The Partnership Fund
Sep 17, 2014
Prior to the fall of Siad Barre’s dictatorship in Somalia, all banks were owned by the state. When Somaliland declared independence from Somalia in 1991, the nascent government did not prioritize the establishment of a banking sector or regulatory environment to develop financial services. Today, Somaliland remains one of the few places in the world with no established commercial banking sector—resulting in a lack of access to capital that constrains the private sector.
The few large businesses in Somaliland generally have access to formal or informal shareholder agreements—mostly from Middle Eastern investors—while informal microenterprises often rely on savings groups and small-scale buyer-supplier credit models. By contrast, small and medium-sized enterprises (SMEs) have limited options to finance expansion, hire new employees, or purchase machinery.
To help close this gap, the Partnership for Economic Growth (PEG) program—funded by the U.S. Agency for International Development—created Somaliland’s first business plan competition, called the Partnership Fund, to identify some of the region’s best entrepreneurial minds and co-fund their ventures. Entrants could be from anywhere, so long as they were investing in Somaliland.
Our team’s call for concept papers reached more than 1 million people and their families through local and diaspora websites, radio, newspapers, and text messages sent by Somaliland’s largest mobile phone provider. The response: nearly 300 applicants from all regions of Somaliland and Somali diaspora in the United States, Europe, Africa, and the Middle East who are ready to invest in Somaliland.
Many of these proposals focused on Somaliland’s most promising but underperforming economic sectors, including horticulture, dairy, renewable energy, fisheries, gums and resins, information technology, light manufacturing, and microfinance. Our criteria included technical feasibility, market supply and demand, and the applicants’ business management experience. We also evaluated proposals on their potential impact on sales, jobs generation, opportunities for women and youth, potential for skills enhancement, and market access for suppliers and other value chain actors.
Grants would range from $30,000 to $150,000. Applicants from all sectors of the economy were encouraged to apply, particularly those focusing on PEG’s target value chains—livestock, energy, and agriculture. Key was the cost-share component; applicants applying for grants under $50,000 had to demonstrate a minimum 25 percent cost-share, while those applying for grants of more than $50,000 had to match the grant amount in full.
Grants And The Greater Mission
The PEG program’s key mission is to help Somaliland’s authorities and private sector improve the environment for the kind of investment that generates productive jobs and improves other livelihoods. The Partnership Fund’s backing of entrepreneurs’ pilot activities promised to complement that larger mission by drawing out good ideas from the business community and helping to capitalize them.
Our work in the priority energy, livestock, and agriculture value chains tackles five systemic market-development constraints:
- Lack of technical assistance and extension services
- Limited research in the productive sectors
- Weak pro-business policies and laws
- Minimal government capacity-building for ministries mandated to support the business community
- Lack of formal investment promotion targeting diaspora investors
In the energy sector, for example, our market study revealed the lack of a legal and regulatory framework to promote investment in energy; a dependency on expensive imported diesel fuel for power generation, resulting in some of the world’s highest electricity costs ($1-$1.40/kWh); and limited skills and technical resources to utilize alternative energy sources. PEG assisted in:
- Development, by the Ministry of Energy, of Somaliland’s first Electrical Energy Law.
- Installation of a pilot wind farm and wind data monitoring stations to provide real-time data and proof-of-concept for potential wind energy investors.
- An ongoing training program for electrical engineers in the ministry and local power providers interested in exploring wind power and hybrid diesel/renewable models.
The Partnership Fund complemented this technical assistance with co-investments in businesses that were addressing energy challenges. Matching grantees included a joint venture in Somaliland’s first commercial wind farm to power cold-storage facilities for artisanal fishing cooperatives along the coast, as well as Somaliland’s first diaspora investment fund, Transparency Solutions, which focuses on large-scale renewable energy investors.
Wind data monitoring stations are now providing real-time information for energy investors; the Energy Law has gained strong support from the Environmental Subcommittee in Parliament; and a commercial wind farm is demonstrating the investment potential in one of the windiest places in the world. As a result, at least four other investors are exploring wind farm installation in locales throughout Somaliland, and a local university recently launched a specialization in renewable energy to build a cadre of local technicians to support this growing sector.
