Round 2 progress

We have just finished work on the funding recommendation for ABIF's second competitive round. The great news is that we eventually received a total of 22 fundable project proposals! Together these proposals envisage projects with total investment of some US$23m, incentivised by grant requests totalling just under US$7m. If we then combine this with the first round results, the potential investment incentive achievement from ABIF can be summarised as US$36m of private sector investment, incentivised by some US$9m of public funds.

Back to the specifics of round 2, based on the final grant requests submitted by the remaining applicants the other day, we have now finished ranking these projects according to the development return on the grant request. This ranking determines which are included in the funding recommendation that goes via the Investment Panel to DFID for review and approval.

The good (or the not-so-good, depending on how you look at things) outcome of the second round is that we have more potentially fundable projects than we have grant funds remaining. This means that of the 22 projects that made it through to the final stage of the competition, only the top 17 are included in the funding recommendation. This means that the anticipated (rather than potential) figures for investment and incentive will be slightly less than the potential mentioned above, but impressive nonetheless - we will only have the final calculation when the second round grant agreements are signed.

In the course of two rounds, after just 18 months of operations, we can reasonably conclude that the ABIF "pilot" is producing real evidence that relatively small grants can be effective incentives, more than justifying the investment that DFID has put into the project and the innovative approach we took to determining grant amounts.

But this of course, is only the intermediate step towards market change and improving the lives of our target beneficiaries, those results will come with time as projects are implemented and innovative products and services enter the market. In due course, we also hope to be able to talk about the positive impact of the capacity building we have done with local business development service providers.

That credible demand for grants has far out-stripped supply is a major achievement in itself, that there are any number of other potential applicants out there, is hugely encouraging both for the future of Afghanistan's economic development in general and for ABIF in particular.

Meanwhile, round 1 project implementation continues (more on that subject in a later post) and the first tangible development results are emerging. These are happy and professionally satisfying days for the whole ABIF team!

On funnels

I wanted to share a thought about funnels that has been developing in my mind for some time now, and which I am beginning to think may have something to it that is worth developing...

The thought started with the feeling based on observation that the way that we try to effect pro-private sector change in a place like Afghanistan is often under-productive (occasionally even counter-productive) and frustrating for all concerned. Our intentions were good, the models were there and the process was reasonably well understood, but somehow, things didn't work out in the way that we wanted.

I first noticed this when I was working in the Ministry of Commerce, way back in 2004-07. These were the good old days, when donors were full of energy and enthusiasm, and money was no object. The size of the budget was matched by the grandeur of the vision and the certainty of the Doing Business indicators. There were any number of exciting ideas as to what reforms the ministry should execute, there were league tables to measure progress and there was an embarrassment of technical assistance to help make it happen.

We wrote strategies, we prepared options papers, we drafted proposals, we held workshops... all driven by an ambitious notion of what could be, if only the government did what it should do.

And this, I now think, is where we went wrong. In setting out the grand vision, in identifying and describing ambitious reform targets, rather than enthuse our counter-part, we frightened them off.

Many civil servants (as anyone who has seen the parody of the UK comedy Yes Minister will appreciate) are past masters at superficially going along with things while delaying/resisting all the way... the end result is that change is incredibly difficult to achieve. For some reason, we (donors and implementers) collectively thought that it would all be so different in Afghanistan. Maybe we were seduced by the fact that it was our vision, our prescription that we were trying to push, maybe it was because there was so little by way of formal government structure to constrain our behaviour, that we forgot about the informal constraints, and ignored the need to convince not by preaching but by listening. Oh, and add into the mix the fact that there were any number of people (both international and Afghan) who had the perfect commercial incentive to sell a line, pretend that anything was possible.

Well, a few years later, we just have to look at what has changed and (just as importantly) what hasn't changed to realise that we made a mistake somewhere. Yes, the Ministry of Commerce is much better than it was, without a shadow of doubt. But has the wide and deep reform we proposed happened as we were convinced it should? Has the change in culture really taken root in the organisation? I would say probably not to both questions. And DFID (which paid for our work back then) acknowledges that this is the case in the business plan for another 3 years of technical assistance and capacity building to the ministry (currently being contracted for 2013-16). And this is a familiar story across the whole of government; depending on the inclination of individual ministers, more or less may have been achieved at the top of the respective ministries, but nowhere (that I know about) has there been real and self-sustaining transformation in the way that organisations work.

