Green shoots in Mazar

Certified rootstock nursery project

Seeing our investment projects actually happening up close has to be one of the most rewarding professional experiences imaginable. A few days spent in the field, meeting grantees on their own territory, seeing their business plans come to life and having a chance to talk with the people we hope will ultimately benefit from the investment project, makes all of the months of design, the endless hours of meetings and the inevitable project administration worthwhile. This is what it is all about.

I have just come back from a short trip to Mazar i Sharif, where we have two live projects from round 1 - an apple orchard/nursery producing certified rootstock and an edible oils factory processing cotton, flax and sesame seeds.

Edible oil production

This short trip was an excellent opportunity to see how these two projects are getting on. The good news is that both are making excellent progress; the land for the nursery is identified, the rootstock is ordered and the first customers are already appearing. This is a business that looks as if it will take off quite quickly. The new rootstock, together with the trellising and drip irrigation technology will lead to a dramatic improvement in yields for thousands of apple and fruit growers around Afghanistan.

Meanwhile, the oil seed factory is taking shape. Most of the production line is now in place and the grantee has identified the bottling plant, which is the last piece to be purchased and installed. Two engineers from the Indian company that supplied the refinery equipment are currently in Mazar overseeing the installation of all of the equipment.

Both projects are on schedule and both grantees are satisfied with progress.

At the same time as visiting the grantees, this was also a valuable opportunity to get out into the countryside and meet some of what we call "target beneficiaries". It is always good to be reminded that this rather impersonal term is actually about real people who are struggling to eke out a living, mostly from the land.

Cotton picking

Driving between Mazar and Shebergan, we had the chance to stop and talk with families who were harvesting cotton and with a group of young men who were beating the seeds out of piles of sesame plants that had been drying in the sun. Typically these people are working the land on behalf of the owner, taking a share of the crop that they manage to grow and sell.

We met a whole family (it seemed that there were three generations working together) who were out in the cotton field bending over the knee-high plants to pick the cotton. The father was complaining about the low prices they received for their work and it is obvious just from watching them that there was a real sense of urgency to fill the bags for sale.

Sesame seeds

Further along the road, the cotton fields gave way to sesame, and every so often there were stacks of plants drying in the sun. Again we stopped and had a chance to talk with a group of three young men who were gradually working their way through the rows of dried plants.

Having never seen a sesame plant before, it was a fascinating experience to watch them beat each bundle on the ground to extract the seeds. The next step is to sieve everything that falls to the ground to separate the seeds which can then be sold.

Mazar city and the area around is probably one of the most prosperous parts of Afghanistan. The land is flat and relatively fertile, we drove past miles of fields, and where there was no cultivation, there were often shepherds with large flocks of grazing sheep and goats.

One of the highlights of the trip was to meet with the "oil seed representatives". As a part of the edible oil project, the factory owner is encouraging the farmers to form groups. One of the first groups is coming together in the town of Balkh.

Meeting farmers' representatives

The representatives plan to organise the purchase of hybrid seeds, fertilisers and other inputs, provide some basic cultivation training and then collect the product for sale to the factory. There is talk of providing some kind of credit facility to help farmers to invest in the higher yielding but more expensive seeds, but this may be a bit ambitious at this stage.

One of the issues we discussed with the representatives was the role of the provincial Department of Agriculture... "Don't they provide extension services?" I asked rather naively. The answer was pretty straightforward, "We haven't seen anyone from the department since Daoud Khan was in charge." Thank goodness for the private sector!

Good argument, good conclusions, wrong pratical solution

The west has squandered time and money in Afghanistan trying to impose high-minded governance and social preferences rather than addressing real needs. Now, with time running out, we need a new private sector investment led model for economic growth focusing on preparing Afghans for a post-donor world. This is the main argument put forward in a Financial Times article that caught my eye, Aid will not sustain Afghanistan’s economy by Ahmed Rashid and Alexis Crow, published on 30 July. I was delighted to see this kind of argument being put forward with such clarity.

