firms providing counterfactual sales estimates 45 Number of firms providing counterfactual profits estimates 28 Number of firms retained for analysis (Table 2.6-9) 8 Number of firms providing data for regression analysis 80 Number of firms surveyed/Number of clients 42% Number of firms providing counterfactual sales estimates/Number of firms surveyed 42% Number of firms providing counterfactual sales estimates/Cumulative number of clients 18% Number of firms providing counterfactual profit estimates/Number of firms surveyed 26% Number of firms providing counterfactual profit estimates/Cumulative number of clients 11% Number of firms retained for analysis (Table 2.6-9)/Number of firms surveyed • Alternative A 7% • Alternative B 2% Number of firms retained for analysis (Table 2.6-9)/Cumulative number of clients • Alternative A 3% • Alternative B 1% Number of firms providing data for regression analysis/Number of firms surveyed 75% Number of firms providing data for regression analysis/Number of firms assisted 31% Assuming that the companies not covered by the survey are similar to the surveyed companies, incremental sales and profits can be estimated roughly as follows: Table 2.6–11 Incremental Sales & Profits - Extrapolated (millions of dollars) Sample Total % Surveyed Population Total Incremental sales • Counterfactual question o Alternative A 5.3 42% 12.6 o Alternative B 1.0 42% 2.4 • Regression analysis 260.0 42% 619.0 Incremental profits • Counterfactual questions o Alternative A 4.0 42% 9.5 o Alternative B 0.4 42% 1.0 To be able to relate benefits and costs, this analysis assumes that incremental profits before interest and taxes would be equivalent to 20% of incremental sales. This estimate would be inappropriate for the relationship between average profits before interest and taxes and average sales. It is likely to be conservative, however, for the relationship between incremental profits and incremental sales. Indeed, for the AMSCO clients providing information on incremental profits and incremental sales, the mean incremental profits/incremental sales was 35% and the median was 16%. A study of a non-IFC SME TA program found that mean incremental profits/incremental sales were 27% and the median 25%. In addition, since OEG is looking at the economic return, it has adjusted the estimated incremental profits using the counterfactual approach to put them on a pre-tax basis assuming a 35% corporate tax rate. Applying these adjustments to the figures in Table 2.6-11 yields the following estimates of incremental pre-tax profits attributable to the facilities: Annex 2.6 Page 9 of 10 Table 2.6–12 Incremental Pre-tax Profits (millions of dollars) Based on 20% of incremental sales • Counterfactual questions o Alternative A 2.5 o Alternative B 0.5 • Regression analysis 123.8 Based on counterfactual questions on incremental profits • Alternative A 14.6 • Alternative B 1.0 Costs The AMSCO program involves three types of costs—the costs (including AMSCO’s costs) borne by the clients, the costs (including AMSCO’s costs) borne by the donors, i.e., the donor subsidies, and the income taxes foregone by the host governments because of the tax exemption for AMSCO-seconded managers. Typically, AMSCO provides services for three-year periods. For purposes of simplification, OEG has taken the total subsidies for the most recent three-year period: Table 2.6-13 Costs of AMSCO Program (millions of $) 1999 2000 2001 Total Costs borne by clients Already deducted in calculating incremental profits Costs borne by donors 3.2 4.1 3.8 11.1 Income taxes foregone 3.0 3.1 4.2 10.3 Total 6.2 7.2 8.0 21.4 Benefits and costs The benefits and costs can be summarized as follows: Table 2.6-14 Incremental benefits and costs - AMSCO (millions of $) Incremental profits • Based on 20% of incremental sales o Counterfactual questions on sales Alternative A 2.5 Alternative B 0.5 o Regression analysis 123.8 • Based on counterfactual questions on incremental profits Alternative A 14.6 Alternative B 1.0 Annex 2.6 Page 10 of 10 Incremental costs 21.4 Incremental profits/Incremental costs (not time-adjusted)* • Based on 20% of incremental sales o Counterfactual questions on sales Alternative A 12% Alternative B 2% o Regression analysis 579% • Based on counterfactual questions on incremental profits Alternative A 68% Alternative B 5% * The available data do not permit estimates of time-adjusted returns. Since (based on the data provided) gestation periods are unlikely to exceed 1-2 years, however, non-time-adjusted returns of 16-18% or more are likely to yield satisfactory internal rates of return This analysis calls for several qualifications: • The estimates assume zero incremental sales for all clients surveyed that did not provide information on incremental sales or incremental profits (58% of firms surveyed for sales and 74% for profits). • The estimates assume zero incremental sales for companies that may not have needed AMSCO’s services and for companies judged by the evaluation team to be unlikely to be sustainable once the AMSCO-seconded managers leave. • They assume that incremental pre-tax profits are equivalent to only 20% of incremental sales. • They ignore the linkages, externalities, and other economic benefits that typically increase the economic returns above the financial returns. • The estimated returns based on the regression analysis are undoubtedly too high, since they include companies that did not need AMSCO assistance and companies unlikely to be sustainable after the AMSCO-seconded managers leave. • A small number of companies account for the bulk of the benefits. Had these companies not provided information, the results would have appeared worse. But some companies with good results may not have provided information. Had they done so, the results would have looked better. Nevertheless, it seems reasonable to conclude that the program appears to yield good returns based on the incremental sales of all respondents but yields unsatisfactory returns after dropping the companies that probably did not need AMSCO assistance and the companies unlikely to be sustainable after the departure of the AMSCO-seconded managers. TRAINING SERVICES Facility (& Courses (or Material) Offered Identification of Topics year 1st Development of Materials and Costs courses Delivery of Training offered) APDF Business planning, general management, Identifies subjects that may be of Uses consultants and training Subsidizes costs. (2000) marketing and sales, production and interest to SME owners or institutions to develop curricula and quality, information technology & finance. managers. Done informally, deliver training. Provides support, Most important programs (based on based mainly on suggestions from including drawing on materials participant-hours): clients & APDF staff. developed by IFC, particularly for • Training in construction management credit analysis and portfolio to help SMEs qualify for sub- management. contracting opportunities under Chad- Cameroon Pipeline Project. • Financial management, governance & control for private schools in Ghana. • Information and communications technology for women entrepreneurs in South Africa. MPDF Management Training Program. Identifies needs. Engages international consultants to Funded curricula (1998) Marketing, human resources, production work with local universities to development, and operation management, finance and develop course materials, including training of trainers, accounting. instructors’ notes, participant and part of Initial courses modified to meet needs of exercises, case studies, and textbook advertising costs. specific business sectors and to reflect references. views of training institutions. Selects and trains local training Most important programs (based on # of institutions to deliver training. participants) • Production & operation management Annex 3.1 • Human resource management Page 1 of 2 • Marketing management Facility (& Courses (or Material) Offered Identification of Topics Page 2 of 2 Annex 3.1 year 1st Development of Materials and Costs courses Delivery of Training offered) Flexible (Distance) Learning Program. Drew on material developed for Retained international consulting firm Subsidized because Self-study workbooks based on existing Management Training Program. to produce workbooks based on did not charge for classroom-based curricula. 