Investing in Afghanistan

Climbing out of poverty, collecting

garbage in Kabul

A few weeks ago, I read a fairly gloomy article in the Financial Times about the end of the economic boom (what economic boom?), saying that investment is drying up in Afghanistan. My feeling when I read that article (as it is now) runs counter to the author's main observations and conclusions.

It seems to me that against all of the odds, there is a growing group of investors who are slowly building a serious financial stake in the future of the country. My view is that with the kind of incentive that ABIF is offering, this process can be accelerated - with all of the wider benefits that flow from private sector investment.

After spending something like 6 years out of the last 10 in the country, I would never underestimate the obstacles to economic development in Afghanistan. However I do genuinely believe that with the right interventions, such as investment incentives, we will be surprised at how much can be achieved in a relatively short space of time.

DFID's investment in ABIF, which was set up as an independent competitive challenge fund with a very clear market development strategy (an essential combination of factors in this kind of environment), will pay back many times over. Those people responsible for making ABIF happen deserve a lot of credit, and DFID should be commended for taking the risk of financing such a project in such a problematic environment.

So here we are today, reaching the end of the first competitive round. We have just completed the evaluation of the detailed business plans we received from the 11 applicants who made it onto our final shortlist. The great news is that we think we could support well over half of these potential investment projects, an excellent interim result (after less than 6 months) for a private sector challenge fund operating in a place like Afghanistan.

This week we have our Investment Panel meeting at which the business plans and our evaluation will be subjected to external scrutiny. The Panel will review the business plans and our opinion, meet the applicants and provide their advice on the projects we are recommending for funding. It will be a long day!

We have evaluated all of the business plans against three sequential criteria:

1. Project viability;
2. Expected development outcome; and
3. Quality of the applicant.

Spring in Kabul, apple blossom in our garden

This evaluation process has been extremely rigorous. We have always said that we will refuse to compromise on the quality of application that we will fund; better to fund nothing than fund the wrong thing. ABIF has a limited budget and we want to make it go as far as possible. So the UK taxpayer can rest assured that their money will be applied as effectively as possible, to incentivise genuine investment in projects that will benefit tens, possibly hundreds, of thousands of poor Afghans.

Despite the Financial Times' somewhat negative take on investor sentiment, it is striking that in all of the projects that we are recommending for funding, the applicant is ready to put a significant amount of their own money into the project. There are clearly some people (and our 350 plus applicants were from all over Afghanistan) who believe that now is the time to invest.

I sincerely hope that the projects we are proposing to recommend for funding will survive the Panel's external scrutiny and that we will move very rapidly to negotiating and then signing Grant Implementation Agreements, and finally to disbursing money to some excellent projects. Watch this space!

Offering a prize is not the same as picking the winner

Offering a prize to encourage innovation has an impressive track record of success. Think back to the Daily Mail flying prizes at the beginning of the 20th century that rewarded Bleriot for crossing the English Channel or Alcock and Brown for crossing the Atlantic. More recently we have seen the effect of prizes to encourage the private development of space rockets... One way or another, there is plenty of evidence to suggest that the incentive of a prize can have an impact well beyond the value of the prize itself.

While our ambitions at ABIF might be slightly more down-to-earth, this broadly speaking, is the approach we have taken towards incentivising investment in innovation. The prize we are offering, in the form of a grant, is intended to encourage business owners to develop commercially viable investment projects that will have a wider impact on the markets in which they operate. Afghanistan desperately needs private sector investment to create economic growth and reduce poverty, our view is that ABIF grants can make a contribution to this process not by designing or implementing grand development plans, but by offering an incentive to Afghan investors to encourage them to do the thinking and the hard work and then take some of the risk.

For too long the debate on state/donor intervention has been too polarised. At one extreme we have the failed central planning dogma, and at the other we have the failed neoclassical free-market dogma. Unfortunately this polarisation has prevented a pragmatic and rational exploration of development approaches that lie somewhere along a spectrum of options between these two extremes.

The soviet style centrally planned economies have been swept away and now it would seem that the stultifying Washington Consensus may have had its day. So finally we have the opportunity to explore ways in which the state (whether the recipient or provider of development assistance) can implement a form of industrial policy that recognises both the potential and limitations of intervention.

