Sarah Marchand

I am now  working at CDC Group in London overseeing the TA Facility for the DFID funded Impact Programme (IP).Previously I worked for ten years at TechnoServe managing the TA Facility of the African Agriculture Fund as well as other similar programmes in Southern Africa. 

Reflections on the effectiveness of TA provided by facilities linked with investment funds

Impact Investing

There is increasing agreement on the value of dedicated technical assistance (TA) provided alongside investment funds. A recent DFID survey of impact investments[1] found that the majority use technical assistance alongside financial investment, with 64% saying they use TA “often” or “nearly always”. However, there are many questions on how to deliver this TA most effectively.

TechnoServe (TNS) has gained significant experience in this space through managing the Technical Assistance Facility (TAF) for the African Agriculture Fund (AAF). This TA has been instrumental in enabling AAF portfolio businesses to identify and explore ways to work with local communities in a way that is mutually beneficial. And it has also made a significant contribution to building the capacity of the portfolio of the AAF SME Fund. This piece focuses on six key reflections on how best TA can be delivered in these types of facilities.

  1. Not all TA is equal

Firstly, it is critical to distinguish between the two main types of TA that these facilities can provide: (i) core business development support (BDS) and (ii) Inclusive business support:

  • Core BDS supports business growth through sector-specific and functional business support (i.e. strategy, finance, marketing, Human Resources (HR), legal etc.). This recognizes that investee companies are generally still small or growing, and that management structures are heavily reliant on founding shareholders and basic systems (particularly, financial) are not strong enough to meet the needs of growing businesses, and pose risks to investors.
  • Inclusive business TA aims to increase the number of ways in which the business provides local economic opportunities and employment, e.g., developing small farmers or the MSME supply chain, expanding agro-dealer networks to increase input supply to smallholder farmers, catalyzing BOP (“bottom of the pyramid”) market opportunities through improved distribution networks or facilitating rural finance options through input-credit.

Inclusive business support usually requires longer timeframes and heavier investment than core business support. While core business support can be deployed rapidly through short-term engagement of experts, inclusive business support generally requires at least 2-3 years to engage beneficiaries of the local community and change their behaviours. A finding from the interviews conducted by the AAF TAF team of these kinds of facilities was that core business support typically costs up to $100,000 per company over several years, with individual projects reported as ranging from around $5,000 – $50,000.  Meanwhile, inclusive business support projects tend to cost much more, from $100,000 – $1,000,000 per (multi-year) project[2].

  1. Core business support needs to be long term to be truly effective

Whilst short-term consultancy support is helpful in setting a strategic direction of an SME, in most cases SMEs do not have capacity to implement the recommendations emanating from these studies. In the AAF TAF case, four core business projects for SMEs required extensions for this reason. Extensions of consulting projects are useful to embed the findings of the projects but still fall short of ensuring implementation and capacity building. The type of support for implementing core business projects needs to be flexible to help management teams to reap the benefits of the strategies suggested by consultants or experts. This could take the form of mentoring, embedding/seconding a manager for a defined period of time or ongoing lighter touch expert advice. 

  1. “Pre-investment” TA has an important role to play but needs to be donor funded

Most TA facilities currently focus on post-investment support, or late stage pre-investment support. But as the pool of capital in developing markets and higher risk segments (such as SMEs and agriculture) grows, there is an increasing need for pre-investment TA to build a pipeline of investment ready companies. In practice, the AAF TA facility found it hard to deploy pre-investment TA as it was not resourced with a deal sourcing team, and therefore had to focus on potential investments identified by the Fund Manager. There is a natural tension between the objectives of a donor and a fund manager in this space. While donors are eager to fund the public good of developing an investment ready pipeline, fund managers would typically prefer to focus TA on deals they know will be completed. One solution might be to blend donor and investor funding allowing the facility to engage in both “patient” pipeline development (early stage support – 6-18 months before investment), funded by donors, and late stage pipeline support (last 6 months), funded by both donors and investors.

  1. Outsourcing is not always the answer

TA facilities regularly use external service providers, since it is costly to provide the range and level of support required via an in-house team (as micro-business support programs do, where needs are more standardized and advisors less experienced/lower cost). However, both TA facility managers and investees themselves should be allowed to deliver assistance where they are best placed to do so (e.g., TNS provision of outgrower scheme support under the AAF TAF; company direct employment of extension staff). Explicit guidelines for both these scenarios should be developed upfront, including additional necessary controls and M&E support.

 

technoserve2

 

  1. Identification of TA providers needs to be streamlined and flexible

While full public tenders are appropriate for larger TA projects the best delivery models allow for more streamlined procurement as well. Often, there is not time for a full and open tender process and in many cases, a company has already identified (or used) a particular provider to service their needs successfully. As a result, there needs to be flexibility in the TA facility procurement rules to allow for short, simple procurement processes. Investee companies must participate in selection processes in order to maximize their buy-in and optimize the chances of the relationship between company and supplier being positive. Still, there is usually a challenging period at the beginning of a TA project while the service provider and company take time to align expectations and figure out how to work together. The TA Facility manager can be critical in helping to navigate this period, to speed it up, and ensure it turns out positively.

In our experience, TA facilities with strong local networks should be able to find qualified local or regional service providers except for the most specialized projects. Flying in consultants from developed countries is rarely necessary, is expensive, and is often ineffective due to the differences between their home environment and where the TA is being implemented.

  1. Match-funding is critical but there is not a 'one size fits all' approach

Match funding is important to incentivise management engagement and ensure commitment to the use of TA. The requirement of the company to co-fund the TA helps to ensure that the TA subsidy is being used effectively and typically ranges from 25-50%.  However, pushing too hard for full cost recovery in all cases may lead to TA facilities focusing only on activities where subsidized assistance isn’t necessary such as funding core business functions. Overall, TA manager judgement and ability to conduct case-by-case cost-benefit/cash flow analysis and negotiate with the private sector is key here. Where there is a compelling impact proposition but uncertain or limited impact on the bottom line, a greater subsidy is required. Where there is a potential 'bottom-line game changer’ (i.e. new product, market opportunity or innovation) then the company should be expected to put more ‘skin in the game.'

[1] Survey of the Impact Investment Markets 2014, August 2015

[2] We have found that overall TA cost ranges from around 2.5% - 10% of investment size (higher for smaller investments)

 

Overview of the African Agriculture Fund (AAF) and its TA Facility

Food security remains a critical issue across the African continent, with many nations relying on imports to feed their populations. In the wake of the 2008 food crisis, the African Agriculture Fund (AAF) was launched into the market with Phatisa as Fund Manager. 

AAF invests in high potential businesses across Africa that are involved in the food value chain, with a focus on increasing production for local and regional consumption. It also has an SME Sub-fund managed by DAFML. 

The purpose of this facility is to provide technical assistance to agri and food related businesses that receive investment through the AAF, allowing them to create new opportunities for smallholder farmers, farmer business groups and rural communities. The project is primarily funded by the EU, managed by IFAD and implemented by TechnoServe, with additional contributions from the Italian Development Cooporation, United Nations Industrial Development Organization and the Alliance for a Green Revolution in Africa. http://www.aaftaf.org/en/

 

This blog is part of the September 2016 series on Inclusive Business Development Services, in partnership with the Inclusive Business Accelerator. Don’t miss the whole series on support available to inclusive business from practitioners, donors and intermediaries including Afrilabs, DFID, Endeva, EY and many more…