The authors make a point that I have been banging on about for some time; that this predilection for focusing on social preferences has been a distraction from the higher priority (at least in the short to medium-term) task of promoting sustainable economic development. They contrast the western approach to peddling liberal democracy with the way that large Chinese and Indian corporations have got on with investing in Afghanistan. In other words, while we push values on Afghans, others extract value from Afghanistan. I agree with Rashid and Crow that this approach has not only lost valuable time, it has also contributed to antagonising significant sections of the local population.  

Where I part company with the article is when it comes to the practical solution prescribed by the authors, "the US should now encourage bold private equity groups with a long-term, high risk investment strategy".

There are three main reasons why I think that this is not the right way forward:

First, the future success of the large Chinese and Indian investments mentioned in the article (the Aynak copper and Hajigak iron projects respectively) rests to a large extent on governance reforms that will bring Afghan mining legislation and regulation more into line with international norms. So while these corporations have got their foot in the door by securing the deals, real investment will only happen when the Afghans have achieved significant improvements in the investment climate.  Investment, even by large Chinese state-owned enterprises relies on the kind of reform programme that the article implicitly de-prioritises. And this need for reform is not restricted to the mining sector. No amount of external support to investors or willingness to take risk can overcome archaic and anti-business regulation that runs through many economic sectors in Afghanistan. If doing something is unlawful, however out of date the regulation may be, it is not a high risk that can be priced, it is plain stupid (or at least it is for a western private equity group). By all means forget some of the irrelevant/outlandish social preferences of the west, but there is some very practical and boring reform work that has been/needs to be done before investment in Afghanistan will really take off. So the "either mess around with reforms/or get on with investing" choice is overly simplistic, the relationship is much more complex than that and we should be working on demand led reform as a high priority.

Secondly, the same Chinese and Indian corporations are strategic, not financial investors. The idea that Afghanistan could be a playground for swashbuckling private equity groups ignores some fundamental realities of the local society and local ways of doing business. The last 10 years of western engagement are littered with well-intentioned ideas for private equity projects, some of which have even managed to attract funding, but none have ever made an investment. Those with long memories will remember the US$20 (or so) million Afghan Renewal Fund managed by ACAP Partners (now dissolved) and financed largely by USAID which was operational between 2004-06 (or thereabouts). The project report, which can be found online, runs through the deal pipeline from the hundreds of initial contacts to the zero deals done in the several years of the fund's existence. Other donor agencies have tried and failed with similar ideas. Why don't these financial investment projects work? The fundamental problem is that Afghan businesses work differently to the west; first most are family businesses that simply don't want outside investors, and secondly most are totally/partially informal - very few would withstand the kind of due diligence and scrutiny that any responsible equity fund manager would require. Then you have a problem with shared management, in a run-off between a remote fund manager and a local owner with different views on business strategy, my money is on the local owner any day of the week. And finally, you have a small issue of exit - what viable exit strategies are available to equity investors? The same family issues would come up again, there is no room for any kind of secondary market in today's Afghanistan. So, it is probably worthwhile looking at how the Chinese and Indians are investing and learn from their example of setting up at scale with their own companies, their own managers and probably significant amounts of their own workers.

Thirdly, the Chinese investor is a state owned enterprise and the Indian investor consortium includes state owned enterprises. These are not private companies willing to take high risks and a long-term view, there is a great deal of very high level political engagement going on in the background. This is a whole lot different to a private equity group trying to manage a portfolio of private investments in Afghanistan.

So what is the immediate and practical solution? Putting the Aynaks and Hajigaks to one side where there are scale considerations that require a different approach, I would propose the following new model for broad economic development in Afghanistan:

• Focus on incentivising Afghan, rather than foreign, investment. Foreign investment is welcome of course, but the faster, easier route is to get Afghans to invest in their own country.
• Forget private equity, use government investment incentives to get Afghans to invest their cash (and there is plenty of it) today not tomorrow, and to invest in productive assets in Afghanistan, rather than real estate in places like Dubai.
• Go for investments that will provide an anchor for wider economic development - for example, agri-processing factories that will buy Afghan produce from thousands of farmers, or mining service enterprises that will make a viable business out of working with small scale quarries, securing thousands of jobs in the process.

