Lessons Learned
The Business Linkages Challenge Fund (BLCF) is a demand driven cost and risk sharing grant scheme with three main objectives: to create linkages, develop markets, and alleviate poverty. It encourages ‘business driven solutions’ together with a market-focused response, offering donors a complementary way for to engage with the private sector and accelerate its response.
Underlying the whole initiative is the concept that local business development offers the most sustainable solution to growth and poverty, but that it is crippled both by lack of access to finance and by the high perceived risk in most developing countries. The idea builds on the belief that there is a wealth of on-the-ground entrepreneurship and potential which needs an initial stage catalyst. The grants typically enable entrepreneurs to overcome high barriers to entry, in ways which include lowering the cost of borrowing and hedging the risk. The focus on linkages supports:
- Partnership between multinational and national businesses irrespective of their size
- Transfers of knowledge and technology both between businesses and between businesses, NGOs and public sector entities
- Information transfers which enable maximization of domestic and international market niches
The BLCF is an important example of a donor instrument which can be tapped by the private sector. Numerous examples exist of private sector programmes which have taken place at far greater speed and scale, and in more risky areas, than they would have done otherwise, due to the additional support provided by the BLCF. Such programmes deliver high impact on poverty since areas of risk are usually synonymous with isolated areas which experience high levels of poverty, unemployment and/ or crime.
Management structure:
Private versus public sector fund manager – The fact that BLCF has been run by a private sector firm has offered many benefits. As well as “speaking the same language”, they were able to be responsive to private sector needs such as predictable and quick decision-making timelines. The fund managers also purposefully streamlined the process of application and funds disbursement to allow for a flexible and timely response to the private sector. As BLCF grantee Unilever commented, “BLCF focused on the contribution of the project to the main goals of a program and less on tiny details as some other donors tend to do. Further they seem well aware of how things work in a developing country. They do not limit themselves to development aid from behind a desk.” Furthermore, the fact that the fund manager itself runs profitable private business served to add credibility in the eyes of the SMEs and other private sector operations, and helped put the projects on a more "commercial" feeling footing.
As the fund was contracted out of DFID, applicants were not required to engage with donor systems, timing and budget cycles. This enabled entrepreneurs - who are often weary of donor systems - to engage with the fund and served to encourage quality deal flow. It also provided a degree of independence that has made the results, monitoring and evaluation even more convincing to other donors.
Centralised versus decentralized fund manager – It proved more effective and efficient to have regional hubs right from the outset of BLCF - for marketing the fund, identifying and developing applications together with grantees - and then proceed to manage the fund centrally after the last bidding rounds. This facilitated the sharing of experience and lessons learned across projects, as well as widening access to more specialised skills for Monitoring and Evaluation and the Dissemination process. Nevertheless, both central and regional management must acknowledge that the level of private sector development in different countries is highly unequal. Regional and country-based managers are more likely to be pressured to deliver against political priorities or to meet an existing crisis/ market shortage. Similarly, they may be susceptible to pressure to demonstrate success in the businesses involved for the purposes of preserving good reputation.
Separation of duties – A key positive feature of the BLCF has been the separation of fund managers from decision makers. Fund managers were able to engage in promotion of the fund and sourcing applicants, as an Independent Assessment Panel made all decisions regarding allocation. This structure promoted transparency, addressed potential conflicts of interest and allowed allocation decisions to benefit from the depth and breadth of panel members’ experience. The fact that this structure was well communicated, together with the trust and respect inspired by the profiles of the Panel members, was key to the high quality and quantity of applications.
Panel composition and role – The Panel was composed of members of the private sector, with the exception of two donor representatives from DFID and GTZ. Panel members came from different professional backgrounds which covered some of the sectors of BLCF applications, such as agriculture and tourism.
The Panel evolved round by round, developing greater effectiveness and efficiency. Panel members built a strong working rapport with each other and learnt joint lessons from previous rounds. The BLCF certainly benefited from being a longer-term multi-round fund as opposed to a shorter-term program.
Marketing:
Marketing strategy - The BLCF team adopted a two-pronged marketing strategy, placing information on the fund in the public domain and combining these efforts with targeted marketing. Media, Chambers of Commerce and so forth were used to advertise the fund, while fund managers met with potential applicants to share information about BLCF.
Channels - A strong network and/or availability of sourcing correct distribution channels proved to be key for effective marketing of the BLCF, contributing to the establishment of deal flow early on. Applications from certain countries, especially those in post-conflict situations, might not have come at all had regional managers not tapped into their networks. Given that the BLCF was a competitive mechanism, this proved critical in ensuring that applications were not only received from those countries with the most developed economies.