Industrial policy has been characterised by its many detractors as "picking winners" and creating opportunities for vanity driven waste and corruption, it has been argued that such interventions will inevitably fail, and where they have been part of a success story, this is only because there were some over-riding special conditions. However, this view ignores the consistent developmental successes of those states that have used various forms of industrial policy to promote investment and economic growth.

Good examples of such states include the unashamedly interventionist economic giants of Great Britain (in the pre-free trade days of growth) and USA (pretty much throughout its history of economic growth and domination), to the new kids on the block Asian developmental states who largely ignored what they were told to do in the 1950's and 1960's, to China and India that today are pursuing very non-World Bank style development policies. The fact is that state intervention, used wisely (and it can be used wisely), is an essential ingredient of economic development.

So for the context of ABIF, it is not so much a question of whether industrial policy is right of wrong per se, as to what kind of industrial policy is likely to be most successful in Afghanistan. The matrix shown here is an attempt to describe a range of options to promote economic innovation according to two key policy dimensions - the scale of the intervention (firm or sector level) and the depth of the intervention (leading or following the market).

If we discard the negative connotations associated with the "picking winners" characterisation of industrial policy (actually, what is wrong with picking winners?) and instead look at how the developmental states achieved their gains (including picking winners), we see that a mechanism such as the ABIF grant is consistent with the main characteristics of successful industrial policy. For example:

1. We operate at a relatively small, firm-level scale, we are not about grand centrally planned schemes to manage or change large chunks of the national economy.
2. We offer grants, not loans, so we have to constantly renew our mandate by demonstrating success, we do not seek to be sustainable or self-funding in ourselves.
3. We identify problems (our challenge themes) that we want private sector investors to address, rather than designing and implementing solutions.
4. We support investments that will have a wider but incremental impact on the market that will benefit our target beneficiaries. 
5. We separate the original intervention from potential subsequent (process rather than end-game) scaling up interventions, which could involve entirely different players.

Looking at the matrix above, today ABIF, while very much in the tradition of industrial policy interventions, is firmly positioned in the bottom left corner. With time, and as individual investment projects mature and the potential for sector level scaling up emerges, it may be that we start to work in the bottom right corner. However, even when working to incentivise broader systemic change, we should support initiatives in a way that recognises the limitations as well as the potential of our interventions. By staying in the lower two quadrants, we use competitive forces to identify potential winners and avoid either defining specific innovations or creating specific entities to deliver those innovations.

MDGs to be re-written?

Rumour has it (BBC TV Newsnight) that a commission chaired by UK and Brazil is to lead efforts to re-write the Millennium Development Goals. What good news, and about time some of us would say. I guess that because forgetting about them altogether (good option) or admitting that the idea of such goals was wrong (better option) would be politically impossible, re-writing them so that we avoid a day of reckoning is the only viable option?

External scrutiny of applications

Many applications concern processes where

we need sector specialists to evaluate the project

The ABIF project management model has always included the idea of an expert pool comprising sector specialists, an environmental expert and a social expert who would be responsible for scrutinising applications and advising the fund management team on relevant technical issues. However, as we developed our grant calculation methodology and better understood the capacity of our typical applicant, it became apparent that in addition to this support, we would also need investment project financial modelling resources.

This is because we require a detailed financial model for each application as a part of the ABIF due diligence and evaluation process. The model is used for assessing both the appropriate grant offer and the commercial viability of the proposed investment project, requiring applicants to reach a reasonably high quality threshold for the financial model. Afghanistan is clearly a fairly extreme example of lack of capacity among applicants to provide reliable financial data or address the complexities of project accounting, but I suspect that funds operating in many other countries face similar issues. This is why I would commend this idea of bringing in specialist support to anyone managing a similar fund. Because we have kept the applicants fully engaged, I think that we have succeeded in bringing in this additional support without undermining applicant ownership of the business plans.

We have been able to use this approach because of the way that we manage our pipeline; narrowing down to the most promising applications as quickly as possible (attrition pyramid A in the diagram below). In a more traditional approach characterised by pyramid B, providing this level of support (which in an environment such as Afghanistan would appear to be essential) would not be possible.

