Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
Evaluation of the Investment Cooperation (INC) Program
- Abbreviations, Acronyms and Symbols
- Executive Summary
- 1.0 Introduction
- 2.0 Evaluation Objectives and Scope
- 3.0 Evaluation Approach and Methodology
- 4.0 Relevance
- 5.0 Performance
- 6.0 Conclusions and Recommendation
- 7.0 Management Response and Action Plan
- Annex A: Comparative Analysis
Abbreviations, Acronyms and Symbols
- Assistant Deputy Minister
- Business to Business (Denmark)
- Multi-sector Practices
- Business Development Bank of Canada
- International Business Development, Investment and Innovation
- Federal Ministry for Economic Cooperation and Development (Germany)
- International Trade Portfolio and Strategic Analysis
- Brazil, Russia, India and China
- Trade Commissioner Service - Regional Offices
- Investment Cooperation Program Division
- Trade Commissioner Service Support
- Contribution Agreement
- Common Administrative Unit
- Canadian Commercial Corporation
- Canadian Direct Investment Abroad
- Canadian International Development Agency
- CIDA INC
- CIDA Industrial Cooperation Program
- Civil society organization
- Corporate Social responsibility
- Development Assistance Committee
- Departmental Evaluation Committee
- Deutsche Investitions- und Entwicklungsgesellschaft mbH (Germany)
- Department of Foreign Affairs and International Trade
- Development Finance Institution
- UK Department for International Development
- Evaluation Advisory Committee
- Export Development Canada
- European Union
- Foreign affiliate sales
- Finance Canada
- Foreign direct investment
- Full time equivalent
- Latin America and Caribbean Commercial Relations
- Global Commerce Strategy
- Africa Commercial Relations
- Middle East and Magreb Commercial Relations
- North America Commercial Relations
- Government of Canada
- North Asia Commercial Relations
- South and Southeast Commercial Relations
- Europe and Central Asia Commercial Relations
- Headquarters, DFAIT
- Human resources
- International Assistance Envelope
- International financial institution
- Industrialization Fund for Developing Countries (Denmark)
- Investment Cooperation Program
- INC Program Adjudication Committee
- Innovative Partnerships for Development (Denmark)
- Information technology
- Minister of International Trade
- Official development assistance
- Official Development Assistance Accountability Act
- Organisation for Economic Co-operation and Development
- Other Government Departments
- Overseas Private Investment Corporation
- Program Advisor
- Strategic Trade Planning and Performance Management
- Private participation in infrastructure
- Public Private Partnerships
- Peer Review Committee
- Private sector development
- Private Sector Investment Programme (Netherlands)
- Programme for Cooperation with Emerging Markets (Netherlands)
- Regional Offices
- Small and Medium Enterprises
- Treasury Board Secretariat
- Trade Commissioner
- Trade Commissioner Service
- Trade and Development Agency (US)
- United Kingdom
- United States
- Evaluation Division
- Office of Audit, Evaluation and Inspection
The Evaluation Division (ZIE) of the Office of Audit, Evaluation and Inspection would like to extend its appreciation to all employees of DFAIT, representatives of other government departments, private companies and business associations who agreed to participate in interviews for the formative evaluation of the Investment Cooperation Program of DFAIT. ZIE also gratefully acknowledges the contributions of Mary Lynch – independent consultant, as well as the support and advice provided by the members of the Evaluation Advisory Committee (EAC) on the approach, findings and recommendations of this evaluation.
The evaluation of the Investment Cooperation (INC) Program was conducted according to the approved Five-Year Evaluation Plan of the Department of Foreign Affairs and International Trade (DFAIT). The goal of the INC Program evaluation was to provide DFAIT’s Departmental Evaluation Committee with a neutral and evidence-based assessment of the relevance and performance of the INC Program and the progress made to date.
The INC Program is based on a redesign and transfer of the Canadian International Development Agency’s Industrial Cooperation Program (CIDA-INC) to DFAIT. Following an evaluation of CIDA-INC in 2007, it was determined that the Program would be more appropriate within DFAIT due to DFAIT’s mandate and expertise in commerce and international trade and investment. In October 2009, Treasury Board approved the transfer of the program from CIDA to DFAIT. The DFAIT program became operational on January 4, 2010 as the Investment Cooperation Program.
The Investment Cooperation Program provides contributions, on a cost-sharing basis, to private sector firms seeking to enhance the long-term viability of their investments in Official Development Assistance (ODA) eligible countries. The overall objective of INC is to support responsible, developmentally beneficial, private sector engagement in developing countries leading to sustained economic growth and poverty reduction.
Funding is available to four categories of companies. The productive sector firms, which include services, receive contributions to support: studying the technical feasibility and commercial viability of investments; introducing and adapting proven technologies to developing countries; and undertaking activities to improve the sustainability of the investment. The extractive sector receives funding to improve the corporate social responsibility content of their operations in ODA countries. The professional services firms have access to funding to enhance existing contracts they have with either a public sector entity in a host country or an international financial institution. Finally, funding is available for firms undertaking public private partnerships (PPPs) for the provision of public services or infrastructure.
From January 1, 2010 to March 31, 2012, 309 applications were submitted to DFAIT INC from 217 companies. Of this, 180 were approved. A vast majority of the approved project (75%) were for Phase 1 viability studies. Almost half of the total approved projects were in Asia and Oceania. Approximately 70% of approved projects were from Quebec firms. Overall, small and medium enterprises (less than $50 million gross revenue) dominate the recipient firms to date.
The Program has been operating for two and a half years. Given the short timeframe INC has been in operation, the evaluation focused primarily on: examining the relevance of INC by assessing the extent to which it addresses the needs of Canadian businesses and is aligned with departmental and federal government priorities; and assessing internal governance mechanisms and processes that contribute to the performance of INC in helping Canadian businesses implement sustainable investments in developing countries.
Relevance and Continued Need for Program
The needs being targeted by INC are still relevant in terms of supporting Canadian firms seeking to invest in emerging markets. A wide range of opportunities continue to exist for Canadian firms in emerging markets. A need for support for Canadian firms exploring these investment opportunities continues to exist. Other countries have a variety of tools to support their firms in making investments abroad, which places Canadians at a disadvantage. The increasing complexity of markets now demands a careful approach that examines a wide range of issues. SMEs, in particular, increasingly must pursue global opportunities in order to aid expansion and growth of their businesses.
Despite the perceived relevance of INC, the Program remains under-subscribed, disbursing less than 20% of the available funds. This low level of disbursements has been caused by a confluence of factors that have come together to depress the demand by firms. First, the application and approval process is complicated and time consuming, deterring firms from applying given the small size of the available funding packages. Second, for a variety of reasons, including some outside the control of the Program, there is a lack of awareness of INC in Canada. Until late 2011, the Program has not been able to do extensive outreach to associations and firms. Third, the categories of support offered by INC are not currently aligned with the needs of companies looking at productive sector investments, PPPs, extractive sector or professional firms. Fourth, INC targets Canadian SMEs. SMEs, however, have traditionally been the most reluctant companies to look at Canadian direct investment abroad (CDIA) as a way to expand their business. Enticing SMEs to consider investing abroad remains a challenge.
INC supports DFAIT’s Strategic Objectives as well as the Global Commerce Strategy. It also supports the Government of Canada’s Corporate Social Responsibility (CSR) Strategy which promotes the adoption of CSR by Canadian companies. General agreement exists that the transfer from CIDA to DFAIT was positive and allowed for better integration of the Program into the DFAIT network such as the Trade Commissioner Services and increased its focus on commercial objectives.
Performance, Governance, Efficiency and Effectiveness
The immediate outcome results being targeted by INC include firms having: an increased understanding of the business opportunities offered by developing country markets; sufficient information to make a go or no-go decision; and undertaking activities to improve the sustainability of the project. The feedback from firms receiving INC support indicates preliminary progress toward these results. Firms receiving funding saw this support as providing value to their investments. Viability study support allowed firms to better research issues such as the regulatory environment and technical requirements of the investment. INC support allowed more in-depth analysis of the factors that would influence the investment and reduce the company’s risk. Firms with existing investments indicated that the support allowed them to better address environmental concerns emerging from the investment as well as improve labour force skills and conditions.
Some progress is already being made toward the intermediate results. For example, firms have already invested in developing countries since receiving INC viability support. Others have indicated that investments will occur within one year.
A 40-day service standard was added to the Program in its transfer from CIDA. The setting of a service standard for processing applications was widely perceived by the private sector as a positive development. At the beginning of its implementation, the Program faced difficulties in meeting the service standard because Ministerial approval was required for projects. By the end of 2011, the authority to approve projects had been transferred to the Director and INC was meeting its service standards with 32.4 business days from submission to approval.
However, the complexity of the application process means that a great deal of time must be spent by the Advisors in assisting firms to complete the application. This complexity encourages the use of consultants by companies to fill out the forms which has had some negative repercussions for the Program. The complexity of the application process also means that the review by the Program Advisors focuses primarily on the completion of the applications, not on the substantive quality of the project and milestone reports. A majority of the Advisors believe it is their role to get the proposal through the approval process and implemented—not to assess its quality or likelihood of moving forward.
Governance structures for approval are in place and theoretically are sound with a multilayer review process. However, the actual application of the processes has issues that reduce accountability and transparency. The desire by the Program to increase disbursement levels has resulted in pressure to approve projects that may not meet the intentions of the Program. This has meant that some of the criteria originally established for the Program, such as financial soundness of applicants have not been adequately included in the decision making and decisions have not always been made on a consistent and transparent basis.
Finally, the low level of disbursements of the Program (less than $4 million in FY 2011- 12) has meant that the administrative costs are high (39% in FY 2011-12) compared to target level for Program delivery. This is a reflection of a series of factors including the time each Program Advisor must spend with companies providing advice on how to fill in the forms, for relatively small amounts of each project (usually $60,000). The process is further compounded by the need for companies to reapply for each phase of funding, making the work for Advisors and firms more extensive. It is unclear how the current staff could actually deliver the full $20 million portfolio under the current conditions and processing approaches.
In May 2012, the INC Program was suspended due to irregularities found in routine audits. This occurred during the course of the evaluation. At the current time, it is unclear when or if the suspension will be lifted.
As a consequence of this suspension, the evaluation puts forward only one recommendation:
- That DFAIT not restart the INC Program in its current form but review with the private sector either a restructuring of the Program or use of the ODA funds for other purposes to support Canadian businesses.
With the suspension of INC, a simple restart of the Program will likely not achieve positive short term results. Without the suspension of the Program, gradual changes could have been made to the Program to make it more effective. These changes could have allowed an evolution of the Program to better suit the needs of SMEs over a relatively short period of time. This is no longer feasible since the momentum on INC has been completely stalled with the suspension and its reputation undermined.
If a rethinking of INC is undertaken, four things would need to happen. First, the Program would need to be restructured—not simply realigned—to ensure the categories, funding levels and target groups are clearer and based on the needs for firms. Second, the application and approval processes would have to be substantially rethought in order to streamline the effort required and focus on the critical areas that require assessment for sound decision making. Third, the criteria for selection and the objectives of the Program would need to be more clearly thought through and then conveyed to both staff and firms. Fourth, the staff hired to implement the Program would have to have right skill sets to adequately assess the proposals being received.
The Evaluation Division (ZIE) at the Department of Foreign Affairs and International Trade (DFAIT), in the Office of Audit, Evaluation and Inspection (ZBD/ZID), is mandated by the Treasury Board Secretariat’s (TBS) Policy on Evaluation to conduct evaluations of all direct spending of the Department for programs (including Grants & Contributions), policies and initiatives. All evaluation reports are presented for approval to the Departmental Evaluation Committee (DEC) chaired by the Deputy Ministers.
The implementation of the evaluation of DFAIT’s Investment Cooperation (INC) Program was conducted according to DFAIT’s Five-Year Evaluation Plan. The evaluation focuses on the continued relevance and performance of the Program. The evaluation was led by departmental evaluators with the support of an independent consultant.
1.1 Background and Context
The Investment Cooperation Program provides contributions, on a cost-sharing basis, to private sector firms seeking to enhance the long-term viability of their investments in Official Development Assistance (ODA) eligible countries. These contributions are provided in order to share costs associated with: a) studying the technical feasibility and commercial viability of investments; b) introducing and adapting proven technologies to developing countries; and c) undertaking activities to improve the sustainability of the investment. These activities benefit Canadian businesses by helping companies better identify the risks associated with investing in emerging markets and, where investments are commercially viable, promoting the sustainability of those investments.
The INC Program is based on a redesign and transfer of the Canadian International Development Agency’s Industrial Cooperation Program (CIDA-INC) to DFAIT. Following an evaluation of CIDA-INC in 2007, it was determined that the Program would be more appropriate within DFAIT due to its mandate and expertise in commerce and international trade and investment.
In October 2009, Treasury Board approved the transfer of the program from CIDA to DFAIT. The DFAIT program became operational on January 4, 2010 as the Investment Cooperation Program. It is managed by the Investment Cooperation Program Division (BTC) within the International Business Development, Investment and Innovation Branch (BFM).
Prior to the launch of the INC Program at DFAIT, some program adjustments were made based on discussions between CIDA and DFAIT and on the results of two roundtable consultations with the private sector and civil society. These changes were aimed at: improving project implementation rates and results; improving the efficiency and accessibility of the program; and ensuring relevance to evolving business needs.
The primary changes consisted of:
- Inclusion of emerging economies such as China, Mexico and Thailand among the eligible countries;
- Introduction of program funding phases to ensure that only projects that are likely to be implemented receive the full range of funding; and
- Introduction of service standards to encourage timely processing of applications— targeting a 40-day decision process.