7 deal with existing curricula, selected digital masters. marketing; 5 with human resource publishers, provided digital masters. management. Bank Training Programs. Identified needs. Helped develop training package in Raised financing for • Loan Analysis Training Package. collaboration with a foreign and manages Bank • Courses added under aegis of Bank university and 2 local banks. Training Center. Training Center: strategic planning, marketing, customer relations, bank operations, human resources, loan appraisal, SME lending. Heavy emphasis on customer relations. SEED General management, financial Identifies subjects that may be of SEED staff and outside consultants Subsidizes costs. (2000) management, strategic planning and interest to SME owners or have shared responsibility for marketing. managers. In doing so, has drawn developing curricula and providing Most important programs (based on on sector studies commissioned course instruction. In one instance, participant-hours): by IFC and SEED as well as SEED drew on materials developed • Chief Financial Officer Development informal feedback from clients. by MPDF. Program. • Entrepreneurship Project Development & Trainings • General Management Development Program. AMSCO Company-Specific Training, based on AMSCO staff prepares some All training plans and training done Subsidizes costs. (1989) training plans developed for individual needs assessments. Others done by outside consultants, selected by enterprises. by outside consultants. AMSCO. Annex 3.2 Page 1 of 1 SIZE OF COMPANIES RECEIVING TRAINING SERVICES ONLY9 BASED ON SURVEYS FOR EVALUATIONS APDF MPDF10 SEED11 (For 2002) (For Year When Companies First For Year When Participated in Training) Companies First Participated in Training) Annual sales (millions of $) • Mean 1.7 8.6 2.4 • Median 0.3 2.0 0.2 Employment • Mean 67 586 49 • Median 25 100 15 Companies not 2% of 29% of companies had > 300 3% of companies did meeting criteria12 companies had > employees, including 12% with 1000- not qualify as SMEs. 300 employees. 4000. 14% had sales > $15 m,, including 9% with sales of > $50 m. 9 AMSCO has been covered in Annex 2.2, since it provides training in conjunction with its secondment of managers to individual companies. 10 MPDF has been given conflicting guidelines. The original feasibility study defined an SME as an enterprise with annual sales of less than $15 million. A later report indicated that “MPDF would provide assistance to projects with annual revenues of less than US$10 million,” but then indicated that MPDF’s principal target would be “companies with total assets of less than $2.5 million and annual revenues less than $5 million.” 11 Using figures in euros, assuming that US$ = €1 when facility had first contact with company (during period covered by evaluation). 12 The WBG defines small enterprises as enterprises with up to 50 employees, total assets of up to $3 million and total annual sales of up to $3 million, and it defines medium enterprises as enterprises with up to 300 employees, total assets of up to $15 million and total annual sales of up to $15 million. Until the establishment of the SME Department some facilities had used different broad definitions for SMEs, but none had a narrower focus for its efforts. Annex 3.3 Page 1 of 1 OWNERSHIP AT TIME OF FIRST CONTACT OF TRAINING CLIENT ENTERPRISES RESPONDING TO SURVEY APDF MPDF SEED AMSCO Wholly owned by local private investors 75% 48% 77% 36% Foreign ownership • Some 15% 3% 9% 53% • Majority 8% 3% 8% 37% • 100% 8% 3% 8% 18% Government ownership • Some 2% 41% 8% 9% • Majority 2% 36% 3% 1% • 100% 2% 34% 0% 1% Annex 3.4 Page 1 of 2 IMPACT OF FACILITY TRAINING SERVICES APDF AMSCO13 MPDF SEED % of companies that reported 82% 84% 98% 88% at least one change in their (n=27) (n=59) (n=96) business as a direct result of the facilities’ services % of companies that reported 83% 73% 83% 46% improvements in at least one (n=27) (n=50) (n=94) area14 Facility assistance increased 55% 69%15 79% 77% to a moderate or great extent (n=27) (n=52) (n=94) the establishment’s ability to compete Without facility assistance, 10% 12% 2% 5% the company could not have (n=27) (n=52) (n=94) survived and would have been forced to cease operations. (% responding “Yes”) Are the establishment’s 52% 52% 82% 22% annual sales better than they (n=27) (n=49) (n=94) would have been without the facility’s assistance? (% responding “Yes”) Are the establishment’s net 41% 51% 78% 18% profits (% responding “Yes”) (n=27) (n=49) (n=94) better than they would have been without the facility’s assistance? Incremental sales attributable to facility (for companies covered by survey) • Mean ($’000) • Median ($’000) 68 479 0.4 6 • Total ($ millions) 2 76 0 0 • n 0.8 24.4 6.8 0.3 11 51 16 53 Incremental employment attributable to facility (for companies covered by survey) • Mean 2.5 16 2.9 6 • Median 0 3 0 0 • Total 33 788 67 516 • n 13 49 23 86 Statistically significant None • Sales of Export sales 128% higher for None results of regression analysis companies that companies whose workers received training received training. 13 Includes combined impact of firm-level and training services. 14 Capacity utilization, direct labor productivity, order-to-delivery time, on-time delivery rate, compliance with local and/or international quality management regulations and standards related to products and services, customer complaints or rejects, defect rate, employee absenteeism, number of workplace accidents, employee turnover rate, air, water, or ground pollution, energy usage, recycling or resource recovery. 15 Percentage of AMSCO respondents saying that facility had increased the company’s ability to compete (yes/no, rather than to what extent). Annex 3.4 Page 2 of 2 APDF AMSCO13 MPDF SEED 43% higher. • Sales 2.3% higher per $1000 of training subsidies Annex 3.5 Page 1 of 5 Benefits and Costs of Training Programs16 Training Programs Benefits The individual evaluations estimated incremental sales using two approaches. First, using a counterfactual approach, they asked clients how much sales would have been without the facility’s services and how much they actually were. Second, using regression analysis, they compared the sales of companies that began to receive facility training services at different times. The regression analysis did not yield useful results (other than for AMSCO, which has already been covered in Annex 2.6), but the counterfactual approach yielded the following rough estimates of incremental sales attributable to facility training programs: Table 3.5-1 – Incremental Sales - for Companies Providing Information ($’000) APDF MPDF (2002) (2001) Mean 68 375 Median 2 0 Total 748 6,757 n 11 18 This analysis does not cover SEED because the survey generated estimates from only one company that had received training services from SEED prior to 2002, the year for which actual and counterfactual estimates of sales were requested. For purposes of comparing benefits and costs, this analysis assumes that companies that selected the facility for training because it was less expensive, companies that previously used outside training services, and companies owned 25% or more by