In the livestock sector, our market study revealed major gaps in research on fodder (hay) seed variety testing, information on export markets, and access for women to male-dominated segments of the value chain. Our fodder demo plots have attracted broad farmer participation through local universities. We also created a livestock end-market study and investment guide to explore marketing opportunities to the Middle East, and supported Ministry of Livestock-led extension services engaging community animal health workers and veterinary pharmacies.
To complement this technical assistance, the Partnership Fund’s matching grantees include fattening farms that are exploring new fodder varieties and export markets, camel dairy farms investing in health and hygiene training for staff and producers, and women’s trader associations. These lead firms in Somaliland’s livestock sector are participating in and incorporating learning from PEG’s fodder demo plot research, hay baling trainings, and end-market study. They are also proving that nomadic pastoralists can collaborate with agro-pastoralists in improving fodder and fattening practices to meet growing demand from export markets.
At the launch of PEG’s end-market study—attended by livestock exporters, traders, transporters, shipping agencies, fodder producers, pastoralists, drug importers, and research institutions—a group of the major traders announced that they would form the first livestock export trade association to make Somaliland more competitive in global markets.
Investing In Job Creation
By April 2012, the top 36 Partnership Fund applicants were shortlisted. At a bidders’ conference on how to develop a full proposal, PEG consultants briefed the candidates on the foundations of a business plan, structuring a budget, and measuring economic growth.
To ensure coordination with PEG’s government and institutional partners, the evaluation committee consisted of senior PEG technical staff as well as representatives from the Somaliland Ministry of Commerce, Ministry of National Planning, and Chamber of Commerce, all with diverse technical and investment analysis backgrounds.
The Partnership Fund generated considerable enthusiasm among business people, agriculture and livestock cooperative leaders, and local NGOs supporting private sector development. By January 2013, PEG had invested more than $1 million in 13 SMEs, which together with the grantees’ co-investment of more than $1.5 million is expected to create many new full-time jobs in Somaliland, including skilled jobs in sectors such as veterinary services, agronomy, construction, and engineering. An estimated one-third of the jobs are slated to employ women and more than half will be filled by young people.
Companies are investing in new technologies, better processing facilities, and improved product distribution that will create market access and employment opportunities for suppliers, local businesses, and producers. Larger entities have created outgrower schemes that are working with our grantees in the livestock, renewable energy, fisheries, salt processing, and agriculture sectors.
Indirect beneficiaries include other businesses in the grantees’ value chains, key Ministries now overseeing a stronger business enabling environment, potential investors who can access high-quality market information, and improved extension services and research in key sectors.
Most grant finalists had requested capital equipment in their proposals, such as ice-makers, quarantine facilities, wind turbines, and salt processing equipment.
With such limited access to commercial loans to purchase machinery, it is not surprising that few applicants requested technical assistance to support their business operations. But we understood that operational and managerial capacity issues were constraining even the Partnership Fund’s largest and most sophisticated grantees.
To ensure our co-investments could be properly managed, the team designed and administered the Business Organizational Capacity Assessment Tool (BOCAT). A modified form of the OCAT (a standard tool to assess the capacity of local organizations), the BOCAT enables businesses to assess their own governance, staffing, financial management, and business operations. The first BOCAT round, conducted soon after grant agreements had been signed with the 13 finalists, highlighted a variety of organizational and management inefficiencies.
PEG engaged a local consultancy to design and conduct training and onsite consulting based on the BOCAT findings. Providing training through a local firm spurred both demand and supply for business development services in Somaliland. Some grantees have already seen the value of this support and have gone on to hire business development service providers, including the local firm that PEG worked with, for further support.
In August, the PEG team conducted a second BOCAT analysis and found that grantees improved significantly in their self-assessed scores. Complemented by the Partnership Fund’s monitoring and evaluation to measure the generation of jobs and increase in sales, the improved scores show that business managers now perceive their operational and managerial systems to be strengthened, one of the foundations for sustainable SME growth.
PEG is a pilot project for USAID—the agency’s first economic development project in the Somali regions in more than 20 years. The Partnership Fund’s second round of matching grants—to be awarded in the spring— will continue to complement PEG’s other value chain and policy development work by funding entrepreneurs who are addressing value chain constraints while generating employment.