The Program has now been operating for two and a half years. However, in May 2012, the INC Program was suspended due to irregularities found in routine audits. At the current time, it is unclear when or if the suspension will be lifted.
1.2 Program Objectives, Results and Activities
1.2.1 INC Program Objectives and Results
The overall objective of INC is to support responsible, developmentally beneficial, private sector engagement in developing countries leading to sustained economic growth and poverty reduction.Footnote 1 INC’s original results framework included the following targeted results.
At the immediate outcome level:
- Recipient firms and, if applicable, local business partners have an increased understanding of the business opportunities offered by developing country markets;
- Recipient firms and, if applicable, local business partners have sufficient information upon which to make a go or no go decision;
- Recipient firms and, if applicable, local business partners undertake activities to improve the sustainability of the project; and
- Recipient firms and local country partners (if applicable) enhance the social and economic well-being of the local community.
At the intermediate outcome level:
- Sustainable local businesses created, expanded and modernized in the developing country;
- New and/or higher skilled jobs are created or maintained at local businesses;
- Increased sales of recipient firms’ and, if applicable, local partners’ products and services; and
- New businesses and services are launched or existing businesses are expanded to foster the development of local business supply chains.
At the long-term outcome level:
- Sustainable, long-term private sector-led growth and development in the local community leading to poverty reduction;
- Good business practices are implemented by recipient firms and local business partners;
- New and/or upgraded infrastructure leading to enhanced services available to local businesses and the general public;
- Recipient firms are better connected to global commercial opportunities; and
- Developmentally beneficial technologies and/or methodologies are transferred to developing countries.
Consultations are currently underway to make adjustments to INC’s Performance Measurement Strategy. The new Performance Measurement Strategy has not yet been finalized, however. Therefore, the evaluation is reporting against the progress on the original framework, primarily at the immediate outcome level.
1.2.2 Program Activities
INC funding recipients must be for-profit, private-sector firms registered in Canada and subject to Canadian corporate income tax. The business must have been in Canada for a minimum of three years. The Minister of International Trade sets minimum annual revenue or sales thresholds as a condition of eligibility. The current threshold is $2.0 million in each of the two most recent years of operation.
As a precondition, eligible firms must demonstrate that they possess sufficient financial and management capacity to sustain the investment at each program stage.Footnote 2 This includes demonstrating positive recent earnings and profit performance, sufficient liquidity in relation to the size of the investment being pursued and the absorptive capacity necessary to take on obligations related to the eventual investment. Firms are also expected to have done some preliminary work including visiting the country and establishing contact with a partner prior to applying. The firms must intend to take an equity stake of at least 10% in the investment and have a clear intention of long term participation (5 years or more).
The INC Program provides funding for four phases of support across four different categories of firms. Two phases target pre-investment decision making, and Phases 3 and 4 support postinvestment. The intention is that firms can apply for any phase they are eligible for, whether or not they have accessed a previous phase. They do, however, need to demonstrate that the necessary preparatory work has been done in order to proceed.
Table 1 summarizes the activities funded and the target groups. The categories are fixed along with the maximum amounts allowed for specific elements.
|Phase||Objective||Activities||Maximum Contribution Considered3|
|Productive Sector||Extractive Sector||Professional Services Contracts||Private Public Partnership Projects|
|3 It should be noted that the maximum contributions listed on this table are the ones used in the public documents. The INC approval documents allowed higher limits on each category but these were never advertised or used by the Program.|
|#1 Commercial Viability Study (50% cost share)||To determine the commercial and technical viability of a direct investment||Market analysis, technical feasibility, financial viability and legal review||$60,000||Not applicable||Not applicable||$500,000|
|#2 Adaptation and demonstration of technology (50% cost share)||To demonstrate the benefits and costs of introducing a technology||Adaptation and/or demonstration of a proven technology||$60,000||Not applicable||Not applicable||Not applicable|
|Post Investment Decision Phase|
|#3 Sustainability (50% cost shared)||To demonstrate the benefits and costs of introducing a technology||Environmental Impact Assessment and Mitigation Plan||$70,000||Not applicable||Not applicable||$70,000|
|Study initiatives that improve the environmental or social (including gender) performance||$70,000||Not applicable||Not applicable||$70,000|
|Human resources and training plan||$30,000||Not applicable||Not applicable||$30,000|
|Local supply chain study aimed at improving the sustainability of the project||$10,000||Not applicable||Not applicable||$10,000|
|#4 Implementation (75% cost share)||To implement activities that improve the economic, social (including gender) or environmental sustainability of an investment||Environmental and/or social initiatives||$70,000||$70,000||$70,000||$70,000|
|Local supply chain initiatives and/or activities aimed at improving the sustainability of the project||$50,000||$50,000||$50,000||$50,000|
|Results Report (100% share)||To report on the commercial and development impacts of INC supported activities||Report to INC on impacts achieved by the project||$5,000||$5,000||$5,000||$5,000|
|Total Maximum Contribution||$575,000||$275,000||$275,000||$955,000|
The funding eligibility varies by each of the four categories of firms. All funding is only possible in ODA eligible countries.
- The productive sector category targets Canadian Direct Investment Abroad (CDIA) in all sectors of the economy aimed at producing goods and services locally. (The extractive sector and infrastructure projects are excluded.) This support is targeting firms that are prepared to make a direct investment of at least $500,000. The funding available cannot be used for research and development, testing unproven technologies or marketing for exports
- The extractive sector support includes firms in oil, gas and mining that have existing investments offshore in ODA eligible countries. The support is aimed at promoting corporate social responsibility (CSR) standards. These initiatives can be implemented at any time during the operational life of the investment including leading up to the transition to closure.
- The professional services support is the only non-investment focused category. It provides additional funds for professional firms that have received a contract from either a public sector entity in a host country or an international financial institution (IFI). The contracts must be for at least $1 million and be executed by the Canadian firm. The intention is to provide supplementary training to complement the work under an existing contract.
- The Public Private Partnership (PPP) category focuses on Canadian firms participating in the provision of public services or infrastructure. Typically it is within a long term contract with the public sector to deliver services. Detailed criteria were set by the Program in terms of what could or could not be included in this definition. For example, Build-Own-Operate projects are included but operation licenses for public services are not. The Canadian participation needs to represent at least 10% ownership in the infrastructure. In cases involving leases, the term needs to be 15 years or longer.
All recipients are required to submit a report on project results up to 3 years after completion of the activities funded by INC. The reporting is done according to a template and the cost of the preparation is fully reimbursed. Given the short duration of the program to date, no results reports have yet been filed.
1.3 Governance and Funding Levels
The Minister of International Trade (MINT) is ultimately accountable for the Program. The Program’s internal governance structure consists of a process with layers of review and decision making related to the selection and approval of projects. This is illustrated on the following graph.
- INC Program Advisors: The INC Program Advisors (PAs) make initial determinations about the eligibility and appropriateness of draft proposals and provide recommendations and guidance to Program clients on the application process. They are responsible for ensuring that the mandatory requirements are met (e.g., eligibility of firm, country, etc.), for moving the project through the approval process, making recommendations for approval and reviewing deliverables by firms. The work of the PAs is guided by an INC Workflow document that outlines the procedures they are to follow.
- Peer Review Committee: The Peer Review Committee (PRC) consists of INC PAs and Deputy Directors. The Committee discusses the draft proposals received and provides comments and recommendations for follow-up prior to the submission of a final application by the firm. Projects can be rejected at this stage. When the final proposal is submitted, the 40-day service standard starts.
- Consultation Process: Assuming that the project gets through the PRC, consultations are then held by the PAs with the Post, appropriate geographic branch, sector specialists, Regional Offices (ROs) and other organizations. At this point, the detailed financial assessment is undertaken to verify whether the firm meets the financial viability criteria. Based on the comments which are returned, a decision is made on whether to recommend or not recommend the project going forward to INCPAC.
- The INC Program Adjudication Committee (INCPAC):The INCPAC provides formal recommendations regarding financial contributions to applicant firms, on a consensus basis including:
- Approval or rejection of contributions;
- Determination of the amount of contributions, if approved; and
- Determination of the term and duration of an agreement.
- The INCPAC is comprised of the:
- Director, Investment Cooperation Program (BTC);
- Director, Trade Commissioner Service Support (BTS);
- Director, International Trade Portfolio and Strategic Analysis (BPA);
- Director, Multi-sector Practices (BBI);
- Director, TCS Regional Offices (BSR);
- Director, Strategic Trade Planning and Performance Management (PDC); and
- One or more Directors from:
- North Asia Commercial Relations (GPC);
- South and Southeast Asia Commercial Relations (GSC);
- Africa Commercial Relations (GFC);
- Middle East and Maghreb Commercial Relations (GMC);
- Latin America and Caribbean Commercial Relations (GCC);
- Europe and Central Asia Commercial Relations (GRC); and
- North America Commercial Relations (GNC).
- Director, Investment Cooperation Program Division: The Director confirms the approval of INC investment proposals based upon the recommendations of the INCPAC and sends information on the approved proposals to the Deputy Minister of Trade and the Minister of International Trade, whose office arranges communication of the approval.
- Common Administrative Unit (CAU): The CAU then prepares the Contribution Agreement (CA) to be signed by the firm. The CAU also provides the financial management function for the INC Program and does compliance reviews on the accounts payable to firms.
1.3.2 INC Resources
The Treasury Board approval of INC allowed a transfer of funding and resources from CIDA to DFAIT. Details of the approved transfer and associated resource implications are provided in Table 2. The targeted level of disbursements to firms by the Program was $20 million per year. INC currently possesses a staff complement of 19 individuals, including a Director and 2 Deputy Directors
|Resource Allocation||2009-2010 (beginning Jan 4, 2010)||2010-2011||2011-2012||ongoing|
|Vote 1 (Operating expenditures)|
|Operating and Maintenance||$188,647||$1,122,520||$839,000||$839,000|
|Audit and Evaluation||$110,000||$230,000||$230,000||$230,000|
|Vote 5 (Capital Expenditures)|
|Vote 10 (Grants and Contributions)|
|Grants and Contributions||$5,000,000||$20,000,000||$20,000,000||$20,000,000|
|Total New Funding||$5,979,592||$23,264,309||$22,980,789||$22,980,789|
|Full Time Equivalents||19||19||19||19|
1.4 Characteristics of Portfolio to Date
As part of the Evaluation, information was gathered from a number of sources to develop a profile of the projects to date. The information presented here only deals with those projects that have been received and approved at DFAIT, including applications transferred from CIDA INC.
The Program was transferred to DFAIT in January 2010 and since that time 309 applications were submitted. Of these submissions, 180 have been approved. Approximately 15% of the proposals were either withdrawn or rejected by INC.Footnote 4 The suspension of the Program in May 2012 became effective immediately, meaning that all the projects still being processed have been put on hold and are unlikely to be approved.
Three quarters of the approved projects were for Phase 1 viability studies. Few Phase 3 proposals were received and of those that were, only 33% were approved. In addition, many of the Phase 4 proposals that were approved were transferred from CIDA where the original application was made. Few new proposals for Phase 3 or 4 funding have been received over the last year.
The heavy focus on Phase 1 viability studies means that 93% of the projects approved were supporting the productive sector (all four phases). While a number of professional services firms had applied initially (with some having their files transferred from CIDA), few professional services firms have applied in the last year. There have been 12 applications for support for PPPs received to date, but only 1 was approved. Only two extractive sector proposals were received with 1 of those being approved.
There is also a concentration in terms of countries with 24% of the approved projects in China, 8% in Mexico, 8% in Vietnam, 7% Brazil and 6% India. Reflecting this concentration, Asia and Oceania had the largest number of projects, with 47% of those approved; Americas had 30%, Africa and Middle East with 22% and Eastern Europe with 1%.
The applications submitted to INC came from 217 companies. A vast majority (80%) of these were small and medium enterprises (SMEs) as shown on the graph.Footnote 5 In fact, 50% of the companies had annual revenues under $10 million.
The small size of the firms was also reflected in the proposed size of the investments they were pursuing in emerging markets. The average size for the productive sector investments was approximately $3.45 million. Over 50% of the companies were planning to invest less than $2 million. Approximately 19% of the companies that applied did so for multiple investments—some with up to 5 individual projects.
There was a heavy concentration of applicants and approvals for firms from Quebec. Approximately 62% of the submitted applications came from Quebec companies, 23% from Ontario and the rest were scattered across the country. Approximately 70% of the approved projects were from Quebec. Only 15.5% of the approved projects were from Ontario companies. The success rate of Quebec companies was higher than those from other provinces. Ontario had a success rate of only 39%, Alberta 52%, British Columbia 50% and Quebec 66%.
2.0 Evaluation Objectives and Scope
2.1 Evaluation Objectives
The goal of the INC Program evaluation is to provide DFAIT’s Departmental Evaluation Committee with a neutral and evidence-based assessment of the relevance and performance of the INC Program and the progress made to date.
The specific objectives of the evaluation are as follows:
- To examine the relevance of INC by assessing the extent to which it addresses the needs of Canadian businesses and is aligned with departmental and federal government priorities;
- To assess internal governance mechanisms and processes that contribute to the performance of INC in helping Canadian businesses implement sustainable investments in developing countries; and
- To reflect on the lessons learned since INC was transferred from CIDA to DFAIT and provide recommendations for improvement.