foreigners may not have needed facility assistance and, therefore, does not take into consideration the incremental sales and profits of these companies. The adjusted incremental sales are as follows: 16 AMSCO’s training services are an integral part of its overall services and have been considered in Chapter 2 and in Annex 2.6 Annex 3.5 Page 2 of 5 Table 3.5-2 – Incremental Sales - for Companies Providing Information Excluding Companies that May Not Have Needed Facility Assistance ($’000) APDF MPDF (2002) (2001) Mean 108 520 Median 16 0 Total 433 6,757 n 4 13 The estimates came from a small portion of the companies visited and served: Table 3.5–3 Proportion of Companies Providing Data APDF MPDF Number of firms involved in training programs 1394 1054 Number of firms surveyed 29 65 Number of firms providing counterfactual sales estimates 11 16 Number of firms surveyed/Number of firms involved in training programs 2.1% 6.2% Number of firms providing counterfactual sales estimates/Number of firms surveyed 38% 25% Number of firms providing counterfactual sales estimates/Number of companies 0.8% 1.5% involved in training programs N.B. MPDF could not provide data on the total number of companies participating in its training programs, since some partner training institutions failed to provide attendance sheets (calling for company names) for 39% of the courses offered. Assuming that the companies not covered by the survey are similar to the surveyed companies, incremental sales can be estimated roughly as follows: Table 3.5-4 – Estimated Impact of Training Programs on Sales – Extrapolated APDF MPDF Sample total ($’000) 433 6,757 % surveyed 2.1 6.2 Population total ($ millions) 16.0 109.0 To relate benefits and costs, this analysis assumes that incremental pre-tax profits would be equivalent to 20% of incremental sales. This estimate may or may not be appropriate for the relationship between average profits before interest and taxes and average sales. It is likely to be conservative, however, for the relationship between incremental profits and incremental sales. Indeed, the median incremental profits for the AMSCO clients providing information on both incremental profits and incremental sales were equivalent to 53% of incremental sales and median 16%. On a similar basis, in a study of a non-IFC TA program private firms, mean profits were equivalent to 27% of sales and median profits 25%. Annex 3.5 Page 3 of 5 Applying this percentage to the figures in Table 3.4-3 yields the following rough estimates of incremental profits attributable to the facilities: Table 3.5–5 Incremental Profits (Millions of dollars) APDF MPDF 3.2 21.8 Costs In principle, two types of costs should be related to these benefits. First are the costs incurred by the facilities themselves. Second are the costs borne by the trainees and their employers. (The costs incurred by consultants participating in course development and by the training institutions providing the training are presumably borne either by the facilities or by the trainees and their employers.) OEG has no information on the costs incurred by the trainees and their employers. Hence, OEG considers here only the costs borne by the facilities. We have calculated the fully loaded facility costs as follows: Table 3.5 –6 Fully Loaded Costs for Training Programs Facility $ millions Comments APDF 0.9 Includes costs for 3 years through 6/02 since the evaluation covered companies receiving services through 6//02. Many companies served during the first half of 2002 would have been unlikely to report incremental sales for 2002. MPDF 1.6 Includes costs for 5 years through 12/01 even though many companies served during 2001 would have been unlikely to report incremental sales for 2001 Benefits and costs The benefits and costs are summarized as follows: Table 3.5 - 7 Incremental Benefits and Costs (millions of $) APDF MPDF Incremental profits 3.2 21.8 Incremental costs to facilities 0.9 1.6 Incremental profits/Incremental costs (not time-adjusted) 356% 1363% Annex 3.5 Page 4 of 5 This analysis calls for several qualifications: • The estimates charge all the front-end costs against the benefits of just the first few years. The investments made in developing courses are likely to allow the facilities to serve additional companies in future years. • The estimates assume that incremental profits before interest and taxes are equivalent to only 20% of incremental sales. • The estimates ignore the linkages, externalities and other economic benefits that typically increase the economic rate of return above the financial rate of return. Included among these externalities would be the benefits to subsequent employers of facility trainees, which would not be captured by the initial employers’ estimates of incremental sales. • The costs for MPDF include not only training for company managers and employees but also capacity building expenditures (covered in Chapter 4). • The estimates ignore costs borne by trainees and their employers. Some tentative conclusions are possible. First, training services have the potential of generating excellent returns—substantially higher than the returns from financial advisory services and consultancy services. Even if the costs borne by trainees and their employers are several times higher than the costs borne by the facilities, the returns should still be excellent. Second, MPDF’s extraordinarily high returns may reflect its reliance on existing training institutions, its introduction of the case study method (using case material drawn from local business situations), the greater maturity of its training programs, the assumptions adopted for this analysis, or chance. MPDF’s Workbook Program Benefits Retail prices have ranged from $1.80 to $3.15 per workbook. These prices do not fully reflect the potential value to the purchasers. Among other things, the purchasers undoubtedly find it difficult to estimate the benefits they may realize from the workbooks. Costs MDPF’s costs of converting material from its training courses into workbooks, translating the workbooks into Vietnamese and Khmer, promoting the workbooks, and covering its own costs averaged $12.70 per workbook sold through February 2002. Further sales will reduce the unit cost. In addition, the publishers have incurred costs to produce and distribute the workbooks. For one publisher, these costs are somewhat lower than $1.60 per workbook. Annex 3.5 Page 5 of 5 The total costs incurred by MPDF and the publishers would, thus, be roughly $14 per workbook sold. Benefits and costs With direct benefits somewhat in excess of $1.80 to $3.15 per workbook and total costs of roughly $14 per workbook, this program appears unlikely to generate adequate direct returns unless the volume of sales can be substantially increased. The program, however, may generate good overall returns if the buyers are able to use what they learn from the workbooks to increase the profitability of their companies. No information is available on what readers have done with what they learned from the workbooks and to what extent the actions they may have taken have increased their sales and profits. IMPACT OF EFFORTS TO IMPROVE ENABLING ENVIRONMENT Program Substance of Efforts Impact or Project MPDF Discussion MPDF published 12 reports written by its staff, international The reports appear to have contributed to the policy debate by reports consultants, or both. Reports distributed to government officials, providing various people with information that they have used in business associations, the press, and others. Titles issued: The their own deliberations and discussions with policymakers. While Emerging Private Sector & the Industrialization of Vietnam; A the evaluation found it difficult to trace any direct impact on Survey