CONFLICT AFFECTED STATES IN AFRICA (CASA) INITIATIVE

PROGRESS REPORT FOR

July – December 2008

CONFLICT AFFECTED STATES IN AFRICA (CASA) INITIATIVE Program Manager: Eva Bakonyi Program started work: May 2008 Program launch: June 2008 Funding received to date: $ 2,620,000

1. Program Objectives In June 2008 the International Finance Corporation (IFC) launched the multi-donor, $ 25 million, five-year private sector development program in fragile and conflict-affected states in Africa, the Conflict-Affected States in Africa (CASA) initiative. The CASA initiative is an integrated, multi-donor, rapid-response approach to developing the private sector in conflict-affected countries in Africa. CASA has been designed to provide both immediate and long term support and will collaborate closely with the World Bank (WB) to ensure this support. Its initial focus is on the Democratic Republic of Congo (DRC), Liberia, Sierra Leone and the Central African Republic (CAR), and will later expand to other African countries that meet the WB Group’s definition of being fragile or conflict-affected1. The CASA Initiative was set up to contribute to peace and stability in fragile and conflict-affected countries in Africa through private sector led economic growth. To achieve this, CASA has identified three core objectives:

• To design and implement integrated country strategies that take into consideration conflict analyses and that draw upon all the IFC Advisory Services business lines. The program focuses primarily on: improving the business environment; strengthening the competitiveness of small and medium enterprises (SMEs) and their support institutions; rebuilding financial markets and institutions; and increasing private participation in the provision and rehabilitation of infrastructure. CASA coordinates closely with the WB and other donors.

• To provide funding to programs that accelerate implementation of country

strategies.

1 The World Bank defines conflict-affected countries as countries that have experienced violent conflict in the past five to ten years, that are currently experiencing violent conflict, and those that are perceived as being at risk of violence. By this definition, forty two countries are currently classified as ‘conflict affected’, 21 of which are in sub-Saharan Africa: Angola, Burundi, Cameroon, Central African Republic, Chad, Comoros, Cote D'Ivoire, Democratic Republic of Congo, Republic of Congo, Djibouti, Eritrea, Gambia, Guinea, Guinea-Bissau, Liberia, Sao Tome and Principe, Sierra Leone, Somalia, Sudan, Togo, and Zimbabwe.

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• To manage the knowledge gained from experiences and lessons learnt by working in these conflict-affected countries and share them with IFC departments in other regions and with the WB, thereby developing – and implementing - best practices.

IFC SME Ventures Program CASA operates in close cooperation with the IFC SME Ventures Program which is a five year, $ 100 million program initially fully funded by the IFC. The Program will provide risk capital and advisory services to small businesses in eight countries, of which four are in Africa. These four countries coincide with the four CASA pilot countries. Small businesses targeted are likely to fall within the WB Group definition of small business, that is employing less than 50 staff with a total assets or annual sales of less than $3 million. The investment size is expected to be in the range of $100,000 to $500,000 and include a combination of debt- and equity-like features. Reference to SME Ventures is included in this report since the Ventures activities are fully integrated with the CASA programs and country strategies, although these are funded and managed separately (see Annex 1).

2. Program Structure

Eva Bakonyi

Program Manager

Sam Nganga

Operations Officer

Hajo Provó Kluit

Operations Officer

3. Program Highlights

• Staffing: The CASA team was set up and recruitment processes were initiated for in-country program coordinators to be based in the four pilot countries: DRC (Kinshasa), Liberia (Monrovia), Sierra Leone (Freetown) and CAR (Bangui).

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• Developing country strategies: Scoping missions were conducted to the four

pilot countries. These missions allowed for the development of IFC-wide common country visions which were based on conflict analyses. During the missions coordination meetings were held with other donors. A number of projects in the DRC, Liberia and Sierra Leone were funded. Coordination between the IFC and the WB was strengthened, both at head-office level and in the field.

• Funding: Funding was received from Ireland (USD 1,870,000), the Netherlands

(USD 1,350,000 plus significant further commitments), Norway (USD 400,000) and IFC (USD 500,000). Other donors, including the AfDB, Sweden and private foundations have been approached to broaden the support base for CASA. The Soros Foundation is keen to partner with CASA in Sierra Leone and Liberia.