2.2 Evaluation Scope
The evaluation issues covered under this evaluation conform to the 2009 Treasury Board Policy and Directive on Evaluation, focussing on assessing the relevance and performance of the INC Program. Relevance issues address the consistency of the Program with Departmental and Government of Canada priorities and the extent to which it realistically responds to a continued need by Canadian firms. Relevance also includes the question of whether the Program is the most appropriate response to the needs identified.
An assessment of the performance of the Program’s strategy includes elements of both economy and efficiency. Economy is defined as the use of resources to achieve the outcomes of the INC Program, while efficiency refers to the use of resources to achieve the outputs of the Program.
3.0 Evaluation Approach and Methodology
3.1 Evaluation Design
The evaluation was managed and led by the Evaluation Division at DFAIT. Work on the evaluation, including the decisions on the scope and coverage, was guided by an Evaluation Advisory Committee (EAC) composed of INC Program and other relevant DFAIT branches/division. The EAC reviewed the draft Work Plan for the evaluation and provided feedback and suggestions of the proposed approaches. They will also review and provide feedback on the draft evaluation report.
3.2 Evaluation Matrix
The evaluation was structured around an evaluation framework. The framework presented in the Evaluation Work Plan represented a summary of the following:
- The main themes and issues that were covered by the evaluation including the specific evaluation questions;
- An outline of the performance indicators used to assess the issues; and
- The sources of data and methods of collection used.
The framework acted as a general guide for the evaluation and is the basis on which the data gathering and interviews were conducted.
3.3 Lines of Evidence
The evaluation team undertook a review of a substantial number of documents, files and reports to gain a better understanding of the INC Program and the context in which it is functioning. This included documents such as: INC Policy documents; INC Program documents, manuals and project information; Program logic models; documents on the CIDA INC Program including the 2007 evaluation; and broader DFAIT policy documents such as the Global Commerce Strategy (GCS) and Corporate Social Responsibility (CSR) Strategy. In addition, information was obtained on other government departments’ (OGDs) programming and priorities to support CDIA.
Background information on the trends in CDIA and international information on direct foreign investment in emerging markets was also gathered and reviewed. This provided background for placing the INC Program into a broader international context.
Key Informant Interviews
Interviews were held with a series of key informants. Current and past INC Program representatives and Management were interviewed about both the Program and in some cases about the transition from CIDA INC to DFAIT INC. Internal stakeholders within DFAIT were interviewed including Geographic branches and Sector specialists. A questionnaire was distributed to 20 of the top Canadian missions dealing with INC to obtain the Trade Commissioners’ (TC) perspective on the Program and the processes being followed. A 40% response rate was seen to the questionnaire.
Interviews were also held with key business associations and consultants working with the INC Program. These focused on issues such as the continued need for and relevance of the Program, issues being faced by firms in accessing the funding and potential areas for improvement.
Sample of Projects Approved and Rejected
Two samples of projects were developed for review. The first focused on a cross-section of approved projects. A sample of 40 approved projects was reviewed in depth covering all four categories—productive sector, extractive, professional services and PPPs. The selection of the sample was based on a cross-section of regions, sectors, project type and Program phase.
Extensive file reviews were undertaken to better understand the nature of each project and its approach and intended results. Other public information on the companies was also reviewed including websites and annual reports. Discussions were held with INC Program Advisors about specific projects and firms to follow-up on questions and ensure that the analysis across projects was accurate. Questionnaires were then sent to the 40 firms to obtain their feedback on the Program, approaches and results to date.Footnote 6 The overall response rate was 60% with responses coming from all four categories of firms.
A sample of 10 firms were also selected that were non-qualifying. In this case, the project documents were reviewed in depth. INC Program Advisors were asked about their experiences with these non-qualifying proposals. The intention was to better understand those areas where firms were submitting proposals that did not meet the Program criteria and what this might mean for the Program design or processes.
Review of INC Project Information
Information was gathered from four sources in order to develop a profile of the Program: the INC spreadsheets developed by staff; CAU database that recorded information on CAs and other aspects of the projects; the on-line INC project information database that holds the applications from firms that have applied at DFAIT; and the files of those projects which were transferred from CIDA and approved at DFAIT.Footnote 7 The information was synthesized and an overview of the Program to date was developed. This was then cross-checked in interviews and used as the basis for some of the analysis in the evaluation.
Over the past five years, there have been a number of programs operating in other countries that are similar to INC. Substantial changes have been seen in the last several years, however, in many of these programs in terms of their approach, client base and priorities. As a part of the Evaluation, a comparative analysis was undertaken to better understand what changes had been made, why they were made and what lessons emerged from these for INC and its future.
The countries covered in the comparative analysis were Denmark, Netherlands, Sweden, United Kingdom, Germany and United States. The results of this analysis are presented throughout the Evaluation report to provide additional information for assessing the efficiency and effectiveness of INC relative to alternative models of support to private firms. In addition, an overall analysis is included in Annex A.
Data collected from all sources were first analysed by source, and then synthesized and triangulated among sources to produce reliable findings. Findings were then contextualised and summarised to conclusions about the status of the INC Program, its relevance and performance and potential areas for improvement.
3.4 Key Limitations
The Evaluation faced two key challenges. First, the INC Program had a number of information and data sources which needed to be consolidated in order to produce the statistics for the evaluation. During the development of the evaluation database, it was discovered that the Program was starting to clean up the INC on-line database and was reorganizing the information that had been collected previously by the evaluation team. However, substantial collection and verification of data had already been made by the evaluation team members at this point, allowing a picture of the projects that the INC Program has handled since its transfer. This information was further substantiated during the interviews undertaken to ensure it was accurate.
Second, some of the active projects being administered by DFAIT were legacy projects approved under CIDA INC. DFAIT took over their management with the transfer but was not responsible for approving the projects. These CIDA INC legacy projects were excluded from the evaluation in order to better judge the projects over which DFAIT had more control in terms of approvals and implementation.
4.1 Continued Need for the Program
The needs being targeted by INC are still relevant in terms of supporting Canadian firms seeking to invest in emerging markets and there is a continuing need for a program like INC.
The original rationale for INC was based on a series of assumptions.
- The requirements of developing countries for capital, technology and training could not be met exclusively through government-to government activity but needed private sector support;
- The development of a vigorous private sector in developing countries is an essential part of the overall development efforts;
- Canadian companies were not taking advantage of opportunities to collaborate with the private sector in developing countries, and
- Canadian companies could play a role in working with the public and private sector in developing countries for mutual benefit.
The Program was a vehicle to engage Canadian firms more directly in developing markets and share the risk and opportunities this created. This was seen as a method of supporting growth in both Canada and the developing world, meeting both commercial and development objectives.
Many of these assumptions remain relevant. The 2011 meetings in Busan on aid effectiveness saw Canada endorsing the Busan Partnership for Development Co-operation.Footnote 8 A key part of this agreement recognizes the central role of the private sector in advancing innovation, creating wealth, income and jobs, mobilizing domestic resources and in turn contributing to poverty reduction. The signatory parties including the Government of Canada (GoC) are now discussing how best to support these efforts. INC has a role to play in supporting Canada’s priorities under Busan.
The increased interest by foreign companies in the developing world has led to dramatic increases in foreign direct investment (FDI), with the developing world inflows of FDI increasing 244% between 2000 and 2010.Footnote 9 The shift of FDI inflows to developing and transition economies has accelerated in 2010 with the global contractions. For the first time, developing and transition economies absorbed more than half of global FDI flows.Footnote 10
CDIA remains an important part of the integrative trade approach for Canadian firms. CDIA has continued to increase as firms realize the importance of having a more global strategy. Overall, CDIA between 2007 and 2011 grew by 33%, reaching $684.5 billion in 2011.Footnote 11 The resulting foreign affiliate sales (FAS) have grown at twice the pace of Canadian exports. As of 2009, FAS had surpassed exports from Canada.Footnote 12 Despite these gains, Canada has barely been able to maintain its share of overall global FDI at 3%.
The patterns of CDIA are only slowly changing. The United States continues to dominate Canadian investments with over 40% of CDIA going there. Sectors with a long standing presence in foreign markets—such as banking, energy, mining and forestry—continue to dominate with 77% of CDIA in 2011. With the exception of China, the relative share of CDIA in emerging economies—notably Russia, Brazil and India—has grown at a slower pace as shown on Table 3. For example, Barbados received 8% of CDIA in 2011; Brazil 1.4%.
|Country for CDIA||2007 (CAD millions)||2011 (CAD millions)||% Change 2007 to 2011||% of Total CDIA 2011|
|Source: Statistics Canada, Table 376-0051|
While the role of SMEs is still limited in terms of overall CDIA volume, an increasing number of SMEs are recognizing this as an important means to grow their company.Footnote 13 Of the firms responding to the evaluation questionnaire, 100% reported that investing abroad is part of their global strategy to develop and serve new markets.
The complex environment of emerging markets demands that care be taken in pursuing and implementing investments. Firms need both a high level of knowledge and realistic plans before deciding to proceed with an investment. This takes time and resources to review in depth the viability of opportunities and find strategic opportunities.
Firms receiving viability study funding from INC saw this support as providing value to their investments, particularly decreasing their risk. Viability study support allowed firms to better research such issues as the regulatory environment and technical requirements of the investment. INC support also allowed for a more in-depth analysis of the factors that would influence the investment and reduce the company’s exposure. Firms with existing investments indicated that the support allowed them to better address environmental concerns emerging from the investment as well as address labour force skills and conditions. Representatives at missions abroad had similar perceptions of the value added of INC, indicating that it provides an opportunity for Canadian firms to undertake more extensive analysis of investments, reduce their risk and better develop a market strategy.
A Conference Board of Canada report highlighted the potential of CDIA for boosting Canadian productivity, trade, investments, jobs and skills within Canada. It indicated that DFAIT’s Trade Commissioner Service (TCS) should expand its activities in support of CDIA for these reasons.Footnote 14 The report also highlights that investments by smaller companies are riskier since these firms have a smaller financial cushion if the investment takes longer than anticipated to become profitable.
Other elements of the INC Program target other markets besides productive sector or extractive investors. The professional services category supports opportunities for firms in the aid market. The aid market has been growing in recent years and represents a niche opportunity for Canadian businesses interested in expanding their international portfolio. In 2010, Canadian companies won approximately US $145 million in procurement contracts from international financial institutions.Footnote 15 Canadian firms are facing increasing competition from new players, such as China and Brazil. These markets are also becoming increasingly complex with the decentralisation of the procurement decision-making process from headquarters to borrowing countries and with the introduction of new instruments and opportunities for companies to get involved. Procurement contracts through IFIs are attractive as entry points to emerging markets, allowing Canadian companies to build expertise and relationships that can be leveraged beyond these contracts.
PPPs are also a growing area. A database of private participation in infrastructure (PPI) has been developed by the World Bank to track key aspects of the projects.Footnote 16 The phenomenal growth of PPI is clearly seen from the statistics. For example, between 2000 and 2010, 17 countries out of the 23 in East Asia and Pacific implemented 908 infrastructure projects with private participation. These projects involved investment commitments (and after,investments) of US$154 billion. Canada was actually an early adopter of the PPP model after Australia and the UK. The extensive domestic experience has not been taken internationally to any extent, however.
INC is the only program providing support to Canadian small and medium enterprises to pursue international investment and other opportunities. Other countries have a range of support services which put Canadian SMEs at a competitive disadvantage. This is particularly true in areas such as financing. Development finance institutions (DFIs) are used in many countries as a method to promote the engagement of firms in emerging markets.Footnote 17
Despite the perceived relevance of INC, the Program remains undersubscribed, disbursing less than 20% of the available funds. This low level of demand has been caused by a confluence of factors.
The flow of applications to INC has been relatively low since the transfer in January 2010 as shown on the following graph. Only one quarter since start-up had more than 50 applications. As mentioned previously, the vast majority of the approvals were viability studies providing $60,000 or less in funding. The resulting disbursements levels per year for the applications approved at DFAIT have been less than $4 million in FY 2011-12 out of a potential $20 million pool of funding.
While it would be expected that the start-up period after the transfer would face low demand as firms began to understand the DFAIT INC Program and decided whether to apply, the patterns over time indicate more fundamental issues. The low demand appears to be the result of a series of factors, which when combined, make the cost benefit of the Program too high for firms to be interested. Each of these factors is dealt with in more depth elsewhere in the evaluation as noted in each bullet below.Footnote 18 It is the merging of these factors that has severely depressed the demand by firms.
- The application and approval process is complicated and time consuming, deterring firms from applying given the small size of the available funding packages. (see Finding #10) Of the firms that start an application on-line, approximately 50% do not submit a formal application.
- There is a lack of awareness of INC in Canada. ( see Finding #16) Business associations interviewed knew very little about INC and, after the transfer from CIDA, no longer engaged with the Program. The majority of firms surveyed reported that they heard about INC from consultants (39%) or that they were previously clients of CIDA INC (44%). A minority of firms had discovered INC through the DFAIT website (11%) or through INC’s promotional activities (6%). The low levels of applications for Phases 3 and 4 in particular are surprising given the amount of existing investments Canadians have offshore. The Canadian missions were asked why they thought there was little demand for post-investment funding. The overwhelming answer was that firms were just not aware the funding was available.