of Medium and Large Private Companies in Lao PDR; policies, one World Bank manager…stated that the reports provide Equitization of State Enterprises in Vietnam; Establishing a Venture “grist to the mill” and “help to change attitudes.” Subsequent to the Capital Firm in Vietnam; Computer Literacy Survey; Garment evaluation, IFC’s 2003 Annual Review: Small Business Activities Study in Vietnam; Vietnam’s Undersized Engine: A Survey of 95 reported that MPDF’s efforts had led to streamlining of licenses Larger Private Manufacturers; Private Companies in Vietnam: A and approvals, reduced taxes and fees, and other reforms in Survey of Public Perception; SMEs in Vietnam: On the Road to Vietnam. Prosperity; The Private Manufacturing Sector in Cambodia; Doing Business Under the New Enterprise Law. SEED Leasing in SEED (a) engaged consulting firm to review materials prepared by Law passed, but no data on impact. A brief web search in May FYR government and suggest improvements in draft legislation and (b) 2004 failed to identify any leasing activity in FYR Macedonia. Macedonia made available consultant’s recommendations during process of drafting legislation. SEED sought to interest potential investors in leasing companies. Government issued 3 licenses “for operations which are peripheral SEED organized seminar attended by 22 institutions. to the priority needs of SMEs.” It is not clear if SEED played a role in attracting these leasing companies. SEED Leasing in SEED (a) engaged consulting firm to review existing laws & Law passed. Government officials said that roundtables and Republic of materials prepared by government and (b) provide report to meetings were instrumental in advancing the legislation. Serbia government, including detailed comments and suggested revisions in draft legislation. SEED also organized roundtables to discuss the legislation participated in government-organized working group. SEED has conducted workshops and seminars targeted potential No data on impact. A brief web search in May 2004 showed that investors in leasing companies and potential customers. several European financial institutions had started leasing activities Annex 5.1 in Serbia. Page 1 of 2 Program or Substance of Efforts Impact Page 2 of 2 Annex 5.1 Project SEED SME strategy SEED worked with a parliamentary committee to develop a Parliamentary committee endorsed report, but Ministry of development in strategy for SME development. It engaged a consulting firm to Economy & Privatization independently began work on an SME Serbian Rep. collect and analyze data on SME sector, organize public strategy with the support of IBRD & the European Agency for meetings, make presentations and prepare a report highlighting Reconstruction. Ministry started from scratch in formulating its factors constraining development of SMEs, delineating strategic strategy, but co-chair of parliamentary committee believes SEED goals and offering recommendations. SEED provided support as efforts helped in “educating and preparing members of the needed & disseminated report through business publications. parliament to take action.” Some elements of the SEED report are found in the strategy issued by Ministry. SEED Legal & SEED participated in WB mission for preparation of Business Accomplishments of working group minimal. Few concrete regulatory reform Environment Adjustment Credit and, as part of process, recommendations. Little change in business registration process. in Bosnia & organized & supported a working group to consider steps to Still, chair of working group considered SEED had played Herzegovina simplify the business registration process. important role by being able to convene meetings of ministers from both parts of Bosnia and Herzegovina. Page 10 of 12 Annex 7.1 EHS performance of projects assisted Compliance with Made improvements in EHS practices IFC due to Facility advice IFC Social Local Social Environmental Local Environmental Requirements Requirements Requirements Requirements APDF 3/9=33% 4/9=44% 8/9=89% 8/9=89% 0/9 = 0% 17 AMSCO 10/22 = 46% 10/22 = 46% 10/22 = 46% 10/22 = 46% At least 3/22 = 14%, including steps to rehabilitate areas already mined, rebuild settling ponds, recycle sludge, & recycle used lubricating oils; introduced downstream processing of waste wood to produce furniture & use of sawdust as fuel; re-circulate used boiler water, implement stricter health & safety procedures, & improve working environment. MPDF 4/13 = 31% would 7/13 = 54% (especially, due to health & safety Presumably compliant, Complying, except for 8/15 = 53%, including Improvements in meet IFC issues). 2 non-compliant companies present except for health & health & safety. See wastewater treatment, improved lighting, dust guidelines. significant reputational risk. In 1 case, safety. See column on column on local reduction measures, reduction in energy use, employees working in atmosphere with high local environmental environmental and increased wages & benefits. But 4 still solvent levels & no personal protection requirements. requirements. don’t comply with some local EHS regulations, equipment. 5 of 6 non-compliant companies including 2 unlikely to be able to comply based could implement fairly simple & cost-effective on actions being taken & 2 that would need to actions to meet regulations. 2 of 6 non- undertake additional improvements. compliant companies also non-compliant on other environmental issues. SEED 4/7 = 57% would 4/7 = 57% would meet local regulations. 3/7 = 43% would meet 3/7 = 43% would 4/7 = 57%, incl. tidying waste materials to meet IFC Shortfalls minor. IFC guidelines. meet local improve working conditions, recycling waste guidelines. Shortfalls minor. regulations. raw materials, purchase of fire extinguishers & Shortfalls minor. Shortfalls minor. related equipment, purchase of personal protection equipment, removal of lightning conductors that contain radioactive material, replacement of diesel forklifts with LPG and electric ones, inclusion of drainage and wastewater treatment in design of new factory, Annex improved ventilation & lighting. Page Annex Page 1 of1 12 17 Consultants did not distinguish between environmental and social requirements and between IFC and local requirements. 7.1 8.1 of 1 ANNEX 9.1 Page 1 of 8 OEG’s Synthesis Evaluation of Four IFC-Supported Small and Medium Enterprise Facilities Management Response Management is pleased to provide the following comments on the Operations Evaluation Group’s (OEG) Synthesis Evaluation of Four IFC-Sponsored Small and Medium Enterprise (SME) Facilities. Management welcomes the recommendations in this report as they are congruent with the ever evolving and improving models of our SME facility work. SME work has been a major focus for Management, and a continuing challenge. Management has continued to improve our approach to SMEs and to experiment with various business models, in many cases through Facilities, but it has not to date found a single business model that it could call “the solution” in the field of SME development. Thus, there has been the need for continued experimentation and learning in search of more effective approaches to SMEs. In this regard, Management has learned lessons through these experiments, and has adjusted the facilities’ operations accordingly over time. The present state of the four facilities, and the design of the newer six facilities that have been launched after them, reflects such learning and evolution. In fact, most of the recommendations in this report have already been adopted or are in the process of adoption. Management would also like to note that IFC is not independent in the management of these facilities. The majority of funding for this work comes from a broad set of donors who are active in setting