So back to the "funnel theory" (as I rather grandly call it). This is not about forgetting the end objective of achieving (in my case) pro-private sector reform, but it is about changing the way in which we try to achieve that reform. Rather than setting some incredibly ambitious goal of where you want to be, start with where you are.

For example, the funnel theory approach would advocate forgetting about re-designing registration processes or re-writing laws or making new regulations as the first and explicit priority, instead look at what processes, laws and regulations already exist and work within these constraints. Don't spread fear and confusion with bold ideas of ripping everything up, instead adopt what is there and start to bring shape and certainty.

Take business registration as a specific issue. The Doing Business indicators (which I now have to say that I reject as a useful tool for governance reform) encourage a race to the fastest possible time and the least number of steps. In this focus it ignores the individual starting point by setting a universal league table and goal. For Afghanistan, even in 2004 there was a registration process, and the main problem faced by businesses was absolutely not the time it took or the steps involved, or even the small bribes that had to be paid along the way (all annoying, but not the real issue). The main problem was that nobody either within the institutions responsible for registration or the businesses applying for registration, really knew what the process was. The result of this was that decision making could not be delegated and was slow, and bottlenecks were everywhere. But this lack of knowledge, in the impatience to reform, was confused for lack of system, and so after spending millions, we ended up with a parallel system (because nobody focused on the existing system, or it was too complicated, or we couldn't be bothered) and even more confusion, as well as creating resistance along the way.

The funnel system approach would be to look at what's there already and probably not try to change anything at the start. A simple process of working with the ministry to map what they had already and making this information available internally and externally is all that is necessary. OK, it won't move Afghanistan up the league tables, but it will make life hugely easier for everyone concerned with business registration. In fact, while others were cracking on with their reforms, this is pretty much what we did. Thanks to a colleague who had worked on what was known as an "Investor's Roadmap", we set about identifying and mapping around 50-60 business registration and licensing processes dotted around government. We covered everything we could find, from pharmacies to mines. We then had each institution sign and stamp their own process to say that the map was accurate. This document (now sadly out of print) was a "best-seller" while stocks lasted!

Why "funnel"? I use the term because the idea is to lead the counter-party towards an objective by gradually narrowing the scope for discretion and resistance. Each step is proportionate and non-threatening and pace is determined by the people entering the funnel. The determination is not to achieve radical, overnight change, but to slowly lead from one conclusion to the next. Circumstances may change and the end goal be refined over time, but that isn't an issue, because we are not saying that we must do X by such and such a date, we are saying that as things stand, we think that our end goal may be X, but let's take it one step at a time and be ready to change as opportunities arise or increasing understanding suggests alternatives. The funnel is still there, the width of uncertainty is gradually reduced, but the process is a gradual one.

This is kind of where I have reached with my thinking so far and probably plenty enough (if not too much) for a blog post! I need to learn about behaviour and refine the thinking, and of course it is perfectly possible that people much smarter than I am have already come up with this kind of idea years ago... but I haven't ever heard such a notion being discussed in the context of development or reform. If you have, please let me know!

Thoughts on challenge fund investment leverage

A recent discussion on the MaFI Linked in group has thrown up a couple of very important points about leverage that we have been working on with ABIF: 

1. What does leverage actually signify? 
2. How is leverage measured? 

ABIF achieves development results through incentivising investment by private sector partners. So answering both of these questions together is important to the understanding the project's performance. 

The original question posed in the discussion about the relative importance of project and partner's leverage is relevant to any project from a value for money point of view. However, it is important to note that the relationship between financial inputs and development results is far from linear or consistent. For this reason, in answer to the question of what leverage signifies, we do not look at partner leverage as a target in developmental terms. Rather it is used as a measure to ensure that we provide the minimum financial commitment necessary for any given project to go ahead. In other words, we are looking for a rational basis for assessing the tipping point in any investment decision. For any project, talking about leverage is important, but it should not be seen as a developmental indicator, instead it gives insight into the quality of the management process and decision making. 