ABIF adopted approach A to pipeline management

The very process of building the model is throwing up a lot of searching questions about the proposed investment projects. We have had a much more focused and better informed dialogue on financial issues with grant applicants than I have seen in my previous projects, long before the final application is drafted and submitted. This is an ongoing process of support, but already our understanding of the applicants' business models has been enhanced and in some cases the applicants themselves have realised that there are shortcomings in their investment projects that need to be addressed. By the time that we receive the final applications, applicants will have tightened their own plans, projections and assumptions, and our fund analysts will have a much deeper understanding of the financial viability of the proposed projects. In the words of one of the external consultants hired by an applicant, "I believe this strictness is good for them [the applicants], they are learning a lot as well, that business planning is not just guessing and creating numbers out of imagination."

The way that we have managed this process is quite new. Some time ago, we asked for volunteer MBA graduates to help with financial modeling as a part of the risk based investment strategy that we have adopted (see this post). For the last weeks, we have been working with a group of four excellent professionals who have brought valuable analytical skills to the team and a vital external perspective to the project application process. Although my hope for volunteers was a bit optimistic, nevertheless the value added delivered by the participation and external scrutiny from our colleagues has been truly impressive!

I am confident that as we approve grants and start to fund projects, having this additional resource will result in not only enabling us to justify the level of grant awards, but also a stronger portfolio of projects more likely to deliver the intended development outcomes.

Budgets and diversity in development

Picking over the scraps

There was an article in the Financial Times yesterday (Development Aid to Poor Nations Falls) talking about newly published OECD figures on western spending on development. Not surprisingly in these times of austerity, many countries have cut back on their development budgets as a part of overall reductions in public spending plans.

Meanwhile against this trend, the UK is currently moving towards legislation that will oblige governments to maintain a development budget at 0.7% of gross national income (an increase from 0.56% in 2011). However while all of the main parties support this objective, there is not universal agreement that this is the best approach. For example, the House of Lords Economic Affairs Committee (referred to in an earlier post) recently concluded "Whatever its merits when it was adopted in 1970, we do not accept that meeting by 2013 the UN target of spending 0.7% (£12bn) of Gross National Income on aid should now be a plank, let alone the central plank, of British aid policy".

If we accept that making international commitments on development spending is a good idea and that the somewhat arbitrary target of 0.7% of GNI is as good as any other target (quite a lot to accept all in one go, but we have to start from somewhere!), my view is that the central development (rather than political) issue is not so much with the target budget but with the target date.

The political issue is straightforward, can the government convince the UK taxpayer that now is the time to increase spending on overseas development when public expenditure at home is being squeezed; but this is something for politicians to worry about. What I think is a legitimate subject for debate in the development world is whether DFID as the main spender of the budget, can successfully manage such a rapid increase in the budget.

This is where I want to come to the issue of diversity in development. From what I have seen over the years, one of the great strengths of DFID as a donor agency is its willingness to employ different approaches in different places and times. It brings a refreshing intelligence and lack of dogma to its development work, and as a result DFID is widely regarded as a global leader in development thinking. My view is that this is both the product and cause of DFID being institutionally designed to be good at diversity in development. The capacity arises from a combination of DFID being a specialist development ministry and the degree of devolution of authority the centre allows to country offices; these key organisational strengths can be balanced to ensure overall political autonomy as well as local variation, experimentation and learning.

The importance of diversity in development lies in the adaptability it brings to the design of interventions. It allows an evolutionary development of development based on experimentation and critical analysis rather than the adoption of models driven by dogma.

One size fits all?

Anyone who says "DFID thinks..." or "DFID says..." assuming that an individual's pronouncement is the same as the World Bank's "Positions" on various topics has missed an important distinction; DFID has placed itself very much at the diversity end, rather than the dogmatic end, of the spectrum. The beauty of this is that DFID has created an environment in which its a relatively small budget (in absolute terms) can be used intelligently and (hopefully) more effectively. Of course it doesn't always work like that, sometimes large chunks of budget are "captured" for political reasons or by dogmatic or bullying agendas, but the potential for intelligent application of budget by virtue of organisational design is there.