strategy and priorities for the facilities, and Management must continue to closely consult with these donors. Each facility covered in this synthesis report had an individual evaluation completed. Those findings and recommendations and their follow-up actions already have been shared and agreed with their respective donors. The four facilities covered in this OEG synthesis report represent three different, evolving philosophies of IFC’s structuring and intent for SME facility work. • The African Project Development Facility (APDF) was created in 1986 with a focus on preparation of business plans designed to help individual SME clients raise needed financing. By 2000, APDF began providing capacity building and training services reflecting a shift in its initial business model. • In 1989, the African Management Services Company (AMSCO) was created to second professional, expatriate managers to firms with substantial African ownership. The original model was not focused on SMEs and only in 1997 did AMSCO commit to changing the target of its services toward SMEs. No other SME facility shares AMSCO’s business model. • The Mekong Project Development Facility (MPDF) was launched in 1996 followed by the Southeast Europe Enterprise Development (SEED) in 2000. MPDF represented a new philosophy in SME support services as it was the first facility to have an explicit mandate that included both direct service to SMEs and ANNEX 9.1 Page 2 of 8 programs to strengthen local capacity to support the private sector. Similarly, SEED was launched with three main components emphasizing a shift away from direct intervention, although still allowing for some direct assistance to SMEs, focusing heavily on capacity building of local service providers and providing inputs to address continuing constraints in the business enabling environment. Before responding to the specific recommendations Management would like to address briefly two of the larger themes of the report. Facilities have lacked adequate strategic focus and not clearly articulated what market failures the facilities should address. While Management agrees that the facilities can and should continue to enhance their strategic focus, it believes the facilities and their respective donors did, in fact, identify specific market failures which the facilities were designed to address. From the board paper which gained approval for each facility to the annual (sometimes semi-annual) donor board meetings, each facility and its board have identified market failures and designed programs to address them. Also, before Board papers were prepared, there was very substantive analytical and feasibility work undertaken to identify key SME constraints and opportunities, review existing donor and related activities and develop programs consistent with this analysis. As an example, the lack of adequate capital flows to SMEs in these markets was identified as a ubiquitous constraint to SME growth. This failure was due to the lack of skills and knowledge both by local entrepreneurs and local financial institutions. In response, facilities provided assistance to SME in preparing quality business plans and financial forecasts required by lenders, as well as providing capacity building and training for financial institutions. Similarly, the identified dearth of service providers such as training institutions or consultants for SMEs and/or the relatively narrow and low quality offered by such local providers prompted the facilities to offer capacity building programs to these local players. Management agrees that there could have been more focused approaches in terms of resource allocations across activities. However, as noted earlier, the facilities do play an important role in innovating business models in the area of SMEs development and are by their nature designed to experiment, to take risks, to conceive and implement new programs ‘outside of the box.’ It is through such an experimentation and learning process that greater focus is now being achieved in these facilities. Facilities devote a substantial portion of resources to firm-level services reaching relatively few companies. Management agrees that this was a relevant observation for the period covered by the review. Today’s facilities allocate much less resources to firm-level services, and when providing firm-level services, they are very focused and aligned with donor objectives. Upon analysis of the facilities spending through FY03 (post the evaluation periods) ANNEX 9.1 Page 3 of 8 Management finds a cumulative 18% reduction for APDF, MPDF and SEED in firm- level spending including financial advisory services and consultancy services. Further reduction in firm-level spending is reported by the three facilities in FY04. According to their own numbers, individual spending on firm-level activities in FY04 was less than 50% of the total for APDF, 18% of the total for MPDF and 10% of the total for SEED. Looking at other program spending including training, capacity building and business enabling environment work, these three facilities increased their spending from $1.8 million in FY00 to $6.2 million in FY03, an increase of 244%. The six new facilities launched subsequent to SEED all have specific mandates to focus on the facilitation of services to SMEs through local service providers and institutions with limited if any direct, firm-level intervention. The remaining firm-level activities are not expensive business planning exercises but rather ‘light touch’ interventions such as company diagnostics and focused consulting projects to help improve client operations. These projects allow the facilities to stay close to the most challenging operational issues facing local SMEs, to pilot training and consulting tools for wider rollouts, and to continue to have some demonstration effect on the broader marketplace. It is important to note that donors have endorsed some continued, targeted firm-level assistance. Regarding the specific report recommendations, Management notes that while they are based on the findings on the four facilities for the periods under review, they are intended for extending lessons for a broader, newer set of SME facilities as well. Management’s comments are as follows: 1. The facilities should improve the strategic focus of their efforts with respect to approaches, programs and client subsidies: a) Identifying the market failures they seek to address in the region or countries served and specifying why they have selected the specific approaches and program proposed to address these issues rather than others. b) Reallocating their resources: i. Continuing to reduce the share of their resources devoted to financial advisory services; ii. Expanding their consultancy services and their training services; iii. Continuing the AMSCO program for a limited period to see whether it can achieve financial sustainability without straying from its development mandate; iv. Focusing their capacity building programs on the specific issues responsible for market failures and on financial institutions that serve SMEs; V. Focusing their SME business climate programs on the most critical issues. c) Issuing explicit guidelines on subsidies to improve the efficiency of their targeting, conform to IFC’s non-displacement principle, ensure ANNEX 9.1 Page 4 of 8 transparency and fairness, and make clients aware of what they would have to pay for non-subsidized services. Management agrees with these recommendations. Continued and sharper strategic focus is necessary as is a clear rationale for the selection of a given approach to address a specific market failure. As stated above, Management believes the facilities have been engaged in identifying and responding to market failures already. To make this more