The second question is surprisingly complex. Somewhat naively, when I first came to the world of challenge funds, I assumed that there would be an agreed methodology for calculating leverage. As Sharad Rai said in his original post, this is regarded as a very important indicator, so you would imagine that there would be a definition of how it is calculated. I was surprised to discover that looking through reports on past and current challenge funds, there was no consistency of approach (in fact some projects do not even disclose how the leverage claim is calculated). We have therefore developed our own methodology, which will be published in our forthcoming project review. When we started to work on this methodology, we realised that there are many variables that need to be defined if a project like ABIF is to present its results in a transparent and consistent way. 


So calculating leverage in the simple cash terms of we put this in, they put that in, does not tell you much, there are context specific issues around risk (political, commercial etc). Such factors make reporting partner investment leveraged potentially misleading and certainly make project to project comparisons unhelpful (I would expect a project in one set of circumstances to be leveraging less partner cash investment than a less risky project in a less risky environment, but this would not show in typical project results presentation). So the question then becomes what is the correct benchmark for any particular project? Donor funded projects have so far come up with two solutions of which I am aware: 

1. Matching grants "one size fits all" benchmark, which by definition, always gives too much grant, but is bureaucratically simple; and 
2. Risk based calculation, which provides a project-specific approach approximating to the "right" amount of grant by seeking to find the tipping point, but is more difficult for donors to understand! 

But this is only part of the story. Should we also be talking about the end-user investment in adoption leveraged? Absolutely in my view. This is an excellent indicator of the behavioural change stimulated by the project and the key to opening the door of the desired development outcome. At ABIF, we place great emphasis on new products or services being accessible, relevant and affordable to end user target beneficiaries. The affordability recognises that these people (particularly producers) typically have to make their own investment and take their own risk in adopting a new technology or technique. In my experience, this is something that scaling up strategies rarely address, and one of the main obstacles to spontaneous copying by end users. 

One of the things that I have seen in the past is that projects tend to make optimistic assumptions about spontaneous copying among target beneficiaries who have been exposed to a new product or service. It seemed to me that these assumptions did not place sufficient emphasis on two points:

1. That end users are themselves required to make an investment and take a risk by changing behaviour; and
2. The closer the end user is to subsistence level, the greater the risk that they are taking.

For example, one of our current investment projects is with an Afghan company that is introducing certified high-yield apple varieties to Afghanistan. With ABIF support they have set up a nursery, and are now selling hundreds of thousands of saplings to farmers. To make the nursery project investment happen, ABIF and the investor both contributed significant amounts of cash, and this is what we used to think about as the investment leveraged. But looking at the project more carefully, we realised that the investment that the end-user is being asked to make is actually much more important and useful to us as an indicator than this traditional view of leverage.

Let's say that to make the original project happen, we put in 100,000 and the investor put in 200,000, we would happily report that we had leveraged 200,000 investment, but what does that actually tell us about the developmental impact of the project? Very little, if anything at all.

But if this nursery goes on to sell 500,000 saplings at a price of 5 each to our target beneficiaries, the scale of collective investment (2,500,000) by the end-users dwarfs the original investment in the nursery project. And more importantly, this leveraged investment does tell us something about behavioural change and gives us a useful indicator of how market systems are changing. Of course, the relationship between the scale of investment and the development result is not linear, but at least we can assume that the end-users buying the saplings perceive a positive risk adjusted return on the individual investments that they are making.

Based on this thinking, with ABIF we have moved from a view of "leverage" focused exclusively on the investment made by the challenge fund grantee, to a wider view that emphasises the investment made by the end-user target beneficiary at the point of service/product adoption. This is where we see a very useful indicator of the way that markets are working for such people is changing.

Having this focus on the end user, starts to fire off other thoughts about the risk and investment involved in changing behaviour, for example:

1. What is the nature of the risk that the end-user is taking;
2. How big is the risk relative to the end-user's economic capacity/diversity of income sources;
3. How can we reduce perceived risk to encourage adoption;
4. How big is the initial investment relative to resources; and
5. How significant is the expected source of increased revenue.

All of these questions helps us to build a picture of the risk adjusted return in the eyes of the end-user.

I don't want to give the impression that we get into hugely detailed calculations or that we have some equation that can show whether copying will or won't happen, rather we try to anticipate the nature and the scale of obstacles to copying, and address them through the investment projects that we are supporting. Clearly, our development interests in copying and the grantee's commercial interests in increasing sales are fully aligned, so frequently it is a matter of finding correct price points, ensuring that marketing is effective etc. But the bigger point is that we do have a differentiated scaling up strategy focusing on demand side copying.