4. Progress to date Objective 1: Design and implement integrated programs The program focus in this regard will be primarily on: improving the business environment; strengthening the competitiveness of small and medium enterprises (SMEs) and their support institutions; rebuilding financial markets and institutions; and increasing private participation in the provision and rehabilitation of infrastructure. CASA has been designed to provide both immediate and long term support. In the proposal, it was envisaged that a rapid response team would be created that could go into conflict affected countries on short notice. This concept has been modified with a view to efficiency. Instead, the IFC will now collaborate with the WB on setting up a callable roster of experts. Democratic Republic of Congo CASA/Ventures conducted a joint scoping mission to the DRC in June 2008. Various IFC business lines were already active in the country: an Investment Climate Development Program that includes Doing Business Reforms, Trade logistics and Special Economic Zones (SEZs); a mining linkages study in Katanga; and in the financial markets sector the IFC invested in a microfinance institution while providing technical assistance (TA). An SME Development Program, including capacity building of the Fédération des Entreprises du Congo, was practically ready to be implemented although some final hurdles had to be overcome. The privatization of a cement plant was being discussed with the government. In the DRC the unstable government is a major obstacle to formalizing the informal sector. From the conflict analysis viewpoint, it would be important to expand the Private Sector Development (PSD) activities to regions other than Kinshasa/Bas Congo and Katanga. However, the individual regions are largely isolated from one another, and fighting continued (and continues) in the eastern provinces. Under these circumstances,

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expansion of the CASA program into provinces other than Kinshasa and Katanga will not be undertaken immediately. The outcome of the scoping mission, as a matter of priority, was to assist the SME Development Program reach the implementation phase, including Business Edge (managerial training modules for SMEs through intermediaries) and SME Toolkit (web and CD-ROM based information for SMEs). The proposal for establishing an SEZ in Lubumbashi was conceptually linked to the mining linkages program. A feasibility study for a business incubator was initiated, and a regional poultry sector study will be carried out. Further business development on Public Private Partnerships in infrastructure will also be undertaken. CASA contributed USD 50,000 to phase I of the DRC SEZ program, which consisted of a pre-feasibility study and several well-attended workshops with stakeholders. This work was required to prepare for the actual SEZ feasibility study.

Improve the investment climate

• Business simplification • Trade logistics • DRC Better Business

Forum • Investment promotion,

Special Economic Zone

Unlock the growth of priority sectors

• Financial markets

• Infrastructure

• Oil, gas & mining

• SME Development

CASA Integrates Programs in the DRC

Strengthen SME competitiveness through access to finance and AS

•Agribusiness - poultry

•Matanga

Add value to investment projects

• Microfinance

• Privatization/Cement plant

• Mining Linkages Katanga

• SME Finance

Liberia Prior to CASA’s inception, IFC was engaged in Liberia in the financial markets with a microfinance program and SME banking. Other programs included private participation in the power sector, a sector study on oil palm and an extensive Investment Climate Development Program which includes an SEZ component. Although the country suffers from similar problems as other post-conflict countries, Liberia has a distinct advantage in having a President that strongly supports reforms. The situation remains fragile nevertheless. One of the root causes of the conflict was the concentration of wealth and power in the hands of a small urban elite. To avoid this destabilizing effect for the future, economic development should focus on rural areas. However, in the post-conflict situation a significant number of unemployed ex-

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combatants live in the urban areas, particularly Monrovia. Economic development focusing on job creation in the capital is therefore equally important. The CASA program for Liberia will build upon the research already done in the oil palm sub-sector and expand the work to more generally cover outgrowers and small holder schemes in the tree crops sector. This sectoral program is being developed in close cooperation with the WB. A first step in this collaboration would be support to a model concessioning framework. To support economic development in the urban areas, Business Edge was identified as an appropriate tool, as well as SME Toolkit and a business incubator. In addition, it was decided to introduce the Africa School Financing Facility, which integrates financial services and capacity building for local banks and independent schools, to Liberia. A leasing feasibility study to assess the need for a fully fledged leasing development program was also initiated.

Improve the investment climate

• Doing Business Reforms • SEZ

Unlock the growth of priority sectors

• Financial markets

• Infrastructure

• Energy

• SME Development

CASA Integrates Programs in Liberia

Strengthen SME competitiveness through access to finance and AS

•Agribusiness - tree crops

•Matanga

Add value to investment projects

• Microfinance (Access Bank)

• Rubber, Oil palm, Cocoa

• Africa Schools

• PPP in Power

• Incubator (youths)

• Leasing

Sierra Leone In Sierra Leone, and with financial support from DfID, IFC is working on investment climate reforms, including a public private dialogue, tax simplification and investment promotion programs. Aspects of the conflict analysis are signs that old habits and structures that led to the conflict are on the increase again. Freetown has many unemployed youths and former child soldiers who either do not wish to or cannot return to their villages. The CASA program should therefore focus on both agribusiness in rural areas and employment creation in the capital.