I say "new model", but this is pretty much exactly what DFID (and now AusAID, who have come in as a co-donor) are doing through ABIF. We have some fantastic real life investment projects that are now beginning to get off the ground and which promise to deliver tangible benefits to hundreds of thousands of Afghans. So far, we have committed US$2.5m of donor money contributing to US$13.3m of private investment, and we estimate that some 500,000 Afghans will be better off in one way or another as a result. Give us more money, and there is plenty more opportunity where that came from!

Grants awarded

With the Round 1 grantees and colleagues at the
signing ceremony.

In July, ABIF signed its first grant agreements, the Fund has now committed around US$2.6m as a contribution to total private sector investment of US$13.3m across seven projects.

This means that from the first round alone, we have already exceeded the target total investment set for the entire project... and we still have more than 2/3 of our grant fund to distribute. This fantastic achievement is down to the hard work and the patient perseverance of the applicants and the whole ABIF team, who have worked together over the past months to develop some truly innovative and exciting investment projects.

The projects we are supporting from the first round are:

• A chain of branded pharmacies, bringing a new retail business model to Afghanistan and promising an approach built on reputation and trust. We estimate that poor people are spending something like US$10-20m per year on counterfeit medicines in Kabul alone. The introduction of a brand that guarantees that the medicines being sold in its name are genuine represents a major market change.
• Two new cashmere investment projects in Herat, one Afghan and the other international. These projects will significantly expand Afghanistan's cashmere processing capacity creating manufacturing jobs and increasing export earnings. Significantly, both will also dramatically improve market access for small farmers through the construction of a network of collection centres in western Afghanistan.
• A young business that has been running a pilot project for the last 8 months will step up its production of computer assisted design and machine produced furniture components to a commercial scale thanks to a relatively small grant. This innovation will allow Afghan carpenters to purchase the decorative pieces they need to make their furniture more competitive against imports.
• In the north of Afghanistan, we are supporting a new edible oils production and bottling plant. The investor will secure supplies through contract farming arrangements with thousands of local producers, providing small scale credit facilities as well as cultivation training and access to improved inputs.
• An established business based in Kabul will be setting up a carton producing factory. The company will purchase agricultural waste, convert it to pulp and manufacture cartons for use in the horticulture sector. This will open up a new income stream for small farmers supplying the waste to collection centres and the cartons will make a significant contribution to reducing post-harvest losses for farmers.
• An Afghan company with connections to Turkish suppliers has been piloting the introduction of certified rootstock and new orchard technology in Balkh province over the last few years. They are now ready to step up their production and distribution of high yield trees. With ABIF support, the company will be setting up a new nursery near Kabul and will be selling hundreds of thousands of trees and the associated technical equipment throughout Afghanistan.

It is so pleasing to see the work of the past months come to fruition in this way. Of course, signing the grant agreement is only the start... we now have to see these projects implemented and achieving the impact that we think is possible. Watch this space for news as the projects mature.

Strike in Kabul

Farhad shows how it should be done!

Yesterday evening we enjoyed a team evening out at Kabul's Strikers bowling alley. I had heard mention of this place a few times since it opened last year, but yesterday I finally had the chance to go and see what it is all about for the first time.

After getting (sort of) used to a city of largely deserted streets after nightfall, it was a slightly surreal experience to walk through a rather unassuming gate, passed the bloke with the machine gun and into the buzzing, happy atmosphere that has been created at Strikers.

The staff were well trained, the hall spotlessly clean, the equipment working perfectly. This was an evening out for the team after a fairly intense few weeks, and we had the most fantastic time (apart from the fact that I didn't win...).

And it seems to be popular with the locals. Three or four of the lanes were busy, people were arriving all the time, and even young Zubair (maybe 8 or 9 years old) at the next door lane to us was getting into the swing of things and giving his father a good run for his money!

Co-incidentally, when reading through a recent edition of the Afghan Scene magazine, I came across a profile of Meena Rahmani, the lady behind this amazing venture. The article gives a bit of a profile of Meena, tells the history of investment and some of the problems that she has faced running a business in Kabul such as the poor electricity supply (which explained the huge generator just by the entrance). Reassuringly, Meena appears to have overcome all of these problems and has a plan for pretty much any situation, she tells the interviewer, "If there is a suicide bombing... I send everyone home".