- Some of the changes made to INC with the transfer from CIDA have been positive for Canadian firms, such as the inclusion of emerging economies like China. Overall, however, the categories of support offered by INC are not currently aligned with the needs of companies looking at productive sector investments, PPPs, extractive sector or professional firms. (see Finding #9)
- INC targets Canadian SMEs. SMEs, however, have traditionally been the most reluctant companies to look at CDIA as a way to expand their business. Enticing SMEs to consider investing abroad remains a challenge. (see Finding #1)
- The objectives and purpose of INC are not clear. The emphasis placed on developmental objectives in the promotional materials leads Canadian firms to believe that INC is less interested in supporting commercially viable undertakings and only interested in poverty reduction. (see Finding #5)
While individually these factors might not have stifled demand, the confluence of these factors has made the Program less relevant to the needs of companies. The result is few applications and low levels of disbursements.
4.2 Alignment with Government Priorities
The INC Program is well aligned with the DFAIT strategic outcomes and policies.
INC supports two of DFAIT’s strategic outcomes:
- Outcome 1: The international agenda is shaped to Canada’s benefit and advantage in accordance with Canadian interests and values
- Outcome 2: Canadians are satisfied with commercial, consular and passport services
For accountability purposes, INC falls under DFAIT’s first strategic objective because it is funded by the International Assistance Envelope (IAE).
INC supports the Global Commerce Strategy by supporting Canadian business to enter emerging markets and facilitate an integrative approach. The GCS has placed a priority on enhancing business promotion in emerging markets and facilitating CDIA. DFAIT’s Report on Plans and Priorities for 2012-13 re-affirms the focus on key markets and high-growth economies such as China, India and Brazil. It also places a priority on promotion of two-way investment and innovation and initiatives to support small and medium-sized enterprises. The INC Program is clearly aligned with these objectives and priorities.
The Government of Canada’s Corporate Social Responsibility (CSR) Strategy for the Canadian International Extractive Sector commits DFAIT to promote and facilitate the adoption of CSR best practices by Canadian companies. DFAIT’s Trade Commissioner Service fosters and promotes CSR at home and abroad by encouraging Canadian embassies, consulates, high commissions, regional offices and Headquarters (HQ) divisions to undertake CSR initiatives.
INC is one of the sources of funding available that promotes the implementation of internationally recognized CSR standards abroad through reimbursing selected costs associated with the implementation of gender, environment and social development strategies. The Program also requires Canadian companies to agree to adhere to at least one internationally recognized voluntary CSR standard including specifying which standards in the application process. In the recently released Development Assistance Committee (DAC) Peer Review of Canada, INC was cited as an important mechanism for supporting CSR in the extractive sector.Footnote 19
INC plays a unique role in supporting Canadian firms and complements the work of other government departments.
The INC Program is the only pool of funding available in Canada to support Canadian firms looking at investment opportunities in emerging markets. As such, it plays a unique role in supporting CDIA in emerging markets.
INC products are complementary to those offered by the Export Development Canada (EDC). The EDC provides a wide range of financing, insurance and guarantee options to firms investing and exporting internationally. Approximately 80% of their customer base is SMEs and an increasing number are beginning to look at CDIA opportunities as part of their strategies. Firms are accessing both INC and EDC services in developing their investment opportunities. Approximately 35% of the firms surveyed responded that they were also working with EDC on their projects.
INC is also complementary to Commercial Corporation of Canada (CCC) and has provided support to firms investing as a method to access CCC contracts. One firm in the sample reviewed was considering an investment as a method to supply products within the recipient country for a CCC contract. Some professional services firms were also working with INC and CCC. However, CCC focuses more on large scale companies so has a different clientele in general than the SMEs under INC.
The Business Development Bank of Canada (BDC) provides financing, venture capital and consulting services to SMEs. It can help Canadian companies finance the expansion of their domestic market or explore new and larger foreign markets. The BDC, however, does not have a mandate for CDIA, even though they recognize its importance for growth. According to the BDC Act, they cannot provide funding for the establishment of a foreign subsidiary for one of their clients.
The coordination of services across agencies is done by the firms. There is limited proactive coordination between INC, EDC and CCC. While INC staff may refer clients to these other organizations, or vice versa, the interactions are more ad hoc among the programs. INC staff have not actively pursued these linkages but do it more on a case by case basis.
4.3 Alignment with Federal Roles and Responsibilities
Supporting Canadian businesses in their pursuit of international investment opportunities is part of DFAIT’s mandate and its role in the federal government.
DFAIT has a clear role in promoting CDIA and CSR initiatives. This is reinforced in various policy documents such as the GCS and in the Plans and Priorities for 2012-13. Both of these take an integrative trade approach, where expanding and diversifying commercial relationships with emerging and high-growth markets can take a range of forms including CDIA.
One of the rationales for transferring the program from CIDA to DFAIT was the fact that DFAIT was better suited to administering the program given its commercial focus and mandate. It was also assumed that if the Program were within the DFAIT structure, businesses would have better access to DFAIT’s network such as the offices in Canada and abroad.
The interviews indicated that there was general agreement that the transfer from CIDA to DFAIT was a positive move allowing an opportunity for INC to better coordinate with the DFAIT network (e.g., TCS) and focus on commercial objectives. This is also reflected in the high usage of the DFAIT network by the firms in the INC evaluation sample with 70% dealing with the Canada’s missions abroad on their investments and 26% obtaining support from the Regional Offices.
The funding for INC comes from the Official Development Assistance portion of the International Assistance Envelope which means it needs to meld both commercial and developmental objectives. The INC Program needs to have and convey a clear linkage to developmental objectives as outlined in Canada’s Official Development Assistance Accountability Act (ODAA). This link to poverty reduction is accomplished through a focus by INC on job creation in developing countries. The INC Applicant Guide makes this linkage clear by stating that the intention is to support Canadian private sector investments that create sustainable employment and economic growth in developing countries. This employment creation linkage is recognized internationally as being a legitimate contributor to poverty reduction and is an element in a wide range of similar programs sponsored by other countries that support the private sector.
It is not the ODA requirement to have developmental objectives as the foundation of the INC Program that has caused an issue with the implementation of the Program but the manner in which this is interpreted. In transferring the program from CIDA, many program design decisions in terms of areas to be funded were influenced by CIDA since the design of the new program was jointly done by the two organizations. CIDA INC had developed specific developmental objectives for CIDA-INC, including the focus on cross-cutting themes such as gender, which were important within CIDA’s structure and priorities. Some of these were less relevant to DFAIT’s objectives. The resulting negotiations led to compromises being made in terms of the categories of support and the elements within those categories to be funded. For example, under the Phase 3 funding, support to sustainable employment is clearly linked to the funding of human resources and training plans. This receives far less funding, however, than studies to improve the social elements of an investment such as gender and community development which were CIDA’s focus. By having the categories of support more closely linked to CIDA’s priorities, an opportunity was missed to rethink how the developmental objectives of INC could be further enhanced with funding categories focused on employment and decent jobs.
This was further complicated with the transfer of staff from CIDA INC to DFAIT INC. A number of staff moved to DFAIT, which allowed their expertise to be available at start-up of the new Program—a distinct advantage for the Program allowing it to move more quickly at the beginning and have systems in place. It also meant, however, that this group tended to have CIDA’s perspective of the link to poverty and development, differing from DFAIT staff who have been joining since. This has resulted in a lack of consensus among INC staff on the objectives of the Program and has caused inconsistencies in the evaluation of proposals received. It has also influenced the messaging of the Program to firms.
5.1 Achievement of Expected Outcomes
INC has demonstrated preliminary progress towards its immediate outcomes to date.
Evidence is emerging that three of the immediate outcomes of the Program are beginning to be achieved: increasing understanding of business opportunities by firms; sufficient information is available to make a go/no go decision on the investment; and improving the sustainability of the project.
The questionnaire to the productive sector firms asked: “What benefits has your company had from the support received from DFAIT INC?” The following were the responses, showing that some preliminary progress is being made already.
|Better able to understand investment opportunities in developing countries||50%|
|Better able to determine the feasibility of the investment project than if funding had not been received||69%|
|Improved viability of the investment||75%|
|Allowed additional resources for establishing the investment||75%|
|Reduced risk associated with the investment||75%|
|Investment strengthened through enhanced focus on environmental issues, human resource development or corporate social responsibility||50%|
Some progress towards intermediate outcomes has been demonstrated.
Companies’ responses to the questionnaires also indicated that some intermediate outcome results were emerging in terms of investments. Approximately, 31% of the surveyed productive sector firms that received viability funding had already made an investment since the INC approval. The total volume of the investments by these firms to date is equal to $8.3 million.
In addition, 54% of the companies receiving viability funding indicated that they were still planning to invest. Most have very specific timeframes for completion of the investment within the next year or two. Only two firms have decided not to invest—one because of regulatory issues within the country, the other through a decision to focus their efforts on the US. These results reflect a better understanding of risks pertaining to the proposed investment and reflect positively on the Program.
The companies that already had investments at the time of receiving INC funding used the support to enhance those investments in areas such as improving the skills of their labour, establishing more reliable supply chains and developing methods to better engage with community groups.
The inclusion of emerging economies that are ODA-eligible, such as China and Mexico, in the transfer of the program from CIDA, has contributed to the achievement of the Program’s objectives.
Countries funded under INC have to be eligible for Official Development Assistance since the funding comes from the Canadian IAE. The list of ODA eligible countries is developed by the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD) and updated every three years. The list is extensive and includes country ranging from least developed to upper middle income.Footnote 20
At CIDA, a decision was made to graduate some countries such as China, Mexico and Thailand and no longer allow them to be part of the INC Program. With the transfer to DFAIT, eligibility was again extended to all ODA-eligible countries, including emerging economies such as China that offer significant investment opportunities.
This change was widely praised in the interviews and responses from firms. Firms gave an average rating of 4.3 out of a possible 5, indicating their level of agreement with the inclusion of these emerging markets among the Program’s eligible countries. The applications for INC reflect the demand in these countries. Of the approved projects, 53% were found in China, Mexico, Vietnam, Brazil and India. Many of these countries were not eligible under CIDA-INC. The interviews also confirmed that this shift contributed to a better alignment with the commercial objectives of DFAIT and the Government of Canada. Countries such as China are specific priorities of the GoC.
The negotiations between DFAIT and CIDA on the new INC Program design resulted in some changes that did not optimize the Program’s performance as intended.
The design of the DFAIT INC Program was based on the results of a 2007 evaluation of CIDA INC and negotiations between DFAIT and CIDA regarding the transfer. Issues had been flagged in the evaluation such as the low implementation rates for both investment support and professional services contracts. Discussions were held between DFAIT and CIDA on how these could best be solved. Many of the changes made (such as the change in the professional services category) responded to issues identified in the 2007 evaluation. CIDA and DFAIT also looked at methods to broaden the impact through inclusion of new areas such as the extractive sector. They increased the minimum revenue levels of firms from $700,000 to decrease the number of applicants that may not have the financial capacity to invest.
After the initial parameters of the new program were defined by CIDA and DFAIT, consultations took place across the country. According to the interviews and documents from the consultations, the private sector representatives felt they had an opportunity to comment on the decisions being considered by DFAIT and CIDA but not on how a full re-design of the program could better meet the needs of firms. The consultations did influence a number of decisions, such as the level of revenue required by firms. Initially, DFAIT and CIDA had been considering $5 million. This was reduced to $2 million annual revenue following the consultations with the private sector.
In the final design, a number of changes were made, with one of the biggest being a move to a four-phase approach. These four phases were intended to ensure that only commercially viable projects would receive funding for further studies and implementation. Under CIDA INC, a firm could receive funding for viability study support and the start-up phase of implementing an investment under one CA. For DFAIT INC, the four phase approach meant that funding would only be committed by phase, if there was evidence that an investment was moving forward. The phases of support were also standardized across the groups of companies—productive sector, extractive, professional and PPPs.
After two years of Program experience, it is becoming clear that the phases and their content are not always well matched to the needs of the target firms. The Terms and Conditions for the INC Program do not appear to be flexible enough to respond to the rapidly changing global opportunities being pursued by Canadian firms. Different issues are seen by category.
As shown on Table 1 above, the productive sector is the only one that is eligible for support under all four phases. A number of issues have begun to emerge, however.
The idea of four phases for investing means that the process is assumed to be fairly linear with firms progressing through the phases. Some INC staff believe that to do an investment well requires following the four phases. In fact, for many firms and investment opportunities this is not necessary. As mentioned above, some firms have already begun to invest within a short period of time, generating employment in the developing countries and starting to contribute to the commercial objectives of the firms and development objectives of INC. The results of a viability study can be quickly outdated depending on the nature of the market and the products being developed. In addition, in some countries such as China, investors are forced to meet very tight deadlines for having their planned investment in place, meaning they must act quickly.
Many of the firms applying for Phase 1 indicated on their applications that they intend to apply for each of the three subsequent funding phases. Care needs to be taken in assessing each subsequent application and how it is providing value added to the investment, as opposed to simply supplying the firm with more funds to further investigate a market. The approvals should not be automatic from phase to phase or the Program could be at risk of disbursing large sums of money to projects that have little prospect of moving forward. With the small size of many investments being proposed, the Program could contribute more through the 4 Phases than the $500,000 minimum investment by a firm. It is important to judge when all four phases might be needed and when not based on the financial and management capacity and intentions of the firm.
The current criteria indicate that the funding is only open to for profit private sector companies in operation for at least three years. The Canadian firm should be proposing to operate in a developing country through either a wholly owned foreign subsidiary or under a formal business agreement such as joint venture with a local private sector partner.
There are organisations such as universities and cooperatives that are investing in developing countries and are entering into long term partnerships which have economic benefits for Canada and the partner country. These organisations are currently excluded from the Program since they do not fall into the legal category of "for profit private sector companies".