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Various donors are engaged in trade and economic development in Sierra Leone. However, it is a matter of concern that their programs all depend on the Ministry of Trade and Industry, which has limited capacity. CASA therefore decided to take a phased approach and increase its program in step with the recipient’s capacity. The following programs were initiated during the reporting period: Business Edge, SME Toolkit, Africa Schools, a leasing feasibility study, and business incubation and pre-incubation. Further support to the financial markets, including microfinance, would complement these activities.

Improve the investment climate

• Public private dialogue, • Tax simplification • Investment promotion

programs.

Unlock the growth of priority sectors

• Financial markets

• Infrastructure

• SME Development

CASA Integrates Programs in Sierra Leone

•Agribusiness

•Matanga

Add value to investment projects

• Microfinance

• Africa Schools

• Incubator (youth)

• Leasing

Central African Republic IFC is still very much in the initial stages of engagement with the CAR. Discussions on support to the Public Private Dialogue and possibly a one stop shop for business registration are being continued. Working in the CAR is particularly challenging as the government has little capacity and no funds. Payment of civil servant salaries is permanently in arrears. The private sector is likewise very limited. The CASA program will therefore be modest and, given the presence of foreign rebel groups and banditry in sections of the country, focused on Bangui. During the reporting period, consideration was given to supporting capacity development at the Chamber of Commerce and to introducing a small enterprise centre. These plans will be discussed further with partners early in 2009 with a view to reaching implementation of projects by June 2009.

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CASA initial program in the CAR

Improve the investment climate

• Public private dialogue •

Unlock the growth of priority sectors

Add value to investment projects

Objective 2: Provide funding to programs that accelerate the implementation of country strategies Democratic Republic of Congo From the CASA funds, $ 550,000 has been allocated to the SEZ program. The purpose of the program is to assist the Government in the creation of privately-managed SEZs. SEZs can provide a location, where companies can invest, create jobs, and produce goods and services in a more or less "normal" environment - in a country where the entire business climate is impaired (including infrastructure, business environment, rule of law, government services, etc). A further $ 400,000 has been allocated to the SME Development Program. This Program has the following objectives: • Provide Business Advisory Services to new and existing enterprises in the DRC. • Conduct training programs aimed at building the capacity of business development

service providers and business membership organisations. • Provide capacity building for SMEs through skills development programmes utilising

Business Edge.. • Expand the SME sector in DRC through linkages with large firms to address their

growth and sustainability constraints. IFC SME Ventures will support the introduction of SME Toolkit and the development of a business incubator program. The planned poultry sector program will be funded from alternative sources. Liberia

Business registrySME Development

Strengthen SME competitiveness through access to finance and AS

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The important Doing Business Reform work in Liberia received significant financial contributions, among others from SIDA. CASA allocated $ 250,000 to the SEZ program which assists the Government to develop a sound legal, regulatory and institutional framework for establishing SEZs. To support development of the tree crops sector program, CASA will contribute $ 300,000 to work on a concessionary framework for outgrower schemes. This program is being developed in close collaboration with the World Bank. SME Ventures will finance Business Edge, SME Toolkit and the business incubator program. Sierra Leone CASA allocated $ 400,000 to the Removing of Administrative Barriers to Investment Program (RABI), which also receives significant support from DfID. RABI has several components: streamlining business start-up and licenses/permits; investment generation; taxation and land and tourism. As in Liberia, SME Ventures will fund Business Edge, SME Toolkit and the business incubator program. Central African Republic As indicated under objective 1, the CAR Program will initially be modest with $ 100,000 being allocated to support the investment climate program, particularly the Public Private Dialogue. An additional $ 100,000 has been reserved in 2009 for an enterprise support program which is under design. Further allocations CASA has allocated $50,000 for a leasing feasibility study in Sierra Leone and Liberia while a further $ 445,000 has been allocated to the Africa Schools program in Sierra Leone and Liberia. The Africa Schools program consists of an integrated advisory and investment program that enables IFC to indirectly finance and support educational institutions in Sub-Saharan Africa. IFC offers risk participation to commercial banks to support their lending to the education sector. The CASA funds will be used for market studies, validation workshops and implementation. CASA has also decided to allocate $ 250,000 for business development for infrastructure in conflict-affected countries, mainly in the four CASA pilot countries. While on the one hand the infrastructural needs in these countries are significant, it has also proved challenging to establish programs in this field.

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CASA allocated $ 900,000 for the investment climate program in Sudan. The investment climate work could lay an important foundation for further Advisory Services work, should CASA decide to expand to (South) Sudan in the future. Objective 3: Knowledge management and best practices CASA shares its experience of working in conflict-affected environments with other regions and units within IFC. Relationships with the WB were established, both in the CASA pilot countries and at headquarters level. The CASA program manager will also take part in the Bank’s Global Expert Team for Fragility and Conflict. 5. Planned Activities and Outputs for the next 6 months

• The CASA Initiative focused on setting up the program, securing funds, conducting preliminary scoping missions in the priority countries and recruiting staff. Recruitment of the in-country coordinators is expected to be finalized over the next six months.

• CASA will continue to work towards integration of the IFC country programs in

DRC, Liberia and Sierra Leone. For the CAR, IFC will strive to attain implementation of the PPD support program and an enterprise support program.

• CASA will furthermore intensify the collaboration with the WB and other donors.

Follow-up PSD donor meetings will be held within the four pilot countries, and the semi-annual consultations on the overall CASA program will be held with donors.

• CASA will work with IFC’s Monitoring & Evaluation team on their study to

improve M&E in post-conflict countries.

• CASA looks forward to expanding the program to two additional countries, but following consultations with donors, will only do so after the CASA coordinators for the four pilot countries are in place.

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Annex 1

SME Ventures

AT A GLANCE:

• What is SME Ventures? SME Ventures is an initiative to provide risk capital and advisory services to small businesses in challenging countries. The project will initially target eight IDA countries (Sierra Leone, Liberia, Democratic Republic of Congo, Central African Republic, Yemen, Bangladesh, Nepal and Bhutan).

o Over a five year period (including a one year launch and start up period), it is expected that SME Ventures will provide risk capital to between 250 and 500 firms, with an average investment size well below US$500,000.

o It is also expected that a significant multiple of firms receiving investment would receive advisory services support, to possibly 10 times the number of firms receiving investment.

o It is estimated that the overall Project funds of $100 million would be allocated between investment, advisory and expenses in the order of a 50%:30%:20% respective split.

• How will it be implemented? There are two distinct and important components of this project, the investment component and the advisory services component, which are being implemented on separate but integrated and parallel tracks. The project is being implemented by a cross-cutting team of investment, advisory, and operations support staff from the three regions, and headquarters.

Investments: The project envisages a wholesale approach, using a private equity fund like structure, investing through independent investment managers, who would be selected on a competitive basis. Typically, in such a structure, IFC would be a limited partner, while an investment manager would manage the fund’s operations.

Advisory: There is no separate legal entity for the advisory component, as it is proposed to use existing IFC in-country offices and platforms and to roll out established advisory products

• Why is SME Ventures being launched now? Sources of risk capital in low

income countries are extremely limited. The primary objective of SME Ventures is to increase the supply of such financing. Through this project IFC has the opportunity to provide risk capital to SMEs, a critical asset class in IDA countries. By drawing on IFC’s wide-ranging institutional knowledge, gained over many

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years, the project provides an opportunity for IFC to become a global leader in the provision of both advice and financial support to SMEs. This support will help sustain SME growth.

• Where can the World Bank Group add value? SME Ventures builds on over

20 years of experience that IFC has in making SME investments, by drawing on various lessons of what has, and has not, worked. The SME Ventures model will combine professional investment managers with complementary advisory services to build both local risk capital investment capacity, and support to SMEs. The objective is to develop a replicable model for this type and scale of investment, where little or no similar financing at this level currently exists.

• When will SME Ventures be operational? The process of identifying fund

managers is currently underway. They are expected to be in place during the second half of calendar year 2009. Scoping missions to identify advisory projects to support capacity building for SMEs are also ongoing.

• What development Impact do we expect the program to have? Sources of risk

capital in low income countries are extremely limited. It is expected that SME ventures would have a significant contribution to local economic development by providing access to risk based capital to grow small businesses, which otherwise would not receive such financing. Importantly SME Ventures is focused primarily in high risk IDA countries where few or no other similar sources of financing operate. Financing of smaller businesses is critical for sustainable development of emerging economies, particularly those that are high risk or volatile, as small businesses are a primary source of jobs and local income in those countries.

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