Perhaps not a typical customer service issue for bowling alley owners, but sounds sensible to me.

My only strike of the evening!

But seriously, I take my hat off to Ms Rahmani and the people like her who, despite everything, are investing and are making their personal contributions to the development of the country one painful step at a time.

Well thankfully there were  no suicide bombers yesterday evening, and we managed to fit a couple of games in before heading home for a barbeque.

But the important thing I took away from this fun evening out with the guys from the office is that Kabul always retains the right to surprise, and sometimes those surprises can be of the most pleasant variety!

Opening a bank account

Colleagues going through the process

My congratulations to the Afghanistan International Bank and in particular to Mr Yama Naseri, the manager of our local branch.

The other day we visited AIB to open a bank account. Not only was the process relatively painless, but we were also served a very pleasant cup of tea... certainly some of the banks back in the UK could learn a thing or two about customer service from these guys!

It is these small but significant interactions with professional people doing a good job that continues to give me hope for Afghanistan.

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...

House of Lords report concludes attribution practically impossible

Having banged on about this subject for years (for example see this earlier post), and having long argued that the various claims of attributable quantified impact made by many projects and researchers (they know who they are and they should be ashamed of themselves) are methodologically unsound, and having consistently said that the sections of the DCED Standard related to attribution and the so-called "Universal Impact Indicators" should be dropped because they are plain wrong... it is quite gratifying that  two of the conclusions of a report published today by the House of Lords Economic Affairs Committee on the Economic Impact and Effectiveness of Development Aid are:

"We accept that accurate measurement of whether or how much aid helps promote growth is not available."

and

"32. The difficulties of accurate measurement and attribution, and of assessing what would have happened if no aid had been given, are so formidable that the evidence that aid makes a contribution to growth in recipient countries is inconclusive."

And of course, what is true at a macro-level is also true at a micro-level. It is simply not possible to measure impact attributable to a given market development project in any meaningful way, and it is certainly not possible to aggregate the impact of projects across programmes. If anyone can prove me wrong on either of these points, I would be delighted to learn about their methodologies!

So finally, can we bring some common sense to development impact reporting? Can we stop producing over-elaborate spreadsheets that calculate pseudo-scientific results? Can we stop publishing seemingly scholarly case studies that make indefensible claims that a specific intervention had a quantified poverty reduction impact? Can we stop even talking about these Universal Impact Indicators, and discard the claims that they can be calculated for each intervention and then aggregated across programmes by different donors?

In fact, let's ask about how much time and money and effort has been wasted on this subject all because some rather over-confident people made some rather foolish (but very attractive) claims about what they could do with numbers, but then didn't have the courage to admit that they were wrong...

Or maybe the noble Lords and all of the eminent folk that gave evidence to the Economic Affairs Committee have got it all wrong? In which case, can those who promote an opposite line come out and explain the methodology they propose for calculating their "robust" results?

I suspect that they won't because they can't.

So please, let's just take a step back and look to see if interventions are working, instead of getting lost in assumptions multiplied by other assumptions, adjusted for another assumption, and then claiming that we have evidence of impact!

I have always said that we should talk about the strength of the contribution of an intervention to a particular observed development outcome (for which it is possible to gather meaningful evidence), this is so much more sensible than trying to quantify that contribution.

The report says loads of other very sensible things, but this really caught my attention! For what it is worth, I say well done and thank you to the Committee. Let's hope that something good comes out of their work.

Happy New Year!

Kabul
1st Hammal 1391

One of the advantages of living in Afghanistan is having two New Year's Days each "year". Two opportunities to be buoyed up by optimism because we made it around the sun once again, and two chances to make (and no doubt break) new year resolutions!

So in this spirit of optimism, I will hope for three things this year:

1. That this year denies the doom-mongers the satisfaction of saying "I told you so";
2. That for the vast majority of Afghans who want nothing more than a quieter, better life for their children than they experienced, 1391 brings some peace and stability; and 
3. That our efforts pay off and our work makes a difference.

Not so much to ask, surely?

As for personal new year resolutions... I thought about writing something here, but I think that on the whole such thoughts are best kept to myself!