Phase 1 – Viability Study
The viability study focuses on reviewing the market, the technical feasibility, financial viability and legal review primarily. Almost all the firms have applied for the maximum ($60,000 cost shared at 50%). However, a number of people interviewed indicated that this funding may not be flexible enough and the levels of funding - not high enough.
A wide range of new issues must now be reviewed by investors besides the classical market and feasibility aspects. For example, in China and Brazil a key consideration is site selection. In other countries the labour market is extremely complex and needs to have a thorough assessment to see how the activities need to be structured in order to access the skills needed. For these more complex assessments, the INC funding levels may not be high enough to support a thorough review of the critical elements. While the INC Policy and Operations Manual indicates some flexibility in terms of content of the studies, firms are under the impression there is limited scope to introduce other types of assessments than those listed in the Applicant Guide.
Phase 2 – Adaptation and Demonstration of Technology
The Phase 2 funding is confusing to everyone in terms of what is being targeted. Both INC staff and outside groups indicated that there was little clarity on what this means. The DAC ODA guidelines say that research and development cannot be included and still be eligible for ODA grants. Besides this, few interviewed could clearly articulate what the category covered. The Applicant Guide refers to demonstrating "benefits of introducing or adapting a proven technology or methodology in a developing country". The INC Operations Manual goes further and indicates product and service testing and certain marketing activities.
INC staff consistently indicated it was hard to judge whether a firm’s request made sense. This is likely one of the reasons that only 42 applications have been received for Phase 2 funding and only 50% of those were approved. Many of those are investments which received Phase 1 funding and firms have now applied for Phase 2.
Phase 3 – Sustainability
This category is open to any company with an investment in an ODA eligible country, regardless of whether they have received DFAIT INC Phase 1 or 2 funding. Given the pool of companies with existing investments, particularly in markets such as China, the potential demand is high. Despite this, Phase 3 has seen low demand with only 15 applications being submitted and only 5 of those being approved. Some of these came from firms whose applications were transferred from CIDA INC.
The funding covers a series of studies or plans such as environmental impact assessment ($70,000), initiatives that improve environmental or social (including gender) performance ($70,000), human resources and training plan ($30,000) and local supply chain study ($10,000). The Phase 3 is supposed to be only for firms that have committed to the investment, although there have been firms who had received Phase 3 funding without having invested yet.
The interviews indicated that the low demand could be related to the lack of awareness about the funding or could be related to the composition of what is covered. From the feedback received, a number of issues were mentioned. Most firms would already have taken into account environmental issues and mitigation strategies, so further reviews might not be needed until the implementation stage. The questionnaires to the productive sector firms explored the degree to which a company would normally integrate environmental issues into the planning and implementation of operations overseas. The environment got a ranking of 4.4 out of 5 with 5 indicating it as critical to the company’s strategy.
The social performance category faces low demand since few firms, unless they are heavily into CSR activities, would be willing to spend $70,000 to match the funding under INC. The investments by firms outside the extractive sector for the most part would not require community based activities. From the interviews with associations, firms do not understand why they should be looking at these issues for a normal investment.
The human resources (HR) and training plan and the local supply chain are something that firms would access based on the challenges they will likely face in their investment. Sourcing labour with appropriate skills and understanding local conditions has become an important issue within many investments. Firms are also struggling with ways to improve their supply chains to ensure that sub-contractors are not only available but are following international standards in terms of quality, environmental standards and labour standards. The funding of $30,000 for human resources and $10,000 for supply chains is inadequate to realistically tackle the spectrum of issues facing a firm. Both HR and supply chains are important and becoming more critical. The funding, however, is too low to make the application effort worthwhile for firms.
Phase 4 – Implementation
Similar patterns are seen with both Phase 4 and 3 since they mirror each other. Phase 4 is intended to provide assistance to the implementation of the studies in Phase 3 after the investment is made. Three types of activities are funded under Phase 4 (Implementation): environment and/or social initiatives for $70,000; training for $150,000; and local supply chain for $50,000.
Phase 4 has seen slightly more demand with 42 applications and 19 approvals, however, many of these were groups that transferred from CIDA and some of these companies have not necessarily made investments.Footnote 21 The demand level also reflects the areas where funding is being provided. Again HR and training would be considered critical; social initiatives less so. Local supply chains are likely again underfunded to attract firms.
The extractive sector was added with the transfer from CIDA to DFAIT. It qualifies only for Phase 4 support at the same funding levels as the productive sector and with the same three funding categories of support. The rationale for the funding is to promote CSR in the extractive sector.
Only 2 applications have been received by INC with one of these being approved. The reason for the low demand, despite Canada’s vast extractive investments in emerging markets, is likely linked to the fact the program is targeting the wrong areas of the investment chain. Extractive sector companies may have less of an incentive to apply at the implementation phase because most firms already have substantial CSR budgets in place at that point and would not see the extra funding as being that important. The company’s own funding far surpasses anything INC has to offer. Besides being able to wave the flag and use the DFAIT support for promoting its CSR reputation, few firms at the implementation stage would bother to apply given the money available and the inflexibility of the INC categories.
Canada has a range of groups which are now focusing on CSR in the extractive sector including business associations. These groups could provide valuable insights into where INC could focus future extractive sector programming. Greater potential might be seen in providing support to integrate CSR into the planning stages of extractive investments—a stage that is currently not eligible for funding but is in need of improvements. Another niche might be to target medium sized firms. Many of these companies do not believe they have the capacity to engage in CSR. Being offered tailored support to assist with the development of new programs might see some demand from these firms.
The professional services category is the one that has changed substantially between CIDA INC and DFAIT INC. Under CIDA, funding was provided for both feasibility studies and implementation of contracts. Large amounts of funding were given to feasibility studies that were intended to position firms to win contracts. The 2007 evaluation indicated a success rate of 15% which was deemed to be too low.Footnote 22 The reaction in designing DFAIT INC was to cut the feasibility study completely. Funding now is only available for Phase 4 with the focus being on providing complementary funding for training to support service contracts worth $1 million or more. The firms must have already secured the contract. Fifteen professional service applications have been submitted to INC and ten were approved. Most were transferred from CIDA, with few new applications coming in within the last year.
The limited demand is again reflective of the inflexibility of the categories of support and the level of funding provided. A number of factors were raised. First, the need to obtain funding for training once a contract has been secured is not apparent given the increasing inclusion of training within many contracts by IFIs. Second, firms mentioned that other types of support to contracts based on specific needs might be more valuable to client countries but INC will only fund training. Third, the time required to get approvals is often too long to have an impact on the service contract which sometimes has short duration. Fourth, the interviews also indicated that the terms of the funding were not well suited to a professional services firm that generates all of their revenue from fees. The funding levels and lack of flexibility exacerbate this.
The INC categories offered to PPPs include Phases 1, 3 and 4 with a total possible contribution of $955,000—the highest of any category of firms. The PPPs included in the INC guidelines are the conventional arrangements where a government contracts the private sector to provide infrastructure services, with the private sector partner bearing the vast majority of the financial, technical and operational risks. The level of INC funding recognizes this risk in the design and implementation phases.
Only 12 applications have been submitted and only one approved. The low approval rating relates to a series of factors. First, some firms applying did not qualify since they were either looking for funding for a feasibility study for a professional services contract or were really productive sector investments not PPPs. Second, there was also discomfort among many INC staff on PPPs. PPPs are difficult to understand and assess given their complex nature and areas such as funding. Staff are not comfortable with reviewing the applications and are often not on the same wavelength in terms of whether a project should move forward for approval. This causes confusion in the review process and firms to abandon their applications as a result.
There may also be some issues regarding the extent to which Canadian firms are pursuing these classic types of PPPs offshore. A limited pool of firms is capable or interested in doing these in emerging markets. In addition, the competition has all kinds of financing backing them including equity financing. Canadians do not have access to this type of support, making their competitive position difficult.
The PPP concept is also shifting away from the classic model targeted by INC. The emergence of new funding routes by IFIs and others is allowing new combinations of public and private participation which allow a greater sharing of the risks. Globally, the emphasis has shifted away from traditional PPPs to other forms of private participation in infrastructure.Footnote 23 In this context, the INC Program definition of PPPs is likely too inflexible.
The limited demand for INC and the need for more flexible programming is not a unique issue. A comparative study was undertaken of similar programs offered by other countries to see if any lessons emerge. The result of the analysis is contained in Annex A. Five years ago, a wide range of programs similar to DFAIT INC were being pursued by other countries. There was a range of programs focused on linking domestic firms to companies in emerging markets. They were developed as a method to engage domestic private sector in sustainable ventures that would contribute to economic growth and development. Among the most important programs were: Danida’s Business to Business (B2B) program; Netherlands’ Programme for Cooperation with Emerging Markets (PSOM); Germany’s Public Private Partnership (PPP) program; and Sweden’s Company Twinning program.
Over the last several years, however, all the programs have shifted their focus and redefined their approaches. Only one program like INC remains that continues to exclusively focus on domestic companies linking to foreign companies—this is Swedpartnership. Others have started to shift their models of support.
For example, Denmark has transformed its B2B program into the Business Partnerships programme in 2011. Danida realized that the support being given to firms needed to be more flexible in terms of types of activities funded and types of partnerships in order to meet the needs of companies. In response to this, Danida changed a number of aspects of its approach including allowing other types of partnerships besides firm to firm and adding flexibility to its funding categories.
The Netherlands also shifted its programming starting in 2008. PSOM was providing funding for investment studies, pilots and support once the investments had been made. PSOM started facing more limited demand by Dutch companies for the funding and a rethinking was done on the approach. A new program was launched in 2008 called Private Sector Investment Programme (PSI) which partially delinked the support from Dutch companies. PSI moved to a tender based approach where proposal calls are done twice per year. Either Dutch or international firms can be linking with a local private sector partner and be making an investment. The arrangement does not have to be a joint venture. There is also flexibility in the types of projects that can be proposed.
What is common across the experience of other countries is that the programs realized that the nature of engagement by the private sector in emerging markets was evolving. While having clear parameters, most programs now have greater flexibility in their funding that allows companies to structure tailor made programs and packages to achieve their commercial (and developmental) objectives. The redefinition of participants to allow other types of partnerships besides private to private has also been consistent. In addition, most countries have complimentary services to support domestic firms engaging in emerging markets that strongly support their participation. It should become clearer over the next year or two whether these changes have increased the demand by firms for funding.
The complexity of the application process discourages firms from applying to INC and increases the use of consultants to assist firms.
One of the biggest complaints about the INC Program revolves around the application process. While the on-line application process was streamlined in the transfer of the program from CIDA, its continued complexity was consistently mentioned in the interviews as an issue facing firms applying for INC funding. Clearly the INC Program needs to require information from firms that will allow a thorough review of the funding requests. However, the way in which the current system asks for the information deters firms from even applying. The online application is difficult to complete and not clear when firms are attempting to fill it out. For example, it is difficult to understand the information that is being requested. The spaces allowed for describing the project do not provide enough information to judge whether the project makes sense. Similar questions are asked regardless of which phase or sector an application is covering. Individual applications must be completed for subsequent phases of the same investment.
The result is that each Program Advisor must spend substantial time with companies providing advice on how to complete the application. Before the formal proposal is submitted, the average firm and Advisor have both spent extensive energy in ensuring that the application is properly filled out.Footnote 24 This time spent counselling firms on the application adds to the workload of Program Advisors and reduces the amount of time that Advisors can spend on reviewing the content of the proposals.
The quality of support provided by INC representative is high during this process. The firms responding to the questionnaire indicated that they were highly appreciative of the support by the Advisors in the application process and gave this a rating of 4.3 out of a maximum of 5.
However, the complexity of the application process has a number of negative consequences. First, many firms who try to do the application simply abandon the process. The amount of funding is not deemed to be worth the effort required for applying.
Second, the complexity of the online application encourages the use of consultants by companies to fill in the application. Of the firms who responded to the questionnaire, 56% used consultants to apply due to difficulties with the application process.Footnote 25 Most of the other firms had already started the application process at CIDA and the applications were transferred.
The use of consultants for the application process raises a number of issues.
- The consultants may not clearly understand or be portraying the intentions of the firms accurately in the applications. There is an incentive for consultants to fill out the application in a way that ensures its approval regardless of whether the information accurately reflects the priorities or situations of the firm. If the consultant is handling multiple clients, there can also be a tendency to begin to cut and paste to fill the applications more quickly.
- The consultants often are engaged by firms to do the work to complete say a viability study. This puts them in a potential conflict in terms of wanting the future revenue this could generate versus ensuring the firm is fairly represented to DFAIT.
- A greater proportion of project interactions occur between the Program Advisor and the consultant rather than the Program Advisor and the applicant firm. The Program may not be fully aware of the company’s intentions and the firm may not fully understand its commitments and obligations under the Program. This makes it extremely difficult to assess the quality of the ideas being presented.
In general, the use of consultants for undertaking the work funded by the INC Program is often appropriate since many of the areas being investigated may require specific expertise. A number of firms indicated that the INC funding allowed them access to expertise which they could not have afforded otherwise but which was critical for them to understand the viability of their ideas.
However, having the consultants brokering the applications and milestones puts both the INC staff and the firms in possible precarious positions. The result may mean less processing time and faster approvals but the actual ability to effectively assess applications and exercise due diligence is undermined. It also places firms in a vulnerable position where they are accessing government funding without necessarily understanding the rules and regulations for that funding or knowing what was committed.