Successfully managing the rapid increase in budget is therefore a question as to whether the new budget can be used as well as (if not better than) the existing budget. Is there spare capacity within DFID (time and space for thinking and designing experiments) to use this new money to enhance the way it delivers development as well as increase the quantity of the development delivered? Can diversity be maintained in the face of pressure to spend more money?

While welcoming anything that means that there are more resources available to apply to poverty reduction work, from the point of view of diversity, I have several concerns about what this rapid increase in budget will or might do to DFID:

1. To head off public criticism (anticipated, real or perceived), DFID will rely more and more on quantified (so-called) "results" when justifying the allocation of an increased budget, meaning that money will go to those that make up the most convincing numbers, rather than those interventions that may be having the most effect;
2. To cope with lack of people to manage interventions (and it is clear that country offices are struggling to manage existing budgets effectively), the plan is that more and more money will be channeled through the  multilateral agencies, meaning the specific characteristics of DFID's approach will be diluted or even lost; and
3. To placate the development community, a disproportionate amount of the increased budget will go to the noisy ones (the campaigning types) rather than those who focus less on attention seeking.

Each of these potential effects of a rapidly increased budget will limit or undermine the diversity of development approaches that DFID has nurtured over the years, which would be a very sad result for DFID and for development in general.

Ag Fair

It is with great pleasure that I can talk about the wonderful Ag Fair held in Kabul over the New Year holiday. I remember the first Ag Fair a few years ago (as I recall it was the USAID/ASAP project that was behind it?), and it is great to see how their early efforts have developed into the quite magnificent event I attended the other day.

Welcome to the Kabul Ag Fair!

The crowd control at the main gate was a superbly Afghan experience; lots of completely ineffective security, a bloke trying to stop anyone getting in, another chap on the back of a pick up truck pointing a machine gun at the crowds while his colleague threatened to hit children with a stick... The VIP visitors never get to see such things, which is a shame. It could give them a slightly more realistic view of how the authorities can treat regular citizens even in such simple situations...

Finally I managed to get through the surging crowds and within a few metres of the gate, when I was identified from on high as "hariji" and somehow plucked from the crowd and propelled through the gate! In the end it was a bit like being a champagne cork forced from the bottle as I was half pulled, and seriously shoved through the Ag Fair gate with quite surprising momentum...

Agricultural machinery attracted a lot of interest

Once I had regained my balance (and attempted to recover my dignity) inside, I started to meander around the various stands. In the early days, the exhibition used to be dominated by sometimes strange handicrafts NGOs. This year, it was a much more convincing selection of genuine agricultural firms, selling real products that you could imagine farmers would be interested in buying.

What was very pleasing from an ABIF point of view was that we had already made contact with pretty much all of the commercial exhibitors (several were first round applicants and one was on the final shortlist). It would seem that one way or another we have reached most of the higher profile companies in the sector. Of course, we have to do more to reach others in future rounds, but as a start, it is good to have the impression that we haven't missed any of the obvious sector players.

Apart from that, it was just great to see some really impressive displays of produce from improved inputs and improved cultivation practices. The progress that has been made through various co-operatives and associations in this respect is remarkable.

But the question remains, how to transform the rural economy by spreading this new access to inputs and increased knowledge? This is where I am convinced that ABIF has a role to play through the private sector. We are not just about changing the way that farmers work, but also by encouraging investment in relevant value chains, we are helping to create new incentive structures that will make it worth the effort for farmers to adopt new practices. It might just be worth investing in better seeds if there is somebody to buy your crop (sounds so simple, but so often missing in the interventions I have seen in the past).

Waiting for the entertainment to start

And finally, on one of the first, warm and genuinely spring like days of the year, it was fun simply to wander around the fair, talk with some of the exhibitors, watch people, see families out together and kids playing, and all of those normal things that go on in life! By the time I managed to get inside the fair ground all of the official speeches etc were long over (not sure that I missed much there) and the musicians had taken to the stage. The crowd sat and waited patiently under the tent and were finally rewarded with some local entertainment... the cheer was enormous!

Can't wait for next year...