Happy New Year to everyone who reads this and to all my Afghan colleagues and friends... and just as importantly, Happy 16th Birthday to Hugo!

Thinking differently about business enabling environment reform

Incentivising investment and encouraging business enabling environment reform to follow on as a demand led process, is a much better route for donor funding to promote growth and poverty reduction than imposing reforms in the hope of "causing" investment.

In fact, we should not even talk about BEE reform feeding through into changes in the economy (increased investment and faster growth) in the way that the authors of the World Bank Doing Business survey do (e.g. see FYR Macedonia case study in DBR 2012). Such attempts to claim a causal link between BEE reform and investment led growth are dubious in the extreme. Yes, better performing economies tend to have more friendly business enabling environments, but they don't perform better because of their friendly business enabling environment. Never confuse correlation with causation!

In fact, there are very good arguments for not pushing through complex general reforms in fragile states where implementation is always problematic. Businesses on the whole prefer certainty over confusion, and if a licensing process takes a few days longer than it would otherwise, then so be it. Most people ignore the official processes in any case. But even for those who do register, better the devil you know... The only exception I would make to this general rule is where specific reforms are necessary to attract international investment (e.g. in large scale natural resource exploitation), in which case strengthening implementation capacity has to be as much a priority as the reforms themselves. And even then investors want regulatory stability as much as regulatory familiarity.

As our recent survey of Afghan investors showed (and admittedly it was a survey of successful investors) business registration and licensing issues were way down their list of problems, while corruption was much higher. Corruption is to some extent a product of complex systems, but it is much more a product of uncertain systems. And regulatory reform, especially in a fragile state, creates enormous regulatory uncertainty, so ironically could actually increase the opportunity for corruption, or at least negatively disrupt established corruption markets.

This is on top of the enormous opportunity cost of unnecessary or badly designed or prioritised reform. For example, why are donors in Afghanistan once again pouring millions of dollars into trying to set up a central credit registry? Is there solid evidence that it will unlock bank lending or is it because it will improve DB rankings? Why are they simultaneously pouring millions into alternative dispute resolution? Has demand been rigorously investigated or is it because it will increase DB rankings? These are just two cases where the reform tail could be wagging the development dog (and the development dog ends up Doing its Business). My suspicion is that this time and money could be deployed so much more effectively if only we were not so obsessed by some ranking in some table.

It would be much better to start by changing the mentality of state and private sector by building investment in Afghanistan. This would give government and private sector stakeholders a genuine reason to want to achieve the right reforms that work for them, surely much better than creating a load of expensive, ineffective and irrelevant institutions taken from the appendices of Doing Business reports. As if the World Bank has a unique insight into what would make the perfect business environment for the 180 or so countries it surveys and ranks!

(I suppose that one consolation is that any number of projects have tried to do the same things in the past and have run out of budget before they have actually implemented anything, so there is every reason to expect the same thing to happen with these latest attempts.)

This is NOT an argument to do nothing. It is an argument for throwing out the claimed causal model and the central planning approach it encourages, and acknowledging that while better regulation and investment tend to co-exist, tangible investment rather than paper reforms should be the priority. Investment should be the priority because it can be achieved in a shorter timescale, it doesn't rely on weak government to implement and it makes a real difference to real people. Quite simply, let us focus on increasing investment that reduces poverty and let reform take its own natural course when opportunities and demand coincide.

So a project like ABIF focusing on investment has three principal advantages over BEE reforms that in fragile states are rarely implemented. First, the right investment contributes to a much more immediate inclusive growth and poverty reduction impact. Secondly, investment gives the relatively rich and powerful a tangible stake in the future of the country in a way that an improved position in a league table never would. And thirdly, incentivising private sector investment is a much more effective route to meaningful BEE reform in such states than the traditional top-down (or worse still, outside-in) approach.

There are five main justifications for this third claim:

1. It is likely to result in an incremental rather than radical change process, making it easier for businesses and the implementing institutions to manage and adapt to change;
2. Reforms will be demand driven because there will be a constituency (private sector investors or their business associations) to demand reform;
3. Reforms will be designed according to real, rather than imagined needs, as there will be the same constituency able to respond to consultation opportunities;
4. Reforms will be delivered by resources managed by local institutions rather than by imposed by international agencies; and most importantly
5. There will be somebody to benefit from the reform creating pressures for implementation rather than paper reforms.