It should be noted that programs in other countries have faced similar issues. A number of programs even have restrictions on the extent to which consultants may be used during the preparation and implementation process of their projects. For example, Danida has strict criteria for consultants’ selection and their role. Companies must take the lead in preparing the application and implementing the project. Danida does not deal directly with consultants on the application or activities. There is also a cap of 30% of the total expenditures that can go for consulting services.
Other complications are seen with the application process besides the on-line form. There is sometimes a lack of clarity on what does or does not qualify under the Program. There are differences between what is in the Applicant Guide and the policies which are followed by the staff. For example, the Applicant Guide does not mention that the proposal by a firm must be closely linked to its specific area of specialization and technology. The Advisors, however, use this as criteria for eligibility and reject firms if they feel they are straying from their primary focus. In some cases, the issue may be clear cut. In others, however, there would need to be a technical assessment to fully understand whether a new product line is within the company’s expertise or not. These types of assessments are not done, however, but decisions made based on the staff’s interpretations and impressions. In addition, there is not always agreement among the Advisors on whether a proposal is within a firm’s area of expertise.
Another example of confusion for firms is around what can be funded. The Guide lists a range of areas that are possible but provides few details. The firms and their Advisor discuss eligible costs, but sometimes ideas are put forward that are different and it is not clear within the guidelines whether they can be funded. One firm, for example, indicated that they were well into the application process when the Advisor finally told them their ideas for Phase 4 were not within the guidelines.
This lack of transparency in criteria and decision making discourages some firms from applying. When added to the complexity of the overall application process and the time required, many firms feel that the INC Program is not worth the effort.
The complexity of the application process also means that the review by the Program Advisors focuses primarily on the completion of the applications, not on the substantive quality of the project.
An extensive guide has been developed for the INC Workflow which shows all of the steps that are required in processing applications and payments—a total of 30 steps. Staff use this guide on an on-going basis to check that the procedures required for approval are being followed. Training has been provided to new staff on its content. Staff showed a high level of commitment to ensuring that the processes were followed.
The time required to work with firms on the application and the emphasis on ensuring that certain steps are followed has meant that the INC staff place priority on ensuring the veracity of the application not the project. Besides assessing generally whether a proposal qualifies such as being in business for three years and having a minimum of $500,000 investment being proposed, little attention is paid to other qualitative assessments of the proposals. How serious is the firm about investing? Does the project make sense as a business case? Does it fit within the overall strategy of the firm? Does the firm have the financial and management capacity to implement the investment?
The result of the emphasis on process means that a majority of the Advisors now believe it is their role to get the proposal through the approval process and implemented—not to assess its quality or potential for leading to investment results. They also do not see the importance of assessing factors such as the financial capacity of the firm—something which is supposed to be a requirement—partially because a majority of the applications are for viability studies. Those that do think a qualitative assessment is needed have difficulty doing this under the current process. For example, staff rarely have the opportunity to travel to visit companies and projects to verify the firms’ capacity, intentions and progress. They often have limited experience within the geographic countries they are managing, making it more difficult to assess whether concepts are realistic. These kinds of issues make assessment and monitoring more difficult.
This is further exacerbated by the fact that many staff do not have the background and experience necessary to assess the qualitative aspects of proposals. These skills are specific and require an understanding of the private sector and how it operates. A number of staff now do not have a commercial background. There are no tools or training available for the Program on anything but the process. The staff end up increasing their knowledge and skills through a learning by doing approach. This also then has implications for their interactions with firms and increases the tendency to deal with consultants not firms.
The right skill set and focus on quality is critical for operating a program such as INC. International experience from other programs shows that it is critical to assess financial capacity, human resources capacity and the commitment of firms to enter partnerships before funding is given for proposals. It is not a question of being able to pick winners or losers but of having the basic skill sets to allow an assessment of these types of factors.
This issue is also true when reviewing milestone reports. Program Advisors are asked to review two things: Does the total amount claimed exceed the approved amount? Does the content of the milestones match what is in the Contribution Agreement? For the most part, limited attention is paid to the quality of the report or milestones.
This raises a number of risks. First, if the firm is applying for subsequent stages, the reports from previous phases should inform the decisions for future funding. This does not seem to always be the case. Second, there is then a temptation by consultants dealing with a number of clients to start cutting and pasting reports that satisfy the CA template but provide limited real insights into the decision making process of the firm. Third, the heavy reliance on `reports` as milestones may encourage the use of consultants in order to meet the requirements. Firms often do not complete studies, but do have a real sense of the factors that now need to be considered. One firm mentioned that they had developed a PowerPoint presentation for their own reporting on the viability study and the options facing the firm. This they said was more valuable to the company then the report that had to be developed to meet INC requirements.
Governance structures are in place and theoretically are sound with a multi-layer review process. However, the actual application of the processes has issues that reduce accountability and transparency.
Figure 1 above shows the various stages to the INC approval process. Overall, the process is sound and allows a number of stages of review to ensure effective evaluation of projects being proposed by firms. The process developed was an adaptation of the one used at CIDA INC. During the evaluation, however, it became clear that the application of the processes was facing issues that reduced both the accountability and the transparency of the review.
Peer Review Committee
The Peer Review Committee is theoretically a good mechanism for initial vetting of projects where the group of Advisors and Deputy Directors can review proposals that have come in and provide feedback. Many see this step as the primary source for due diligence on the proposals. It provides an opportunity to discuss the merits of projects and their eligibility for funding. Comments can then be fed back to the firms for clarification or revisions before formal submissions of the applications.
The evaluation has identified some areas of concern, however, that are making the PRC less effective than it could be. First, as mentioned elsewhere, INC staff often have different perspectives on the INC Program, its objectives and areas such as eligibility. This leads to inconsistencies in how the proposals are assessed and viewed. The extreme case is seen with PPPs were some staff do not even believe they are appropriate to be funded. There are also differences in interpretation of guidelines for which the Program’s Manual of Policy and Operations does not provide clarification. This means that discussions can focus on other areas besides the merits of a project and its actual eligibility.
Second, the workload is divided unevenly among staff, creating risks in terms of each Advisor’s ability to perform due diligence when reviewing an application for PRC. Sometimes the timelines for review are very short, not allowing the Advisor to completely review the project documents. In a few cases, the workload is so heavy for some staff that they do not have time to review the entire application before the PRC.
Third, the style in which the meetings are conducted does not always encourage discussion and debate. The decision to move an application forward is centralized with the Deputy Directors. The Advisors simply provide their comments. It often is not clear to staff how this final decision is made and on what basis. What makes a proposal get rejected in one case but in a similar case with the same concerns being expressed by staff, the project moves forward? The lack of transparency in the decision making to move forward the application causes further confusion about how to assess applications. While records are kept of meetings, they are not detailed. In addition, few applications are actually rejected at this stage, giving the sense that the need for disbursements is driving the decision making. Most applications advance regardless of concerns expressed by PRC members.
The consultation process is an important part of the review since this provides feedback from specialists, the Canadian missions abroad, Regional Offices, INC’s financial advisor and other stakeholders such as EDC. These groups are asked their opinions on the project and whether they support it, conditionally support or not support the project. Given the lack of commercial and geographic expertise of the INC staff, this is an important element in the review to get informed opinions on the content of the projects.
The implementation here also faces a number of problems. First, by the time the project reaches the consultation stage, the amount of time invested by the Advisors and companies provides a disincentive for staff to walk away from the projects. As a consequence, few projects have been rejected as a result of the consultation process, even when objections have been raised by the reviewers.
This in itself would not be a problem if it were not for how the consultations are handled sometimes. There have been instances where individuals who are reviewing the projects have indicated they do not support the project and provided reasons. The Program has then gone back to them to ask them to change their ―non-support‖ to a ―conditional support‖. The respondents have complied along with providing conditions but have never received any feedback on whether these conditions are being met. In some cases, after the project has started in the country, it becomes clear that the firm has not taken these factors into account. This means that there is a sense by some reviewers that the consultations are not always taken seriously but are simply a formality.
Second, the detailed financial assessments of firms are done at this stage, not upfront in the process. The methodology for these assessments appears to be strong in terms of some key ratios being examined and the ability of the firms, given these ratios, to be in a position to invest. However, the consultation stage is too late in the process to have an impact on the approval of an application. While the $2 million revenue threshold is verified at the beginning of the process, these financial assessments are treated as input into the consultations, not go/no go criteria as they are portrayed in the Applicant Guide.
In addition, there is also pressure here to give conditional approvals to firms that have marginal or unacceptable financial ratios. Some INC staff were not even sure why these financial assessments were being undertaken if the firm had $2 million revenue. This means that the financial soundness criteria are not being adequately integrated into the decision making on the applications. This is critical, however, if the objective is to have a higher proportion of those firms funded moving to the investment stage.
INCPAC serves as a high-level approval board that allows the department to have a final review of the proposals before they are approved. The INCPAC is meant to identify issues that must be resolved before a proposal is approved. The members believe it is a good opportunity to do a final review of the projects and provide an additional level of due diligence.
A few issues impair the member’s ability to completely fulfill this role. First, the INCPAC members assume that extensive due diligence on the quality of the project has been done before the project gets to INCPAC. This is true to a certain extent, but as described above, the focus of the review is more on the process around the application not the content of the proposals.
Second, each application is allocated a very short period of time at the meeting, with multiple applications coming forward at each meeting. This means that members tend to only review and comment on those proposals within their area of expertise or geographic area. Heavy reliance is placed on feedback from the Posts during the consultation stage to flag issues. Few proposals are rejected at this stage. The evaluation team was only able to identify one instance of a proposal being turned back from INCPAC for revisions before approval. None have been rejected.
The lack of a single client database and a comprehensive results framework is hampering the Program’s ability to track its results.
A database was in existence at CIDA that allowed the CIDA INC staff to track information on companies and projects. The database was comprehensive and consolidated a wide range of information on client firms. It was possible to quickly see things such as how much funding a firm had received previously, number of proposals and their results to date. Yearly calls were made to firms to find out their progress after the project had been completed. This information was also able to be entered into the system. The database allowed CIDA to see the lifecycle of the investments, including factors such as how many jobs were created and the investments actually made.
Unfortunately, the client database developed at CIDA could not be migrated or linked to DFAIT. This meant that DFAIT needed to develop its own system, compatible with the DFAIT information technology (IT) infrastructure. This has been a slow process and as a consequence the Program must rely on individual spreadsheets that various Program Advisors, the Deputy Director and the CAU have developed along with the on-line system.
As a consequence, the Program faces difficulty in easily accessing information on a consistent basis in terms of demand, approval times and progress of recipients. Advisors cannot easily check on the range of projects proposed by individual firms. This is an issue since almost 20% of the companies have multiple investment applications. The Advisors also cannot access information easily on the previous performance of a recipient, making effective decision more difficult.
This lack of information also extends to the tracking of results. The current approach of collecting results is through a three-year final results report. Funding is provided to firms to fill in an online report that tracks key indicators such as jobs created. None of these reports have been completed to date since no projects have reached the three year trigger point. Without other methods of follow-up, however, these reports will not provide timely information needed to inform decisions about the management of the Program. No lessons or trends will be able to be seen for several more years, meaning decisions are made based on perceptions not evidence. Other methods are needed to be able to assess the projects funded and their potential for achieving the Program results on an ongoing basis.
The Program’s results framework and method for tracking results also need to be revised. The original results framework is currently being reassessed to better reflect the Program and its potential results.
5.2 Demonstration of Efficiency and Economy
The Program has been making substantial gains on meeting the 40 business day service standard.
The setting of a target for processing times for applications was widely perceived by the private sector as being a positive move as part of the changes going from CIDA to DFAIT. The commitment to reviewing and deciding on projects within 40 business days was seen to be far better than the lengthy times often required under CIDA INC.
The 40 day period covers the time from when a firm formally submits a proposal (after the Peer Review Committee has been completed and the application adjusted as needed) to the date of approval or rejection of the project. At the beginning of the Program at DFAIT, the staff faced difficulties in meeting the benchmark because Ministerial approval was required for projects. This meant approval times climbed substantially, reaching 178 days by the end of 2010. With the Director now signing off on the approvals, the Program was meeting the service standard by the end of 2011. The average approval period at that point had dropped to 32.4 days.
This streamlining of the portion of the process is very positive in terms of progress and meets the targets set out in the original approval documents for INC. What it masks, however, is the total length of time required before firms are able to begin to access the funding.
Three aspects of the process are not covered in this service standard. The first is the time required from initial contact with INC by a firm to the time of the formal submission after PRC. The interviews revealed that this time can be quite extensive, spanning months. During this time the Program Advisors are working with the firm to develop a proposal that can proceed to PRC and then advising the firm on changes that might be required.
Two other steps are ones over which INC has limited control. After the approval by the Director, the firm is not immediately contacted by INC. Communications of the approval is done through the MINT’s office. This step can take from a few days to several weeks. After this, the Contribution Agreements then need to be developed and this is done by the CAU not the INC Program. Sometimes there is a backlog at CAU which may mean a substantial delay in getting the CA to the firm as well.
When this whole process is added together, the overall time from when firms approach INC to when they might have a signed CA is substantial. From the firms’ perspectives this overall timing is what they are interested in and the negative comments about the length of the approvals reflect this.
The administrative costs of delivering the Program are high, at approximately 39% of the current level of disbursements in FY 2011-12.
The complexity of the application process means that each Program Advisor must spend a lot of time with companies providing advice on how to fill in the forms. This is time consuming for relatively small amounts of each project (usually $60,000). The process is further compounded by the need for companies to reapply for each phase of funding, making the work for Advisors and firms more extensive.