In terms of results measurement, we are now working through these thoughts with our donor, and trying to come up with a results management system that captures this kind of developmental leverage. I think that we are getting there!

Fruits of labours

Delivery of nursery equipment to Trio

The fourth of the seven ABIF first round grantees has just achieved a major project implementation milestone. Trio, a fruit nursery project in Balkh province has taken delivery of and completed the planting of some 150,000 saplings for sale next season in addition to the 150,000 that are already sold (50,000) or ready for sale (100,000) this year.

Trio came to us originally as an orchard and cold-storage project, but spotting the greater market development potential of a nursery supplying certified saplings to small farmers, we encouraged them to re-think the business model accordingly. As the proposal developed, it became clear that there was very promising commercial potential in importing mother stock and selling on semi-dwarf variety saplings in the north of Afghanistan. The saplings are supplied together with a drip irrigation and shading system that maximises yields and reduces water consumption.

The ABIF Investment Panel recommended that the cold-storage component was dropped, and with the new business model, this made perfect sense.

Meanwhile, we put the investor in touch with the Afghan National Nursery Growers Association, a sector association founded with the support of an EC financed project under the Ministry of Agriculture, Irrigation and Livestock.

Working on the new nursery

As soon as the weather became warm enough, the nursery was established on 2.5 hectares of land, adjoining the current orchard owned by the same investor.

The successful implementation of the Trio project means that four of the first round projects are now well on track (the others being Al Hadi 786 pharmacy chain, the Herati Cashmere and Skins de-hairing line and collection centres and Naab Interiors computer assisted furniture production). The fifth (Saniazada Edible Oils) is expected to pass its main implementation milestone in the very near future and the remaining two are on track to make significant progress later this year. It is great to see such tangible results from the financial support provided by ABIF, and a pleasing reflection on the selection and process of the first round that all of the projects appear to be heading very firmly in the right direction.

A dose of the right medicine

Eye-catching branding

Yesterday saw the official opening of the first branch of Afghanistan's first pharmacy retail chain. ABIF has awarded a grant towards this major investment project that will eventually see 20 shops operating under the 786 Pharmacy brand across Kabul.

Counterfeit medicines are a huge problem in Afghanistan, costing money and lives, particularly for poorer consumers. While the Ministry of Public Health has been working to try to stamp out the sale of counterfeit medicines, a survey by a French NGO showed that something like 40-50% of the medicines being sold in licensed pharmacies are not genuine. Our estimate is that our target beneficiaries are spending US$10-20 million per year in Kabul alone on counterfeits.

In the absence of effective implementation of regulation, one of our Round 1 grantees spotted the commercial advantage in becoming a trusted retailer of genuine medicines. The business model is based on the simple unique selling point that consumers will be attracted to a recognisable brand that they know that they can trust. Targeting poorer customers would be achieved by locating the pharmacies close to public hospitals where these people go to receive free health care.

The applicant, Al Hadi Ltd, had a long history in importing and distributing medicines in Afghanistan, and saw the commercial potential for modernising the pharmacy retail sub-sector. Based on our own market analysis that had identified serious problems at the retail end of the pharmacy value chain, we immediately spotted the game-changing potential of their concept. We worked with them to develop their business plan and based on an example from Nigeria, we seeded the idea of a product verification system using mobile technology.

Apart from financing the significant investment, two things stood in the way of realising this project. First the pharmacy regulation prevented shops from being sited within 200 metres of another pharmacy outlet. This meant that (on paper at least) pharmacies could claim prime sites and prevent competitors from opening nearby. Secondly the same regulation only allowed one pharmacy, one license, one name. This regulation prevented the emergence of pharmacy retail chains - a key market development witnessed elsewhere in the developing world, allowing investment in the retail sector, upgrading skills and providing better quality assurance for consumers.

The applicant, with the support of ACCI, lobbied the Ministry of Public Health and earlier this year the Minister instructed officials from the Pharmacy Directorate to change the regulation to remove the anti-competitive restriction on locations and to allow multiple branches. The 200 metre rule has already been changed and the Directorate is currently working on the multiple branch regulation.