Application and selection process:
Application phase - The BLCF is demand driven and is a competitive process with set criteria, to which the private sector responds. The pipeline is not self-generating and regional fund managers learned the necessity of being more hands-on than anticipated during the application process. While the application was easy, straight forward and “private sector friendly”, regional managers found that some potential applicants were still nervous about engaging with the fund assuming that it would be cumbersome due to their perception and experience of donor-originated funds. Some encouragement was necessary in order to overcome this and build a strong, relevant pipeline.
Assistant with development of the proposals (though not the concept notes) can be necessary, especially where English is not the first language. Applicants should be able to apply in their native language, or application preparation could be outsourced or offered upon demand.
Selection - The selection process was handled entirely by the Panel. Selection was based on projects being potentially commercial sustainable, but in need of initial risk sharing. As the BLCF was competitive, allocation has been extremely important. The Panel worked well in ensuring that efficient allocations across the fund were made.
Baseline - Monitoring and Evaluation systems need to be in place from the start and should not rely for the baseline on the grantee.
Other key features and lessons learned:
Competitive grant allocation – The competitive nature of the mechanism brought many benefits to the BLCF. It contributed to the quality of deal flow and encouraged high quality applications, while also fostering private sector and public- private linkages. The entrepreneurs were motivated to not only think innovatively but also to admit their weaknesses and provide a mitigation strategy. There model also included an in-built flexibility to refuse applications due to competition, which helped the Panel to avoid funding inappropriate projects or those which their opinion was split. Real competition increased towards the end when funds became tighter.
Cost-effectiveness - The BLCF leveraged the private sector resources in design, implementation, and monitoring. The BLCF was run by a small team with dedicated fund manager time on promotion and targeted support to applicants through the application process. Fund managers had a very light touch in implementation and achieved a fine balance, avoiding the temptation to be more hands on. They operated on the philosophy that the private sector must drive implementation and that they were providing a grant, not technical assistance. Where the entrepreneurs decided to use the grant for technical assistance, it was of course supported, but independently procured. While this reduced the cost of managing BLCF, it also discouraged a dependent relationship, promoting the ability of grantees to continue beyond grant support. The private sector was left to get on with implementation, while the fund managers provided effective project management discipline.
Nevertheless, some grantees benefit from a more hands-on approach, especially in developing their business plan and ensuring that a realistic timetable is set for starting the project, disbursing the BLCF funds and achieving commercial sustainability. In most cases, stricter financial management criteria or more assistance with financial management can be beneficial. Thanks to the BLCF funds, many businesses grew so rapidly that the financial management and planning skills available in house did not always match the growth and future potential.
Flexibility - A positive characteristic of the BLCF is the mechanism’s inherent flexibility. Many grantees had changes from their original forecasts and were able to shift or re-apply for funds with approval from the Panel. As grantees operate in markets with changing political, economic and social structures, the flexibility of the fund has proved to be critical in ensuring success.
Consortium members/grantees – Successful projects have at least one strong commercial partner driving the implementation. Most importantly, successful projects have capable and dedicated management with a deep knowledge of the local conditions and political economy.
With larger grantees and multinationals, Corporate Social Responsibility (CSR) drivers helped create momentum. However it was important to ensure that support went towards their core business agenda, versus their CSR activities. BLCF support was engaged with real commercial elements of the business and not used to support CSR initiatives.
Sectoral and regional concentration - It is difficult and relatively expensive to cover lots of different sectors and different geographic regions as well as ensuring that strong applications are received and that projects are properly monitored. Also, in order to be able to effectively assess and compare different projects and conclude which type of projects can benefit from this type of assistance, a more narrow sectoral (and sometime geographical) focus would have been beneficial.
Managing funded projects - Planning for improvement of SMEs’ financial management skills is key. In fact, it is worth setting minimum financial management standards before approving a grant. In most sectors, SMEs in Africa need financial management help. The lack of such expertise often results in bad planning and difficulty in commercial borrowing.
Without access to finance, the SMEs hardly grow and cannot deal with crisis. For example, if you compare the Anglo Zimele and the BHP Billiton model for SME development in Southern Africa, the key difference is that Anglo provides financing to bridge/ fill the gap left by commercial banks, with the result that their projects are much more successful. Similarly, in Ghana and Mozambique, if the agricultural projects 3K&A and MOCIT had had access to affordable financing, they would have diversified, grown and made different choices which would have made them much more profitable. They would have also been more resilient to shocks. For example, 3K&A would have been able to borrow and buy the harvest fast when it flooded, as opposed to making losses due to the lack of sufficient available cash in a small period of time.
Recognition of quality - EMG was recognized by the British Expertise International Awards competition in 2006. EMG was highly commended in the category of Small Consulting Firm of the Year for our management of the DFID funded BLCF.
In late 2007, EMG’s short listed entry for the British Expertise awards was highly commended in the Poverty Reduction category for our 3K&A Ghana project.