The problem of course is that it is much easier to measure paper reforms than changes in attitude, and increased local demand for the right kind of reform. So no doubt in these days of reducing all development reporting to the most simplistic numbers, however meaningless they may be, we will be stuck with the World Bank Doing Mischief report for some time.

Stupidity and frustration...

Yesterday's news that copies of the Koran had been burnt at the military base at Bagram made my heart sink, a feeling compounded by ongoing reports of trouble breaking out here in Kabul and in Jalalabad. After all of these years of international military presence in Afghanistan, and so many incidents from which to learn, how could anyone be so stupid to do such a thing?

For those of us who are here for longer than the typical 6 or 12 month tour of duty and are trying to engage with our Afghan hosts in a constructive way, this kind of behaviour is the cause of immense frustration. Every such incident makes it that little bit more difficult to do the job for which we are paid.

I hope that the vast majority of foreigners in Afghanistan (including the military leadership) would absolutely condemn this latest act of desecration, and I imagine that most find it hard to understand why it happened in the first place. But a little bit more cultural sensitivity would remove the need for the General's after the event hand-wringing.

It is quite possible that somebody will die today because of what has been done, what is there to be said?

Ranking projects and allocating funds

We have now reached the stage of the first round when we have to rank shortlisted projects competing for limited funds. Our shortlist is such that the cumulative requested grant contribution is significantly higher than the total grant budget available for this round.

Of course, we can expect adjustments to grant requests once the applicants prepare their detailed business plans, we explore alternative financing options, and we have serious negotiations with applicants. Maybe some applicants will even drop out. But nevertheless, we need a rational basis for ranking projects (that deliver very different types of benefits) against one another.

Our problem was how to compare (for example) a project that delivers access to affordable genuine pharmaceuticals against a project that delivers increased fruit yields per hectare, or against a project that opens up new markets for goat owners? How to incorporate this diversity of benefit into a comparison of different grant/total investment ratios? Should we monetise everything, do we maximise leverage as some of our colleagues would argue? 

I don't think that there is an acceptable conversion rate for a child's recovery from illness to extra kgs of apples, and leverage is irrelevant when we are interested in value for money development impact. Rather, we wanted to find a methodology that is slightly more sensible (and sensitive) than these approaches. The rest of the methodology described below is pretty standard stuff, but this is the tricky bit...

We have been working on the ranking/fund allocation methodology for some time now, but now we have to apply it. Fortunately the development has now reached a point where we are pretty much ready to pilot it with our shortlist. If this methodology works (if the applicants get it and it produces the intuitively right results) then the idea is to roll it out for the second round.

One thing to note is that this approach only works when it is incorporated with the risk adjusted grant methodology we have already adopted. Otherwise you don't have a rational basis for the "cost to ABIF" column at the final step and you get into difficulties with weighted incomparable criteria and leverage/impact trade off.

So here is an overview of the methodology we intend to use to rank projects and allocate limited grant funds. We would of course be very grateful for any feedback or suggestions for improvements.

Introduction

When we are evaluating projects we are primarily concerned with four questions: 

1. Will the product or service deliver profits to the investor and development impact to the donor?
2. What is the potential outcome of the project, how many of our target beneficiaries could benefit and how much could they benefit by?
3. What are the chances of the applicant achieving the theoretical potential, do they have the necessary capacity and resources?
4. Are we giving the right amount of financial support?

The questions above relate to very different properties of the applicant and the proposed concept. It is not possible, without creating unacceptable trade-offs or forcing incompatible criteria into the same selection step to look at all of these questions together. So, the challenge we faced was to come up with a methodology that allows us to take a sequential and related criteria approach to evaluating applications against each question, regardless of the type of product or service that was being proposed... and then to come up with a ranking that "makes sense" when we take a step back from the details of the evaluation process (does the ranking tool produce similar results to our intuitive sense of what makes a good project for ABIF).