explicit, Management suggests that documents used for approval of facilities and their work programs (board papers, annual work plans shared with donor boards, and project approval documents) include sections where specific market failures and their implications are identified. Similarly, these documents should then propose programmatic responses including specific design elements and rationale for their selection. Changes already have taken place in this regard. In particular, all PDFs began reporting directly to the regional investment departments as of January 1, 2004. This closer alignment with the regions allows for increased focus and improved selection of programs and projects in line with the commonly agreed priorities stemming from existing market gaps and identified market failures. Also underway is the pilot of a common Project Data Sheet for all technical assistance projects (PDS-TA) which requires descriptions of project design, rationale, fit with regional strategies and expected benefits and impacts. TA project proposals will be reviewed by the regional director or his/her designee and others as appropriate to provide the necessary technical, economic and other relevant input. Management also agrees with the recommendation to reallocate facilities’ resources. SEED and MPDF already have reached a mix of programs and delivery methods consistent with the report and as agreed with their donors, and APDF has made significant strides forward. Similarly, AMSCO undertook a one-year retooling period as agreed with its board and has become more focused and cost effective. Also with the on- going input from the regional departments and donors, the facilities are increasing the focus of these programs and their business environment interventions on the most critical issues and gaps. For example, SEED is working closely with FIAS on implementing a program to address key administrative barriers in Bosnia and Herzegovina. MPDF actively participated in the investment climate assessment (ICA) in Cambodia and is part of the WBG PSD team. The South Asia facility is participating in the ICA work in Bangladesh. As for subsidies, Management agrees that a set of guidelines should be developed and consistently applied across IFCs’ SME facility operations, and technical assistance operation in general. Working closely with the Private Sector Development Vice Presidency and donors, the SME Department will develop such guidelines for internal review, revision, piloting and implementation. 2. IFC and the facilities should take advantage of the opportunities that may arise from the facilities’ January 2004 integration into IFC’s regional ANNEX 9.1 Page 5 of 8 investment departments but should maintain and expand the SME Department’s role in encouraging cross-facility collaboration, knowledge sharing, and good-practice standards and should ensure that the donors’ concerns are adequately reflected in the facilities’ policies and strategies. To this end, consideration should be given: a) By IFC, to encourage the regional investment departments to treat the facilities as an integral instrument in their work and, by the facilities, to contributing to the development of an IFC-wide strategy in support of the local private sector; b) By the SME Department and the Financial Controller’s Department to continuing their efforts to improve the facilities’ systems and processes for project selection, planning, monitoring, and evaluation, and for management information, internal control, and reporting; c) By IFC and the facilities to ensuring that they take adequately into consideration the views, concerns, and interests of the donors. Management agrees with these recommendations. The regional investment departments have a good opportunity to leverage the SME facilities and their extensive local presence to effect important and strategic enhancements. To ensure the fullest synergy from these resources IFC’s senior management has instructed the regions to prepare regional TA strategies for discussion in early October of this year. Such discussions will highlight opportunities for leverage and sharing of good practice and common solutions to common challenges. These TA strategy discussions will become part of the annual planning process. Autumn TA meetings will allow sufficient lead time for feedback and reflection of these TA priorities into the FY06 strategy and business planning cycle. Management has already noted its current pilot of a common project proposal form (PDS-TA) at a project level, for which system improvements are supported by Board- approved capital budget. This will enhance project selection and planning and facilitate the sharing of good practice across facilities. It also will help record the strategic fit of projects with IFC regional priorities. The PDS-TA is only the beginning of the process that will culminate in a Project Completion Report (PCR-TA) similar to the ones used for self-evaluation of IFC investment operations. The PCR-TA template is in a draft form and its validation stage will begin in the second quarter of FY05. To further enhance the quality of our TA projects, especially in the SME facilities, the SME Department is currently recruiting a senior monitoring and evaluation officer to provide leadership on the operational side of TA project design and impact evaluation. More than 100 applications for this position were received from internal and external candidates. The SME Department plans to finalize its selection in September 2004. The Controller’s Department also continues its efforts to enhance internal controls and system support to the facilities. The Controller’s Department has created a facilities start- up handbook. It is currently undertaking enhancements to the existing financial management and reporting systems while analyzing longer term, more comprehensive system improvements. And it is continuing with its internal controls compliance training ANNEX 9.1 Page 6 of 8 and reviews with COSO visits planned to Africa and SEED before the end of the calendar year. Finally with regard to ensuring adequate consideration of donor concerns and interests, the facilities will continue to hold annual or semi-annual donor board meetings. Representatives of the regional investment departments as well as facility managers will attend these meetings. On-going local interaction between facility staff and donors is also key to this goal. In addition, in its role as facilitator and support provider to the facilities and the regions, the SME Department will invite two to three key donor representatives shared by many SME facilities to serve as advisors. This will allow donors to have a single point of input on common policy and operational issues vis-à-vis IFC-managed SME facilities. Management expects members would rotate every two to three years. The group would also include a representative from IFC’s Trust Funds Department. 3. IFC should continue its efforts to encourage collaboration between the facilities and the rest of the WBG. To this end, IFC should consider: a) Calling for the facilities to access WBG expertise; b) Requiring the facilities to consult with IFC and the Bank before undertaking business climate activities; before expressing, directly or indirectly, views on legislative or regulatory issues; and on the rules of engagement for supporting business associations; c) Encouraging the facilities to locate their offices at the same site as the World Bank and IFC offices (subject to taking into account the facilities’ own needs and constraints). Management agrees with these recommendations. To help facilitate increased collaboration between facilities and the rest of the WBG, the SME Department has launched three ‘knowledge networks.’ These networks are thematic in nature, e.g. Access to Finance, Access to Business Services, and Business Enabling Environment, and have members from the SME facilities, the SME Department and various WBG departments on a self-selection basis. These knowledge networks facilitate personal networking of staff across unit boundaries, share good practice examples, and hold meetings and seminars to discuss areas of common program interest and to gain access to expertise from outside the network as well. As previously indicated, there are already numerous examples of PDF collaboration with the broader WBG. While these networks are a start to improved collaboration, the PDS-TA process described above will help formalize this. The PDS-TA review and approval process not only requires the IFC regions to verify strategic fit with regional WBG priorities, including business climate issues, but also provides for industry/sector specialist input. This process is still in its infancy but its goals fully reflect the spirit of these recommendations. As for co-location of facilities with World Bank and IFC offices, Management supports this as a general rule bearing in mind that some facilities may have a mandate to serve ANNEX 9.1 Page 7 of 8 specific regions where IFC or the Bank do not have offices, and that donors and Management are constantly looking for cost effectiveness. 4. The facilities should bring their handling of EHS issues in line with IFC’s policies and should increase their ability to influence client behavior on these issues. To this end, the facilities should consider: a) Issuing policy statements and operating guidelines, approved by IFC and the other donors, calling for compliance with IFC’s EHS policies; b) Taking steps to improve the efficacy of their efforts on EHS issues in their firm-level activities; c) Taking steps to ensure that, contrary to current practice at two of the facilities, facility reports not say that projects assisted will be designed and operated to meet national environmental requirements unless the facility has an adequate basis for such an assertion. Management partially agrees with these recommendations. Management agrees that the facilities should adopt a common policy statement calling for compliance with Type 1 EHS Requirements as applicable to IFC’s financial intermediary operations. Such policies should be disclosed to donors, host governments, and clients of the SME facilities. Type 1 Requirements mean that IFC expects its clients and beneficiaries of its services to meet local EHS standards. To that end, the facilities’ efforts should focus on awareness-raising and education commensurate with the scale and industry type of clients they serve. This must be balanced against the reality that many of the clients served by the facilities have nascent skills in both business and EHS management. It would not serve our purpose or the greater good to cut off services to these clients when they are most in need of increased knowledge and skills for improved EHS performance. To that end, Management also agrees that SME facilities should employ a local officer to champion EHS efforts. This person should receive training and support from IFC’s Social and Environmental (CES) Department and in turn be able to train local facility staff and clients on EHS management and good practices. Management agrees that facilities need to be clear about their policy requirements and monitor performance accordingly. Management suggests that in consultation with CES, an environmental and social management framework be established that sets out an appropriately scoped program of EHS outreach and awareness building. Given the diverse client base of the facilities, it would be both inappropriate and inefficient to adopt a compliance approach for sub-projects. Such a program must fit within the mandate and scope agreed with the donors as well. As for the preparation of an annual EHS performance report, Management agrees that the facilities should prepare a report on their achievements and shortfalls against established goals. This may be supplemented as appropriate with a case study when the facility undertakes more significant EHS training and capacity building with a particular client or group of clients. ANNEX 9.1 Page 8 of 8 Management agrees that facilities should be transparent in their reporting. They should distinguish between their own recommendations and the purported intent of the client from actions taken and results realized. ANNEX 10.1 Page 1 of 4 CHAIRMAN’S SUMMARY: COMMITTEE ON DEVELOPMENT EFFECTIVENESS On August 30, 2004, the Committee on Development Effectiveness (CODE) discussed the Operations Evaluation Group (OEG) report entitled “A Synthesis Evaluation of Four IFC-Supported Small and Medium Enterprise Facilities” together with the Draft Management Response to the OEG Review. One Executive Director issued a written statement. Background. The report synthesized evaluations by OEG-directed independent consultants of four of the Small and Medium Enterprise (SME) facilities sponsored and managed by IFC that were sufficiently mature for evaluation. It also drew on evidence from other programs that pursue similar objectives. The report examined five broad issues: (i) relevance, whether the facilities’ efforts are justified by their likely impact on development; (ii) their efficacy and impact; (iii) their efficiency in providing services; (iv) the sustainability of the services that they provide and the business service providers they support; and (v) some structural and administrative issues; it also placed the findings of the four evaluations in a broader context, drew conclusions and made recommendations. In setting the report context, the Director General, Operations Evaluation (DGO) noted that the study represents a relatively innovative evaluation in a difficult area, making an attempt to actually calculate rates of return on different kinds of interventions, a type and level of analysis seldom undertaken in evaluating technical assistance programs. OEG Evaluation Findings. The evaluation found that although the facilities had served many SMEs, helping to boost their sales, profits, and employment, their strategic focus has been inadequate: the facilities pursued a range of approaches without (i) clearly articulating what market failures they sought to address; (ii) estimating the expected benefits and costs of their services; and (iii) identifying their own capabilities and disadvantages. Some approaches did not give adequate attention to strategic priorities and the most economic use of their resources, and in some cases, the facilities accepted clients and granted subsidies without due concern for crowding-out private service providers or for client needs for subsidies. The report acknowledged that the facilities’ willingness to experiment accounted for some of these shortfalls, and that many Management corrective actions were already underway following delivery of the individual facility evaluations. Based on the findings, the report recommended: (i) improving strategic and client targeting focus with respect to approaches, programs, and client subsidies; (ii) taking advantage of the facilities’ recent integration into IFC’s regional investment departments, while expanding the SME Department’s role in cross-facility collaboration, good-practice standards and ensuring that the donors’ concerns are adequately reflected in the facilities’ policies and strategies; (iii) continuing efforts to encourage collaboration between the facilities’ and the rest of the World Bank Group (WBG) by accessing training, coordinating on investment climate advice, and co-locating in field offices; and (iv) bringing the facilities’ handling of environmental, health, safety and social issues (EHS) into line with IFC’s