75669 JUNE 2012 ABOUT THE AUTHOR M�RIO GOMES Managing Entrepreneurs: is an Operations Officer in IFC’s Sustainable Business Advisory Lessons Learned from Providing Advisory (SBA) Business Line and is based in Maputo, Mozambique. He has worked in private sector Services to SMEs in Mozambique and Angola development (including SMEs) for 16 years. Advising small and medium enterprises (SMEs) can prove very challenging. From APPROVING MANAGERS 2006 to 2008, IFC tried to do just that in Mozambique and Angola, with the goals of Colin Shepherd, Regional Business Line Leader in Africa; Johane helping local entrepreneurs and enterprises secure financing, building up their Rajaobelina, Senior Operations Officer, Management Solutions (SMS) business membership organizations, and providing professional training. This SmartLesson shares lessons learned from that effort, called the Entrepreneurship Development Initiative. Background At the time that IFC launched its initiative initiative stimulated growth in the target in the two post-conflict countries in 2005, businesses by providing better access to Mozambique’s economy had been finance and business system support, and— expanding at a rapid pace for the previous on a selective basis—access to export markets decade, after the 15 years of civil war that and local subcontracting markets. ended in 1992. However, limited access to finance and business expertise was a Specifically, the Entrepreneurship Development constraint on the private sector’s ability to Initiative undertook the following projects in meet consumers’ needs, create jobs, and Mozambique and Angola from 2006 through 2008: generate tax revenues. Angola’s economy also was booming, after its 27-year civil war 1. Providing a business plan or a feasibility that ended in 2002. But its economy study for five projects in Mozambique to help remained heavily dependent on oil them secure financing. IFC’s cost of $176,560 production; monopolies and quasi- to draw up plans and studies helped the monopolies dominated the leading sectors entrepreneurs and enterprises to raise $3.47 of the economy, and inconsistent million in loans and grants from commercial government regulations made banks and international institutions—a cost entrepreneurial activity costly and difficult. recovery of 22.57 percent. In sum, both countries had very weak private sectors. 2. Supporting nine business membership organizations representing SMEs in IFC Advisory Services launched the Mozambique and Angola. That work Entrepreneurship Development Initiative in included developing strategic 5-year partnership with the African Development plans; setting up workshops to analyze Bank and the governments of Denmark, the the strategic plans, as well as workshops Netherlands, and Norway. The initiative with government and other private provided direct assistance to small and players; conducting market surveys; and medium enterprises and to entrepreneurs, creating marketing tools such as websites as well as to intermediaries that support the and brochures. The organizations—which enterprises, such as business development include industry associations, women’s service providers and business membership associations, business associations, and associations. The initiative also sought to chambers of commerce—can play a key create a business environment conducive to role in the market, since they usually are successful growth and expansion. the private sector’s voice in its dealings with government, public institutions, IFC’s initiative used both innovative and international organizations, and donors. pragmatic approaches to develop the SME IFC’s budget was $122,000 for sector. It helped enterprises at different Mozambique and $56,000 for Angola and stages of development, including start-ups, it had cost recoveries of 20 percent and 7 and offered industry-specific solutions. The percent, respectively. SMARTLESSONS — JUNE 2012 1 3. Training 2,285 individuals, including entrepreneurs and managers or staff of small businesses in Mozambique and Angola. IFC offered the professional training either through business membership organizations or financial institutions, or directly. Trainees included several business associations in Mozambique, hotel staff in Angola, and accountants and businesswomen in both countries. IFC’s budget was $567,000, and its cost recovery was 21.71 percent. Lessons Learned Lesson 1: Working with a limited budget for consultancy services requires creative solutions—or more money. Hiring consultants in both countries was very difficult. Land Preparation for an Agribusiness Production Project. The projects involving finance for SMEs called for specialized skills in finance that weren’t readily available program for proposals on using their technology to in Mozambique. Also, consulting firms such the Big Four boost rural development in Mozambique. The usually charge more than $750 a day, plus sometimes a $200,000 grant program was offered by the World success fee. For most of the projects, IFC’s budget called Bank Group in partnership with public- and private- for a daily rate of $300 to $350 for 30 working days, or sector entities in Mozambique. IFC was willing to about $10,000 total. spend more on the grant program because it was a World Bank initiative and helped SMEs gain access to • In one case, we found a creative solution. A Project finance. in Agribusiness sector that planned to produce