Interior of the first branch

As indications of their commitment to selling genuine medicines, 786 Pharmacies offer an SMS verification service that allows customers to check the barcode of their purchases against a central database, receiving an automated reply that confirms that their medicines are genuine. The shop also has an electronic receipting system that shows the exact product, the relevant batch number and expiry date. The receipt is stamped at the point of purchase as the 786 guarantee that the medicines sold are what it says on the packet. All of this is backed up by staff training for the pharmacists employed by the company. The SMS verification system is still in the testing phase, but the plan is that it will be rolled out along with the other branches over the coming months.

The design of the branding and the interior of the shops all adds to the sense that this is a modern, reliable retailer. The contrast between 786 Pharmacy interiors and a typical Kabul pharmacy is striking. Already the owner has been approached by one pharmacy license holder who wanted to take a franchise and open his own 786 store.

Despite this being early days, the word of what Al Hadi Ltd has done through the 786 brand is already out. The Ministry says that some other pharmacy license holders have approached them to apply for multiple licenses with the intention of setting up similar chains. This potential for crowding in by competitors was one of the main reasons that we were so excited about the market development impact of this investment. The benefits to our target beneficiary consumers will be enormous as the private sector imposes self-regulation driven by commercial interests. Eventually our small investment could end up benefiting millions of people in Kabul and across the country.

Cashmere processing line opened

The first de-haired cashmere from the new line

Just back from Herat where we attended the opening of the new cashmere de-hairing line at Herati Cashmere and Skins, one of our Round 1 grantees.

Seeing a grant project come to fruition is one of those experiences that makes it such a pleasure to work on the ABIF project. After speeches from various distinguished guests, we had a tour of the plant and I was allowed to cut a ribbon and press the button that started the de-hairing line!

As well as the formal ceremony side of the event, this was also an opportunity to meet several of the company's representatives who are going to be running the cashmere collection centres in Badghis and Ghor provinces. The new collection centres will allow farmers in remote areas to sell small quantities of cashmere that are then aggregated and transported to Herat, helping to strengthen the factory's supply chain. This means that farmers who were previously largely cut off from demand, or were unaware of the value of cashmere, will be able to access a new market and benefit from a new/more reliable source of income. As well as collecting the cashmere, the centres will also provide animal health services and harvest training for the goat-herders.

Listening to the stories and ideas of the HCS representatives

During our discussions with the collection centre representatives, they told us that not only was this a money making business for them, but they were paying more than the traders who previously controlled the market (where it did exist) and expected farmers to start to grow and harvest more cashmere goats as the word about the new market opportunity spread. They told us that with the new cashmere processing capacity, they could buy as much cashmere as the goat-herders could produce. HCS estimates that once all of the collection centres are up and running (in time for this year's harvest, expected in April), they will be buying cashmere from something like 40,000 goat-herders.

It is through this kind of private sector development driven by an anchor investment, that ABIF is not only changing the way that local markets work, but is also able to overcome the kind of security constraints that otherwise prevent direct interventions in remote areas of Afghanistan.

Access to finance breakthrough

Access to commercial finance in Afghanistan remains a serious obstacle to growth for SMEs. In a major breakthrough, earlier this week one of our Round 1 grantees has managed to secure long-term finance of US$250,000 from a local bank, largely thanks to support from the ABIF fund management team (who made the introduction and assisted with some of the negotiations), the strength of the business plan that the grantee presented and the fact that the ABIF grant agreement is signed and effective.

We have not had to provide any guarantees, all we have done is reassured the bank that the applicant has a viable business plan, has been through an extensive due diligence process and will receive the grant payments as various project implementation milestones are achieved. This relatively light-touch approach has helped to unlock a substantial loan for the applicant, allowing him to pre-finance the purchase of machinery essential to the investment project.

This is a major endorsement of our assertion that ABIF grants do not displace commercial finance, instead they should actually stimulate the commercial finance market. While this is a relatively small start in the greater scheme of things, this loan agreement shows the wider potential impact that ABIF can have on SME and market development. We hope that having helped one applicant to secure this finance and having familiarised the bank with our procedures, this will open the door to a wider co-operation between the project and the bank and we will see other current and future grantees achieving similar results.

We are all delighted for the applicant and are now looking forward to the rapid implementation of the investment project. This is great news for all concerned!