policies. ANNEX 10.1 Page 2 of 4 Management Response. Management welcomed the OEG evaluation and generally agreed with its recommendations. Management noted that the report covers a certain period; that many of the recommendations are being currently implemented; and that in many cases the facilities did identify and address specific market failures (e.g. lack of adequate financing accessible for SMEs). Management stressed that IFC often must be responsive to other facility donors’ concerns. It also noted the important role of experimentation and learning from experience in finding suitable models for SME development. Management underscored the importance of compliance with IFC’s EHS requirements, as recommended in the OEG report, but emphasized that the rigor of application of these standards needs to be balanced against the reality that many clients have limited skills in both business and EHS management. Conclusions and Next Steps. CODE members welcomed the OEG evaluation and the Draft Management Response. They agreed that SME development remains a major challenge for the WBG. Although there were concerns that some findings taken out of context might create a general negative perception of SME facilities, most CODE members appeared to broadly support the recommended directions for the future, informed by a clearer results framework and a deeper understanding of the inter-linkages with business climate. Analysis of the implications for the future, such as the possible shift in clientele for the services offered by SME facilities, would be useful. CODE members generally concurred that there is no single correct business model for SME development and noted the importance of experimentation and ability to learn from experience. Among the specific issues raised by the Committee were: Strategic focus. Speakers were generally supportive of the recommended shift away from a firm-level approach to more general capacity building activities (e.g. training and consultancy) for a range of SMEs and consultancy companies, but some cautionary questions were sounded both as to what exactly was the potential for IFC and the World Bank to scale up in this area, as well as how, by whom, and to what extent firm level services could be provided in developing countries. OEG replied that the intention of its recommendation was not to phase out, but reduce in relative importance the firm-level services in order to redirect resources towards more wholesale activities. One member cautioned against excessive use of foreign consultants. A speaker expressed concerns regarding some conclusions of the report that could be misinterpreted as painting a negative picture of the SME facilities in general, and encouraged management to develop communications strategy to mitigate possible negative reactions. OEG replied that in the disclosed edition of the report, referenced background information (literature review on the case for subsidized support for SMEs) would be accompanied by introductory material, thus putting the findings into proper context. Subsidies. The issue of subsidies drew comments from several members, with most supportive of targeting based on clearly identified market failures as recommended in the report. Members welcomed the OEG recommendation on issuing explicit guidelines on subsidies to improve the efficiency of targeting. They noted that although the facilities are not expected to fully recover their costs, subsidy mechanisms should be carefully ANNEX 10.1 Page 3 of 4 designed to avoid market distortions. OEG noted that the need for subsidies is ongoing and the main thrust of its recommendation was to ensure fair and transparent targeting, since resources are finite, and also to make clients aware of what they would have to pay for unsubsidized services. Management agreed with the recommendation on issuing explicit guidelines on subsidies and noted that it is planning to put them together, including policies on the rationale for subsidies and the mechanisms to award and evaluate them. Business climate. CODE members stressed the crucial importance of the business climate and regulatory framework for SME development and encouraged study of the linkages between investment climate and success of facilities in different regions. OEG agreed that investment climate is a critical area to be addressed by the facilities and noted that it will be delivering a study on investment climate that will look more closely at these issues. The DGO stressed the importance of distinguishing between the issues of improving business climate and finding remedies for the market failures, which may not be directly related. Management noted that issues related to improving the business environment are increasingly becoming an integral part of the SME-related work package. Results. Speakers underlined the importance of a clearer results measurement framework and urged greater rigor in establishing specific benchmarks. They also asked for an update of the existing programs, including an evaluation of constraints to private sector development. A member stressed that proper analysis of development effectiveness of these facilities needed to go beyond their clients and include comparisons with enterprises that had not received the facilities’ support. OEG replied that it had compared client firms that had received facility services with those of firms just accepted for services—providing a good test for attribution. OEG added that while it was able to quantify costs and benefits of some programs, it was unable to do so for the capacity building and business climate programs, which is likely also to be a challenge for future evaluations. Coordination. Many CODE members underlined the importance of upstream coordination within the WBG, especially on regulatory and legislative issues related to business climate. Some members stressed the need to have a unified approach on reporting in all facilities, to better share the best-practice knowledge. One speaker was interested in how the facilities fit into the overall International Development Association (IDA)/IFC SME strategy. Management noted that recent structural changes are likely to have a positive impact on improving coordination within IFC, as well as with the rest of the WBG. Several speakers noted that coordination with other donors could be burdensome for the facilities, and stressed the need for more flexible approach in that regard. EHS. Some speakers expressed concerns about non-compliance with and inadequate attention to the EHS standards. They stressed the need to employ a country-based approach, to be applied in a standardized way with a degree of flexibility and asked for more information on the size of companies to better assess possible impact on communities, and reputational risks. OEG had noted IFC had a reputational risk issue, and underscored the report’s recommendation to require firm clients to comply with host country EHS laws and regulations. Management noted that new performance standards ANNEX 10.1 Page 4 of 4 are currently being discussed, and agreed with the need to look at the possible tradeoffs between compliance and the impact of excessive standards on the performance of firms, which are most in need of knowledge and skills for improved EHS performance. Structure and content. Several speakers felt that the report would have benefited from more information on the history of establishment of each facility and the rationale behind the choice of design and staffing. OEG replied that more detailed background information on each facility is in the four individual facility reports that can be obtained from OEG. OEG also added that the study was more an impact evaluation than a management review and should be approached as such. Chander Mohan Vasudev, Chairman