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Using Technical Assistance to Build Impactful Businesses
Image: Demonstration plot funded by IF TA Facility in Ghana
Using Technical Assistance to Build Impactful Businesses
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In late 2012, the UK’s Department for International Development (DFID) launched the Impact Programme, an initiative aimed at developing new ways to foster the market for impact investment in Africa and South Asia. There are two investment vehicles under the programme: the Impact Fund (IF) and the Impact Accelerator (IA).
The Impact Programme’s Technical Assistance (TA) Facility provides support to pipeline and portfolio companies of both the Impact Fund and Impact Accelerator. Both of these vehicles, and the associated TA Facility are managed by CDC Group, the UK’s Development Finance Institution. The programme has a coordination and learning unit which is run by PricewaterhouseCoopers LLP who helped CDC to capture the insights contained in this note. More detail is provided below and on the Impact Programme site.
Through working with these two investment vehicles the Impact Programme TA Facility supports a wide range of companies across many geographies, sectors and business maturity levels. At the time of writing, this TA is available to more than 30 companies and this number will grow as both IA and IF make more investments. Given the breadth and scale of the facility, it’s important that it is set up in an efficient way. It is also critical that the interventions it funds are impactful and high quality, and that market distortions are minimised. The policies and procedures of the TA Facility have been refined over time to enhance its effectiveness, and several lessons have been learnt:
- Make technical assistance aligned, but arms-length from the deal team. Technical assistance needs to be fully aligned with investment strategies and business plans in the most commercially-orientated way possible. In practice, this means bringing technical assistance facilities as close as possible to the deal teams (so that decisions can be made in consultation with investment teams) whilst having an independent governance structure for technical assistance to ensure that there are no conflicts of interest in final decision-making.
- Ensure additionality through careful screening. Requests for technical assistance need to be carefully screened to ensure they support catalytic ‘one off’ - rather than recurrent - activities. This can mitigate the risk that technical assistance is used to subsidise costs which could lead to market distortions. Companies need to be clear at the outset about the steps they will eventually take to move to a self-financing and self-sustaining model for the technical assistance activity area. Longer-term assistance should be structured so that companies increase their contribution over time to encourage this ultimate transition. In practice, this means that increasing company contributions towards the proposed technical assistance is a vital proxy for the relative importance of the activity area versus other priorities that the company may have.
- Recognise the limitations of technical assistance. Technical assistance can plug critical gaps in financial management, business operations and in environmental, social, and governance (ESG) systems, but it is not a silver bullet for the many capacity constraints facing small and medium enterprises (SMEs) in frontier markets.
- Address constraints in service supply. Companies often struggle to find suitable technical assistance service providers. Given the time and effort required to source and vet quality providers, a key focus of donor support could be on finding cost-effective ways to intermediate between the supply of and demand for technical assistance, and build high quality sustainable service markets. Given that businesses in different sectors have very different needs, these will likely be sector-specific.
- Consider technical assistance that helps address sector-level constraints. Requests for technical assistance can be similar across several portfolio companies, especially those in the same sector or geography. In some cases, recurrent, system-wide constraints could be better addressed with a ‘sector’ level technical assistance project, rather than on a company-by-company basis. Donors should recall the history of their strategies for private sector development, which have shifted from providing discrete business development services to individual SMEs towards developing commercially viable supporting markets that can benefit SMEs operating across an industry.[1]
- Actively engage with the technical assistance ecosystem. Impact investors need to be aware of the technical assistance ‘eco-system’, which encompasses a range of actors from commercial service providers to development aid projects. Coordinating with other donors/ investors providing technical assistance co-investment is critical. This helps to ensure that input is complementary and that there are no unintended negative consequences such as overlapping or duplicative assistance which distract from core operations, or the high transaction costs for companies managing multiple inputs.
About The Impact Programme
The Impact Programme was launched by the UK Department for International Development (DFID) in 2012 and aims to transform the market for social impact investment in South Asia and Sub-Saharan Africa. CDC Group, the UK’s DFI manages the programme’s two investment vehicles.
The Impact Fund (IF) invests in funds and other intermediaries that cannot yet attract commercial capital and have the potential to achieve significant development impact through investments in financially sustainable, scalable private sector enterprises.
The Impact Accelerator (IA) makes direct investments in highly developmental opportunities that have the potential to be commercially sustainable, but where the risk is too high and/or the financial return is too low for purely commercial investors. In terms of impact, both seek to generate economic opportunities (e.g. good jobs and access to markets) and access to basic goods and services for underserved groups or in remote, fragile or otherwise challenging geographies.
The Impact Programme’s market-building activities, managed by PricewaterhouseCoopers LLP, seek to reduce the constraints in the impact investing value chain and make the practice of impact investing as effective, as efficient and as attractive as possible to investors, intermediaries and enterprises.
This article first appeared on The Practitioner Hub for Inclusive Business and is reproduced with permission.
[1] See, for example, the 2005 BDS Reader: http://www.bdsknowledge.org/dyn/bds/docs/452/Reader_2005_final_LOW_...
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