The answers to each of these questions will be obtained from the concept note in the first stage of the challenge fund competition and (in much more detail) from the application in the second stage. The approach we are taking to answering the first three questions is set out below, the way that we answer the fourth is described elsewhere - this is the risk adjusted grant methodology we have developed.

Commercial and developmental viability 

Once we have determined that a product or service is innovative within the ABIF definition, this is the most important eligibility criteria related to the concept itself.

ABIF supports private sector investment where commercial profits and development impact coincide. The Applicant should demonstrate that the business model that they are proposing will be profitable. We are not looking for projects that require ongoing subsidy, we do not want projects that are built on charity or corporate social responsibility. ABIF financial support is limited to the investment required to get a launch a product or service.

But we want more than good business ideas, we will only support projects where the investor will make a good return on his investment and there will be a tangible development impact as an integral part of the business model. So to pass this eligibility test, we need to answer two questions:

1. Is the product or service commercially viable?
2. Does the investment naturally drive the impact logic?

If the answer to both questions is positive, the application moves from the eligibility evaluation to the assessment process. In this second step we rank the projects based on the the potential development outcome (the potential outcome) of the project, which we discount by the project delivery risk (the capacity of the applicant to deliver that outcome) to arrive at the expected development return. 

It should be noted that this is not a means to quantify the expected outcome, it is simply a tool to give us a rational basis for ranking investment projects based on the development outcomes that we can reasonably expect them to achieve. As well as having internal value as a management tool, this also gives a framework for us to use to explain to applicants what we are looking for in a project and how we decided to accept or reject their application.

Potential development outcome

The potential development outcome is a product of two factors:

1. The number of target beneficiaries that could experience a benefit as a result of the new product or service; and
2. The value that the target beneficiaries would place on the benefit that they experience from adopting the product or service.

While the first factor can be projected (e.g. target market size and penetration) and measured (e.g. actual sales), to keep things manageable and avoid a spurious precision at the evaluation stage, we are restricting the estimation of numbers to orders of magnitude. 

However, the second factor is subjective and does not have a constant value within our target beneficiary population. For example, one community might value cultivation training much more highly than another, different people of different ages might value new products differently, according to their adaptability to new technology. 

So the question for us in relation to a given project is how do these two factors combine? If we look at our entire population of target beneficiaries, is there a sub-group of sufficient size that values the benefit sufficiently to incur some cost or effort to consume it, and can the product or service be delivered in such a way that the cost of delivery is less than the value that the consumer places on the benefit it generates. The question then is (to an order of magnitude, anything more precise would be nonsensical given the quality of data we have available) how big is that group?

We start off by looking at the product or service in theory, based on what we know of the relevance, affordability and accessibility of the product or service, the attitudes of the target beneficiary population and the prevailing market conditions in which they operate. This allows us to place the project somewhere in a 3 x 3 matrix and give it an associated score:

Potential development outcome of a project is a product of how many people benefit by how much.		Potential number of target beneficiaries
		100s	1,000s	10,000s
Potential value of benefit experienced by target beneficiaries	Not very valuable	0	0	1
	Quite valuable	0	1	2
	Very valuable	1	2	3

This score is essentially a means to place an evaluation value on the potential development outcome of the investment project. The values we use depend on the relative and combined importance we place on the two variables; for example, the illustrative values in the table above show that we would automatically reject any project in the top left three cells. We could adjust the value of the other cells to produce different results... but these illustrative values are just a start (and probably as good as any other values as a starting point) and we need to see how they play out in practice.

Project delivery risk

However, like any investment today that should bring returns in the future, there is a risk factor that should be used to adjust the theoretical impact downwards. The greater the risk, the greater the downward adjustment. For ABIF, which operates through the private sector, the risk associated with achieving the development potential of any given project is a function of the qualities and capacities of the investment partner and the resources available to them.

The specific factors that we are interested in are:

1. The capacity of the applicant to manage the project and the business; and
2. The capacity of the applicant to reach the potential target beneficiary group already identified.

Before, we have referred to the same questions as issues of the strength of the scale agent and the strength of the route to scale. 