It is unclear how the current staff could actually deliver the full $20 million portfolio under the current conditions and processing approaches. To reach a $20 million disbursement level would require over 330 viability studies disbursed per year—more applications than have been received to date.
At the current levels, however, the administrative costs within the Program for FY 2011/12 were 39% of the funding disbursed to firms (approximately $3.78 million).Footnote 26 This is far outside the norm for program delivery—which usually is below 20%.
One of the weakest areas of the INC Program is seen in the area of communications and outreach. Broader outreach efforts to outside stakeholders have been limited to date.
The most consistent observation across both the interviews and questionnaires was that the Program had not been well promoted and limited outreach to outside partner was undertaken. The reasons for this are complex.
At the time of the transition, substantial marketing should have been done to advertise the move and the new conditions and approaches of DFAIT’s INC Program. Little marketing was done in fact during this period due to the uncertainty created by the bottlenecks in the approval process when Ministerial approval was required. For ten months, no approvals were made. This caused uncertainty with the staff in terms of whether the Program would continue. In addition, the INC Program was not allowed promote the Program during this time. The delays in approvals and silence from the INC Program meant that many firms and associations thought that INC processes had become even more complicated at DFAIT since no approvals were forthcoming. In addition, it was mentioned in interviews and by the Canadian missions that the Ministerial approval gave the impression that the decisions were political, not based on the merits of the projects being proposed.
The limited outreach since the transfer had a number of unintended consequences which exacerbated the low demand for the Program. Business associations contacted during the evaluation consistently said they had limited or no contact with INC—even ones that had previous strong relations with CIDA INC. Even attempts to maintain contact with INC were unsuccessful. The lack of on-going outreach by INC to the associations after the transfer meant that they no longer understood the Program nor were they promoting it with their memberships.
Consultants became the primary sources of new INC applicants. These firms know the INC Program and were bringing clients to INC. The concentration of firms from Quebec in both the applications and approvals reflects this. Firms specialized in INC projects, bringing firms to the Program and then undertaking the work such as the feasibility studies.
There was also limited information available on the Program, and the material that was around lacked clarity. This meant that there were many misinterpretations of the Program and its criteria. The presentations that were done by INC staff were not consistent—making the messages garbled.
Since the approvals have been moved to the Director level in 2011, new attempts have been made to better market the Program across the country. Representation is now being made with key associations and at meetings across the country. The Regional Offices began to organize conferences and seminars around INC. A direct mail campaign was also undertaken. Approximately 88% of the Posts responding to the evaluation questionnaire indicated that they were now referring firms to the Program.
These efforts appeared to have been paying off in terms of increasing the overall participation by firms outside of Quebec. During the first quarter of 2012, 36% of the submitted applications were from Ontario firms and 17% from Alberta, a substantial increase in the proportion from the previous quarter that had 13% and 8% respectively. These 2012 figures are more in line with the overall representation of business clients handled by the TCS.
6.0 Conclusions and Recommendation
The rationale for the INC Program remains sound. A wide range of opportunities continue to exist for Canadian firms willing to invest in emerging markets. A need for support among Canadian firms exploring investment opportunities in emerging markets continues to exist. Other countries have a variety of tools to support their firms in making investments abroad, which places Canadians at a disadvantage. The increasing complexity of markets now demands a careful approach that examines a wide range of issues. SMEs, in particular, increasingly must pursue global opportunities in order to aid expansion and growth of their businesses.
The evaluation confirmed that results are emerging from the support to date. For those accessing the INC support, the funding is providing value added to the investment activities of recipient firms. Productive sector firms feel that they have decreased their risk and improved the viability of the potential investment as a result of their participation in INC. They have also begun to produce results such as concrete investments even within the short period of time since receiving the funding. The Canadian missions abroad also see value in the funding provided in terms of increasing a firm’s understanding of risks and opportunities as well as increasing the viability of an investment.
Firms with existing investments have been able to strengthen the skills of their labour force, establish more reliable supply chains and develop methods to better engage with the community. The Professional Services firms have been able to leverage the training funds for more contracts and maintain their presence in the partner country. These kinds of results show the potential of the Program in terms of its value added.
Despite its perceived value, INC continues to face low demand, disbursing only a quarter of the available funds. This is due to a range of issues including the inflexibility of the Terms and Conditions, lengthy approval processes and low levels of outreach. Many of the categories of support are not well aligned with the needs of the firms. The complex approval processes are a deterrent to companies which are applying for only limited funding. For a wide range of reasons including factors beyond the control of the Program, INC has not been well promoted to potential partners within DFAIT and the private sector. There has even been limited outreach by INC to private sector organizations since its transfer from CIDA.
The limited demand for INC and the need for more flexible programming is not a unique issue. A comparative study was undertaken of similar programs offered by other countries to see if any lessons emerge. What is common across the experience with other countries is that the programs realized that the nature of engagement by the private sector in emerging markets was evolving. While having clear parameters, most programs now have greater flexibility in their funding that allows companies to structure tailor made programs and packages to achieve their commercial and developmental objectives. They have also become clearer about how they are assessing the proposals from firms and the expected results. This need to be more demand driven and clear on the process are also lessons that have been seen from the INC evaluation.
The complexity of the application process means that Advisors focus primarily on the completion of the application, not on the substantive quality of the proposal. Many INC Advisors believe their role is to get an application through the approval process, not assess its prospects for success or its logic. In fact, many staff do not have the background and experience with firms to understand the investments being proposed. Those that want to do more extensive assessments face obstacles.
The governance structure while theoretically sound has not operated as transparently as it could. The desire by the Program to increase disbursement levels has resulted in pressure to approve projects that may not meet the intentions of the Program. This has meant that some of the criteria originally established for the Program such as financial soundness of applicants have not been adequately included in the decision making and decisions have not always been made on a consistent and transparent basis.
INC lacks performance measurement and information management tools that would allow the Program to track its performance on an ongoing basis. As a result, it has been difficult for staff to understand their portfolio of firms and the other types of funding the firms might be getting, along with their performance. The Program cannot assess its performance in terms of the volume and type of applications received and approved or the results achieved to date. This means that opportunities for improvement cannot be identified based on the experience to date, except anecdotally.
INC is facing administrative costs totaling 39% of its current level of disbursement. This is partly due to the complexity of the application process and the time needed to counsel firms in the submission and revision of applications. It is unclear that the time spent advising firms is contributing to the quality, viability and implementation of projects.
The suspension of the Program has now exacerbated many of these issues, making it more difficult to make adjustments in the short term. The pipeline of firms waiting for approval has now stalled, with those clients unlikely to wait around to see if funding flows again. The reputation of the Program in terms of its slowness and complexity will be enhanced.
That DFAIT not restart the INC Program in its current form but review with the private sector either a restructuring of the Program or use of the ODA funds for other purposes to support Canadian businesses.
With the suspension of INC, a simple restart of the Program will likely not achieve positive short term results. Without the suspension of the Program, gradual changes could have been made to the Program to make it more effective. These changes could have allowed an evolution of the Program to better suit the needs of SMEs over a relatively short period of time.
This is no longer feasible since the momentum on INC has been completely stalled with the suspension and its reputation undermined. Restarting the Program and then making changes will cause even more confusion about the objectives and approaches of INC. From the interviews, it will even be difficult to entice firms that were waiting for approval back into the system. The end result would be continued low demand in the short term given the restarting process and lead times for approvals.
Discussions with the private sector could assist in determining where the needs currently are for support and whether even a revised INC could support those needs. The interviews indicated that the need for an INC type Program was strong. The problem was that the current approaches and processes were not totally meeting the needs of firms.
If a rethinking of INC is undertaken, four things would need to happen.
- The Program would need to be restructured—not simply realigned. A rethinking of categories, funding levels and target groups would be needed to see where the greater opportunities exist for supporting firms and which would produce the greater results. This would also likely include having separate and tailored categories of funding for different groups.
- The application and approval processes would have to be substantially rethought in order to streamline the effort required and focus on the critical areas that require assessment for sound decision making. This would likely mean having a variety of applications for different clients and funding mechanisms—not the one size fits all approach used now. The experience of other countries shows ways to streamlining this process and focus on critical areas that are needed for sound decision making. Again, a simple reworking of the existing processes and on-line application would be lengthy and result in firms believing that little had changed.
- The criteria for selection and the objectives of the Program would need to be more clearly thought through and then conveyed to both staff and firms. It should be clear how proposals and firms will be evaluated and what elements are appropriate for funding.
- Consideration would need to be given to staffing. Having the right skill sets to ensure that the commercial objectives of any program are fulfilled is critical including the ability to judge the quality of projects and their prospects for moving forward. The objective is not to simply fund ideas by firms but to assess which have potential for implementation and results for the firm, Canada and the emerging markets. This is difficult and requires specific skills that many DFAIT staff would not have.
Private sector organizations can be a strong vehicle for not only promoting the Program but identifying adjustments that may be needed after start-up. If they are engaged in the redesign, this should help to gain their buy-in and support for the re-launching. On-going dialogue will assist in identifying areas of the program that may be working and others that may not.
7.0 Management Response and Action Plan
That DFAIT not restart the INC Program in its current form but review with the private sector either a restructuring of the Program or use of the ODA funds for other purposes to support Canadian businesses.
Management Response & Action Plan: Agree with the first part of the Recommendation. With respect to the second part of the Recommendation, Management notes that the objective of Canadian Official Development Assistance is to support international development. The kind of investment support most attractive to the business community may not always qualify as Official Development Assistance. In addition, the management of Canada's International Assistance Envelope requires that, as programs conclude, funds are returned to the envelope pending a Cabinet allocation decision. Against this backdrop, the Government is committed to finding projects that both support international development and contribute to the growth of Canada's private sector.
On May 18, 2012, the Minister of International Trade requested a Fundamental Review of the Program. The final decision on the future of the program will be made following receipt of the Minister’s views on the findings of the Fundamental Review.
Responsibility Centre: Investment Cooperation Program Division (BTC)
Time Frame: The time frame for action will be provided following the Minister’s decision on the future of the Program.
Management Response & Action Plan: INC-funded investment projects are multi-year and DFAIT has a legal obligation to fulfill the terms and conditions of the existing funding agreements, a number of which will not terminate until fiscal year 2015-16. INC will continue to comply with its contractual obligations.
Responsibility Centre: Investment Cooperation Program Division (BTC)
Time Frame: Current contractual obligations are expected to be fulfilled by March 31, 2016.
Annex A Comparative Analysis
1.0 Overview of Current ODA Programs
Five years ago, a wide range of programs similar to the then CIDA INC were being pursued by other countries. These programs focused on linking their domestic firms to companies in emerging markets and were developed as a method to engage their domestic private sector in sustainable ventures that would contribute to economic growth and development. Among the most important programs were: Danida’s Business to Business (B2B) program; Netherlands’ Programme for Cooperation with Emerging Markets (PSOM); Germany’s Public Private Partnership (PPP) program; and Sweden’s Company Twinning program.
Most of these programs provided support in areas similar to CIDA INC. The first category of support was assistance in early explorations of investment opportunities including viability studies or pilot initiatives. The second was supporting the implementation of investments with emerging market partners.Footnote 27
Since that time, the programming has begun to shift based on the results emerging from the past programs and increasing knowledge on how to engage the private sector in development activities. As shown on the following graphic, all of the countries have changed the nature of their programming in recent years including the extent to which the programs are tied to domestic companies.
Three models have now emerged.
- Domestic firm to foreign firm linkages – These are like the INC Program and focus primarily on building the commercial interests between private sector companies. Only two programs continue to take the more traditional domestic company to foreign company linkage approach: DFAIT INC; and Swedpartnership. Both of these programs have been moved out of their respective development agencies (CIDA and Swedish International Development Agency) into other organizations that deal more closely with private sector companies. This reflects their continuing commercial linkage focus.
- Hybrid models with some linkage to domestic tying – Here the programs have maintained some form of tying to domestic groups but are now also allowing a variety of partners, both domestically and in the recipient country. The programs by Danida and the Netherlands fall into this category.
- Development partnerships – These programs are the fastest growing area and do not tie the funding to domestic firms. Instead, the programs solicit a broad base of proposals from the private sector (including domestic groups) around specific development issues that are a priority for the agency.
Domestic firm to foreign firm linkages
In the case of Sweden, the Swedpartnership was placed within Swedfund which is a development finance institute that provides risk capital, expertise and financial support to Swedish companies investing in emerging markets. Swedpartnership provides financial support to Swedish small and medium enterprises (SMEs) to invest in equipment and knowledge transfer (e.g, training) when they are setting up businesses in Africa, Asia and Latin America as well as the non-European Union (EU) countries of Eastern Europe. Funding is not provided by Swedpartnership for feasibility studies, market research or projects focused on export sales only.
The Swedpartnership funds are given initially as loans ranging from CAD$29,000 to CAD$110,000 up to a maximum of 40% of total estimated costs. One-third of this must be for knowledge transfer such as training programs. The loan can be converted to a grant when the project is completed according to the agreed plan.
A number of forms of cooperation are allowed between the Swedish and the local company including subsidiaries, joint ventures and supplier or distributor arrangements. The local partner can be a wholly owned subsidiary as well. The Swedish companies to qualify must be: limited liability; have between 5 and 249 employees; have less than €50 million in annual turnover; and a balance sheet not exceeding €43 million.