multi- variety roses for sale locally and in South Africa and As for the projects supporting business membership the Netherlands it was particularly hard to find organizations, there weren’t many local consultants consultants with expertise in horticulture. By in Mozambique or Angola with the necessary networking with other consultants, we found an expertise. Both economies had been centralized after expatriate from Zimbabwe with suitable experience, the countries became independent, which didn’t and managed with the target budget of $10,000. We allow for private businesses. IFC’s budget for each of prepared a business plan that helped the Rose these projects ranged from $6,000 to $30,000, and Production Project raise about $3.15 million from this was too low for international consultants. Our commercial banks. solution in most cases was to select individual consultants with experience in strategic planning, • In another project, A Midia Expansion Project from designing marketing tools, and facilitating a local company that obtained written and audio workshops. information and images and sold them to communications media, including newspapers and The situation in Angola was more complicated, because television channels we were able to stick close to our consultants wanted higher rates. The solution was again to budget mainly because of the strength of the IFC be creative and fly Mozambican consultants to Angola brand. The group wanted to broaden its business to instead of hiring locally. (In many cases, the World Bank/IFC include typography and a daily newspaper and rates for short-term consultants do not match the going needed a feasibility study on the financing required. rates in the local market.) IFC committed to pay one of the Big-4 Consulting firms $16,000 to do the study. The firm initially Despite the budget constraints, IFC followed its complained that the fee wasn’t high enough, given procurement rules and procedures in hiring and managing the scope of the project. In the end, the consultant the consultants. accepted the contract, mainly because it wanted to work for IFC. Lesson 2: Providing advice and training to • In two other cases, we were able to hire entrepreneurs and their business membership management firms because IFC considered the organizations demands that IFC exert strong projects a priority and increased their budgets. We leadership and take extra steps to ensure that got $40,000 from IFC and the African Development projects are managed properly and to control their Bank to draw up a business plan to establish the outcomes. Institute of Directors of Mozambique, which was meant to represent top private- and public-sector In general, entrepreneurs, SMEs, and business executives and promote corporate governance in membership organizations were looking to get cash Mozambique. IFC considered that improved from IFC and not expecting that this would require them corporate governance was a pressing need for to improve their management practices. The Mozambique, as a post-conflict country. We got organizations had that assumption because many donors $100,000 to prepare business plans for about 20 SMEs and institutions do provide cash contributions, and they from the information and communications didn’t understand that IFC sometimes just provides technology sector to help them compete in a grant advice. 2 SMARTLESSONS —JUNE 2012 SME’s receiving advise in Business Plan under the ICT Program The Launch of the Institute of Directors in Mozambique. with the World Bank. Each of the clients posed different challenges. Lesson 3: In working with entrepreneurs and their business membership organizations, IFC’s oversight The Mozambique project promoters tried to hide some must include careful management of consultants’ information from IFC; they changed ideas and approaches contracts and payments and the work they produce, quickly; and in some cases, they tried to manipulate numbers including training materials, business plans and to present a more favorable picture of their finances. For example, one entrepreneur wanted our consultants to feasibility studies. artificially increase the amounts in their investment plan so that later on they could buy a family house. Another client Because it was difficult to find consultants with the wanted his business plan to give an artificially high cost for necessary expertise for these projects, IFC staff in the field equipment he needed to purchase, and later tried to buy knew from the beginning that they must put extra effort the same equipment at a lower price and quality. into managing the consultants. Not all entrepreneurs took the advice of IFC’s consultants. The effort included meeting periodically with the In the Agribusiness Project, the consultants recommended consultants and exerting strong control over their bringing in a technical partner with expertise in contracts and payments. Consultants wanted up-front horticulture, since the local entrepreneur had little payments of 10 percent to 20 percent of their fee, but background in that sector. The entrepreneur refused that because they had simultaneous contracts with other suggestion and still managed to get a loan of $3.15 clients, they often wanted to delay their work on the IFC million. But when the project started in the field, it failed. project. To manage this situation, IFC would not make an up-front payment but would pay in installments after the IFC’s task in these situations was to always defend the consultant delivered a result that was approved by IFC consultant’s recommendation and work, and to protect and the client. the consultant from being negatively influenced by the entrepreneur. In the case of providing professional training, many of the consultants weren’t accustomed to working with SMEs and Working with business membership organizations also initially didn’t adjust their material to suit the SMEs’ unique required IFC to keep control by using proper project needs. IFC had to take control of customizing the material management skills and tools, since most of the presented to the trainees and secure the client’s approval organizations had a host of problems. They had low of the material before the training began. membership and poor accounting and governance practices. They weren’t able to sustain themselves financially and IFC also encountered situations in which Mozambican therefore relied on donors. They provided little service, entrepreneurs and SMEs unquestioningly accepted ineffective lobbying, and weak communication with the everything that the consultants said and wrote. Our job in public (for example, some have no brochures, flyers, or that case was to closely monitor the business plans and websites). In many cases, an organization had no periodic feasibility studies that the consultant produced, to ensure elections and was run by one man who viewed it as an that they were appropriate. opportunity for self-promotion and political links. Lesson 4: Before taking on a finance advisory To overcome these problems, IFC and its consultants needed project, IFC should canvass potential lenders to to take some additional steps. For example, after IFC had gauge interest and learn about financing hired a consultant and signed a contract with specific requirements in the local market. Making deliverables, board members of a business membership presentations to lenders also is a useful step in the organization would sometimes contest the contract details process of structuring a project. and budget that they had previously approved. To avoid this type of misunderstanding, IFC would prepare minutes of Before agreeing to provide advisory services to the five board meetings and circulate them to all board members. Mozambican projects seeking finance, IFC contacted the Also, IFC insisted that the leaders of the organizations financial institutions with which the entrepreneurs indicate in writing their satisfaction with each deliverable. already had relationships, to gauge the institutions’ SMARTLESSONS — JUNE 2012 3 looking for quick wins. Managing their interest in providing loans to those projects. personalities and agendas was interesting Without such interest, we would not provide but difficult. any support. Likewise, the business membership We contacted other lenders in order to organizations were poorly organized and increase the potential sources of financing could have been risky to work with, because for the projects. That exercise also helped us if anything had gone wrong, they could understand the market requirements for have sent out incorrect messages to their accessing loans and assisted us in structuring members and others that would have the projects. created a problem for IFC. It also was difficult to find consultants with The consultants on IFC’s team and the project the necessary expertise for these projects in promoters made several presentations to small markets such as Mozambique and financial institutions, which helped us to Angola, and therefore managing the substantially improve the structure of the consultants demanded extra effort. projects and also helped the lenders understand the projects. The project taught us that working with a limited budget for consultancy services In the end, the Agribusiness Project, the calls for creative solutions and, sometimes, Institute of Directors of Mozambique, and more money. Also, IFC must exert strong leadership when working with and the information and communications training SMEs and their business technology sector grant program managed membership organizations, and take to secure financing. extra steps to ensure that projects are managed properly. One possibility is for Conclusion IFC to actively participate in the project to ensure that everything goes well, but This project was designed to give a boost to the risk is that IFC might get too involved small and medium enterprises and to and create the perception that it is acting entrepreneurs in Mozambique and Angola as the consultant, not the project to help the countries along their path of manager. IFC must carefully manage economic recovery after long civil wars. consultants’ contracts and payments and Although worthwhile, the project presented closely monitor the work they produce several pitfalls. for those clients. Finally, before taking on a finance advisory project, IFC should Entrepreneurs and small business owners canvass potential lenders to gauge were tricky project partners, because they interest, learn about financing often lacked structured ideas that could be requirements in the local market, and converted into a business plan or a feasibility address key questions that lenders might study. They were practical people who were have about the project. DISCLAIMER SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. 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