The scale agent is the applicant, the entity that is responsible for managing the project and the business; creating the conditions and then achieving scale. The questions we ask here are to do with the adequacy of the resources and the timescale for delivering the investment project itself, and the capacity of the investor to manage the business resulting from the investment. We look at their financial capacity, their management capacity, and their presence and reputation in the market.

The route to scale is the physical or virtual intermediary network that links the scale agent to the target beneficiaries. This can be a wholesaler/retailer network for a manufacturer, or a provincial/district branch network of a BMO, or a network of village co-operatives for a processor, or it can be a mobile phone network or television channel for an information service provider. Whatever the form of the network, the question for us is how effective is it at linking the scale agent to the target beneficiaries? We consider questions such as:

1. Does it already exist and is already proven, or will it have to be created?
2. Has the network been used for the proposed purpose before, or is this a new use?
3. Does the scale agent own the network, control the network or does he buy the facility of the network?

Again, we construct a 3 x 3 matrix, based on our assessment criteria and the categorisation that we use and give each cell a "discount factor":

The project delivery risk is a measure of how confident we are that the applicant can deliver the theoretical development outcome		Capacity of Applicant to manage the project and business
		Weak	Borderline	Strong
Ability to reach the target beneficiaries	Weak	0	0.33	0.5
	Borderline	0.33	0.5	0.66
	Strong	0.5	0.66	1

These discount factors are subjective and we continue to refine them based on experience of comparing projected outcomes with actual outcomes. The values range from 0, which means that we lack any confidence in the applicant's ability to deliver the potential development outcome, through to 1, which means that we are confident that the applicant has the capacity to deliver the potential development outcome described in the application.

Expected development outcome

The final step in terms of ranking the projects is to discount the potential development outcome by the development project risk to give us an expected development outcome that can be used as a basis for ranking. 

So we construct a table that shows the expected development return of the group of investment projects that we want to compare:

Project	Potential development outcome	Development project risk	Expected development outcome	Ranking
A	2	1.0	2.0	1
B	1	0.5	0.5	5
C	3	0.33	1.0	3
D	3	0.66	2.0	1
E	2	0.5	1.0	3

Again, it must be stressed that the value of the expected development outcome is for ranking purposes, it is not an attempt to quantify the outcome of the project. As a ranking indicator it allows us to compare the various outcomes we might expect to see from different investment projects that are competing for limited funds.

Allocating funds

The first step in allocating funds is to use the risk based approach described elsewhere as a way of determining the grant to be offered to each investment project. This methodology gives us a rational basis for offering a specific grant to a specific investment project. As a result we do not have to trade off leverage and development outcome as a part of the evaluation process. We know how much grant a certain project will require to produce acceptable investment returns, so now we can focus (almost) exclusively on the expected development return as a basis of ranking and allocating funds. In this way we can allocate grants to maximise the expected development outcome for available budget.

Obviously things are not quite so simple as funding projects in ranked order until we run out of funds. We have to look at the individual and cumulative investment contributions and identify the optimal way of allocating funds in order to maximise the expected development outcome for the round. This may mean allocating funds to "cheaper" projects (in cash terms) that are ranked lower than a more expensive one that we do not fund.

So, for example, if we take the projects listed above and we assume that there is a maximum budget for the round of £1,000,000, we would recommend funding projects B, C and D in order to maximise the expected development outcome from the portfolio at least cost within the budget:

Ranking	Project	Expected development outcome	ABIF negotiated cash contribution	Funding recommendation
1=	A	2.0	800,000	No
1=	D	2.0	400,000	Yes
3=	C	1.0	300,000	Yes
3=	E	1.0	400,000	No
5	B	0.5	200,000	Yes

Conclusion
One last word... please don't think for one moment that we are claiming that this is some scientifically rational way to measure the development outcome of investment projects. It is just supposed to be a simple framework to structure a comparison and selection process in a way that:

1. Brings greater consistency to our project selection judgments broadly consistent with intuitive sense of what makes a good project for ABIF;
2. Makes sense to our Investment Panel and DFID who rightly ask why we preferred one project to another;
3. Allows us to explain what we are looking for to our applicants (and to justify our funding decision to them); and of course
4. Focus our efforts and limited resources on projects that stand the best chance of achieving development impact!