Hybrid models with some linkage to domestic tying
Two countries have moved towards a more hybrid model, albeit still linked to their domestic firms. Denmark transformed its B2B program into the Business Partnerships programme in 2011. The new program was developed to respond to two issues. First, Danida had developed a separate program called Innovative Partnerships for Development (IPD) Programme that supported partnerships that advanced strategic Corporate Social Responsibility (CSR) and Socially Responsible Innovation. Danida realized that the companies funded under both schemes were focusing more on CSR issues and the two programs needed to be better integrated. Both IPD and B2B were then folded into the new Business Partnerships program.
Second, Danida realized that the support being given to firms needed to be more flexible in terms of types of activities funded and partnerships in order to meet the needs of companies. In response to this, Danida changed a number of aspects of its approach. It no longer only focuses on linking Danish companies with local companies but allows Danish companies to also link to combinations of the private sector, civil society organizations (CSOs) or other legal entities in the country (e.g. research institutions). The intention in all cases is to establish long term partnerships which can have an impact on the development of the country as well as create value for the Danish companies. These partnerships do not have to be joint ventures. If joint ventures are developed, a minimum of 25% local ownership is required to receive funding.
The categories of support under the Danida program were also opened up to provide greater flexibility to meet the needs of the Danish companies. Funding categories shifted from three phases (contact, pilot and project) to two phases (preparation and implementation). The range of activities that could be funded under each of these phases was expanded to reflect the broader needs of firms. Preparation phase can now include: partner identification; visits; market analyses; risk analysis; business plan development; testing models; and baseline indicators. The implementation phase will vary by partner based on the specific needs of the arrangement but may include: technical assistance and training; base of pyramid ideas; innovative approaches to business economic, social or environmental issues; and environmental improvements.
Funding for the preliminary stages under Danida decreased from CAD$193,000 to CAD$132,000 along with a shift in the percentage of support provided by the program. Funding levels went from 90% across the board to 75% for the preparation stage and 50% for the implementation phase. There was a clear priority placed on results and sustainability with firms having to report on their progress. Danida also placed higher requirements for competencies and financial resources of the participating partners.
The Netherlands shifted its programming starting in 2008. PSOM was providing funding for investment studies, pilots and support once the investments had been made. PSOM started facing more limited demand by Dutch companies for the funding and a rethinking was done on the approach. A new program was launched in 2008 called Private Sector Investment Programme (PSI). This moved to a tender based approach where proposal calls are done twice per year. Two groups of tenders are held. The first is for 48 countries eligible for PSI Regular support. Of those 24 countries are only open to Dutch companies. The other 24, which tend to be the least developed countries, can be either Dutch or companies from other countries. The second group are 10 countries that are fragile states (PSI Plus). PSI Plus is open to all companies (Dutch or otherwise) as well as corporate foundations. All projects are either 30 months or 36 months and have maximum funding of €1.5 million without inclusion of working capital. PSI donates 50% (a few of the fragile states have 60% contribution by the Program). All sectors are allowed but preference is being given this year to food security and availability of water.
Under PSI, the company (either Dutch or international) must be linking with a local private sector partner and be making an investment. The arrangement does not have to be a joint venture, however. A critical factor in accessing funds is additionality—the company does not have the financial means to implement their plans otherwise nor can they obtain funds from a bank to finance the plan. The company must be capable of financing 50% of the project budget and the proposal must be commercially feasible and have a positive effect on the local economy of the country in terms of factors such as employment, new knowledge and technology, and/or improving environmental conditions. The approach is that the PSI is facilitating the entry of the firm in the market with the intention that the project will leads to additional investments and increased turnover after finalization of the PSI funding.
The Netherlands Public Private Partnership (PPP) program also shifted in 2012. PPP complemented the old PSOM but did proposal calls for Netherlands companies to tackle specific development issues such as health agricultural products. In 2012 the program was shifted to allow the involvement of one Netherlands group (government, private sector company or non-governmental organization) along with one from the country where the project is being developed. The tying to a Netherlands company per se was taken out but it is still tied to groups within the Netherlands.
The rest of the programs have shifted towards a development partnership model that was original developed and tested in the United Kingdom (UK) and the United States (US). In the late 1990s, the UK Department for International Development (DFID) started some experiments with Challenge Funds. These Funds were proposals calls aimed at testing new approaches to supporting private sector partnerships that could be commercially beneficial to companies while also having greater development benefits. The approach was to focus on a specific issue and try to generate innovative proposals from the private sector around the world, not necessarily UK firms. The original funds focused on business linkages and financial deepening. DFID has now develop a new series of more specialized Challenge Funds.
In 2001, US Agency for International Development launched its Global Development Alliance intended to mobilize resources from the private sector, public sector and civil society to work together to achieve development results. The funding of the program has been substantially increased in recent years with the funds focusing on innovative public-private partnerships by US and foreign owned companies, including local firms and multinationals. USAID now has a number of specialized initiatives covering areas such as food security and global health.
These two experiments proved successful and have triggered a wide range of other countries and agencies to undertake similar approaches. This includes bilateral groups such as AusAid and multilaterals such as the World Bank and Inter-American Development Bank. Based on lessons from these early programs, the new approaches are now becoming more focused on specific development issues. They have also proven to be most effective with engaging large scale enterprises, including multi-national corporations, not necessarily SMEs since they often involve moving companies from their core business activities to complementary areas of focus.
The shifts in the graph above to these development partnerships show the extent to which countries are embracing these areas for working with the private sector. The move away from tying funds to domestic firms for investments to having proposal calls for specific issues such as health is an attempt to try to mobilize the best ideas from the private sector to tackle development issues.
Germany is one of these countries which has made a more gradual shift in its programming approaches. Having started some of the first support programs in 1999 aimed at collaborating with business on potential investments, Germany reviewed its developPPP.de programming approaches and decided to develop methods to enhance the development impact of the partnership activities and to integrate these more into the mainstream development work being done. It also wanted to mobilize greater resources from the private sector to invest in partner countries.
Under its developPPP.innovation program it began to broaden the focus to include European companies not just German companies. While the Federal Ministry for Economic Cooperation and Development (BMZ) has established a separate division to encourage participation by German SMEs in development partnerships, the program is not tied. Proposals calls were made to obtain innovative ideas for partnership among the private sector.
In 2009 it also moved to competitions focused on specific topics (develop.Topic). The program is open to European companies already doing business (or preparing to do business) with companies in partner countries. The business activities can include investments, joint ventures or trading activities. In addition, they have a program (develop.Alliance) that fosters large scale interventions usually between several companies and operating in a region (at least two countries).
For all these programs, businesses must provide at least 50% of the costs. The public funding may only be provided if the private partner would otherwise not carry out the project (additionality) and the firm must not gain any competitive advantage.
In addition to the Swedpartnership program, Sweden also has a Business for Development (B4D) focusing on promoting innovations in technology and business practices. Priority is being placed on working with large scale companies, although SMEs are also eligible. The funding is not tied to Swedish companies. New forms of collaboration are being developed. Currently, it has four areas it is focusing on:
- PPPs where private and public actors identify a possible solution to a development problem and join forces in order to address it.
- Challenge Funds such as the Innovations Against Poverty and African Enterprise Challenge Fund.
- Drivers of Change supporting organizations that promote areas such as CSR.
- Innovative Finance for mobilizing capital resources in the private sector. A pilot program in the area of health is under development. If successful, it could be applied in other sectors, such as climate adaption.
2.0 Common Features Across the Programs
While the programs now available to support the private sector are more varied than in the past, some common elements can be identified across the initiatives that could provide lessons for DFAIT INC.
All the programs combined commercial and developmental objectives. What distinguishes them is the mix of these two elements and which takes precedence.
Whether they are supporting linkages between domestic and foreign firms or are broader development partnership approaches, all programs combine development and commercial objectives. The development partnership type programs have the clearest articulation of the development objectives and focus on specific areas that the countries want to promote. This could range from food security to water to information technology. The partnerships approach tries to find companies that are willing to pursue commercial opportunities that can contribute to the specific development objectives of the organization. Very specific development priorities are the entry point. This trumps where the firms are coming from in terms of nationality.
The more linkages based approach of groups such as Swedpartnership or Danida focuses on stimulating involvement of the domestic private sector in emerging markets as a way to stimulate job creation and growth. The tying domestically is aimed at ensuring that firms in the country also gain benefits from the funding. Commercial objectives are priority.
In all case, however, the motivation for firms to participate is financial not altruism—they expect and are expected to make a return on their investment through either new business opportunities or increasing the profitability of existing investments.
The balance between developmental and commercial objectives differs among the programs but all expect viable commercial projects. The development partnership approach is more proactive and focuses on finding firms to meet developmental objectives. A linkage approach relies on private sector developing the ideas and the programs judging whether they are likely to produce investment results which will generate jobs and growth.
Programs undertake assessments of the companies’ financial capacity, human resource capacity and commitment to enter the partnerships. This is a prerequisite for eligibility.
The programs have minimum revenue requirements for companies and assess their ability to undertake the investment. The criteria for judging this varies across programs but in all cases are rigorously applied. For example, Danida requires that equity make up at least 15% of the balance sheet. Swedpartnerhsip evaluates the company’s requirements and resources that are planned to complete the project. The Swedish companies need to have adequate financial and human resources to implement the project including having assets and equity that are in line with the size of the investment. They use a measure that the company’s equity should be at least two to three times the size of their stake in the project.
Most programs also assess the human resource capacity of the company to undertake the project. The preference is for in-house staff to be used to ensure that the company is fully engaged, increasing the chances of sustainability of the business arrangement. A number of programs such as Danida’s even have restrictions on the extent to which consultants may be used during the preparation and implementation process of their projects. Danida has strict criteria for consultants’ selection and their role. Companies must take the lead in preparing the application and implementing the project. Danida does not deal directly with consultants on the application or activities. There is also a cap of 30% of the total expenditures that can go for consulting services.
While having clear parameters, most programs have flexibility in their funding that allows companies to structure tailor made programs. Only a few of the groups have specific categories of support that are funded. Others are interested in the business idea and possible results and the firms are expected to present the best methods to achieve those results within the program parameters.
Most countries have complimentary services in other programs to support domestic firms engaging in emerging markets.
Almost all the countries have a financing arm that support firms with various capital funding. For example, Germany’s DEG (Deutsche Investitions- und Entwicklungsgesellschaft mbH) provides German companies with long term financing at market rates for investments in developing and transition countries. It also provides advisory services to the firms in areas such as risk analysis, project development, reviewing business plans and appraising local partners.
Denmark has an Industrialization Fund for Developing Countries (IFU) which promotes investments by offering capital and advice to joint venture enterprises involving Danish businesses. It can take an equity position, loans or guarantees. The focus is on DAC countries with less than US$6,138 per capita. It also has Danida Business Finance which targets key infrastructure sectors by providing concessional loans to countries. It offers interest free or low interest loans in addition to a grant portion. The borrower repays the loan in equal, semi-annual installments over 10 years. If there are sufficient Danish suppliers to fulfill the contract, the bidding will be limited to those Danish companies.
Netherlands has a development finance company, FMO. FMO finances companies, projects and financial institutions from developing and emerging markets. It has a range of products including: equity, loans and guarantees; capital market transactions; mezzanine and other tailormade solutions; long-term and short-term project financing; and access to expertise, networks and partnerships. Its Facility Emerging Markets provides medium and long term loans to companies or joint ventures in emerging markets that are majority owned or controlled by Dutch enterprises. In many cases, no appropriate commercial financing is available for these joint ventures and subsidiaries for the construction or expansion of a production plant or to buy new equipment or terms may be too short. FMO provides long-term finance to a maximum of €10 million with maturity ranging from three to 12 years. The Dutch company must provide certain guarantees to strengthen the financial structure of the local enterprise. FOM-financing is possible in all member countries of the World Bank, with the exception of high income countries and EU-members. FOM will not finance Dutch companies that have entirely or largely transferred to emerging markets. The costs of FOM finance (interest and fees) are in line with market conditions and based on the risk-profile of each individual case.
The US Overseas Private Investment Corporation (OPIC) provides long term support for investments in developing countries and emerging markets through direct loans and loan guarantees. OPIC targets new investments, expansions and modernization of existing plants. The company involved must have at minimum 25% equity by a US firm or citizen. The funding is 2 to 5 years with market rates of interest and fees. Loans range from US$100,000 to US$250 million. They will pay up to 60% of the costs of the investment. They are also targeting small businesses with less than US$400 million, a net worth of less than $100 million and less than 500 employees.
Other types of support are also being given. For example DFID has a Business Innovation Facility that works in 5 countries—Bangladesh, India, Malawi, Nigeria and Zambia. The Facility provides advisory support and facilitation to companies which are developing the private sector. Some services are free and are provided by in-house staff and include assistance with initial assessment of viability of the idea, finding partners, and finding possible areas of support. Other more extensive services such as investment plans and appraisals of value chains are cost shared with the company (50/50) with a total cost of assignments between £50,000 and £100,000. The services are provided by groups such as PriceWaterhouse.
The US Trade and Development Agency (TDA) has a mandate to promote economic growth in developing and middle income countries while helping US businesses to primarily export goods and services but also invest in other countries. One of the areas of support is for the planning of large scale infrastructure projects that will be undertaken by US firms. Feasibility studies are funded that evaluate the infrastructure opportunities. The funding is initiated through the host country partner which then enters an agreement with the US firm. Funds are then paid by USTDA to the firm based on the payment schedule set out in the contract. Where the country partner has identified a specific US firm for sole sourcing, the firm and USTDA cost share the cost of the activity (up to 50%). If a substantial contract is awarded to the firm, the USTDA may require the firm to reimburse part or all of the USTDA funding. The average grant is around US$400,000.
- Date Modified: