Malawi Innovation Challenge Fund (MICF) 2015 report MIC… · Malawi Innovation Challenge Fund (MICF). The initial management contract for the challenge fund in 2014 was considered

Q U A R T E R L Y R E P O R T F O R J U L Y – S E P T E M B E R 2 0 1 5

Malawi Innovation Challenge Fund (MICF)

SUBMITTED TO

The United Nations Development

Programme

S U B M I T T E D B Y

Nathan Associates London Ltd. and

Imani Development International Ltd.

www.nathaninc.com

O C T O B E R 2 0 1 5

i

Contents

SECTION 1. Introduction .................................................................................................................. 1

SECTION 2. MICF operational Activities ......................................................................................... 1

2.1 Discussions With Donor Partners ....................................................................................... 1

2.2 Milestone Verification .......................................................................................................... 2

2.3 The Termination of a MICF Contract................................................................................... 5

2.4 Monitoring of MICF Portfolio Of Projects ............................................................................ 5

2.5 Risk Assessment of MICF Portfolio Of Projects .................................................................. 6

SECTION 3. Outstanding Issues and Lessons Learnt ..................................................................... 2

3.1 Outstanding Issues.............................................................................................................. 2

3.2 Lessons Learnt to Date ....................................................................................................... 2

SECTION 4. Workplan For The Next Quarter .................................................................................. 3

SECTION 5. Conclusions ................................................................................................................. 7

ii

List of Abbreviations

AfDB African Development Bank

DfID UK Department for International Development

FDCF Financial Deepening Challenge Fund

GDP Gross Domestic Product

GOM Government of Malawi

Ha Hectare

INVC Integrating Nutrition into Value Chains

IP Investment Panel

MCCCI Malawi Confederation of Chambers of Commerce and Industry

MICF Malawi Innovation Challenge Fund

M&E Monitoring and evaluation

MITC Malawi Investment and Trade Centre

MOIT Ministry of Industry and Trade

MOST Malawi Oils Seeds Transformation Project

MSME Small and Medium size Enterprises

MWK Malawian Kwacha

NES National Export Strategy

NGOs Non-governmental organisation

PSDP Private Sector Development Project

SETFI Small Enterprise Training and Finance Institute

SWAp Sector Wide Approach

UNDP United Nations Development Programme

USAID United States Agency for International Development

VfM Value for money

1 MICF Quarterly Report July - September 2015

SECTION 1. INTRODUCTION

The United Nations Development Programme (UNDP) has engaged Nathan Associates and Imani Development International to provide fund management services for a challenge fund in Malawi, the Malawi Innovation Challenge Fund (MICF). The initial management contract for the challenge fund in 2014 was considered successful and a second year contract was awarded to Nathan Associates and Imani Development International running between 2

nd January 2015 and 1

st January 2016. Future

reviews on implementation progress will determine the extension of the management contract in subsequent years. The MICF is an important operational tool to the Government of Malawi’s Private Sector Development Project (PSDP), funded by the United Nations Development Programme (UNDP) and the Department for International Development (DFID) that aims to strengthen the private sector’s ability to serve as the engine of economic growth. The goal of the project is to accelerate economic diversification and to increase the opportunities for the poor to benefit from economic growth through higher incomes and better job creation, and through productive partnerships within the private sector, particularly between lead firms and poor producers and entrepreneurs, especially smallholders. The MICF will be the main instrument to stimulate pro-poor market innovations and competitiveness of value chains in the agricultural and manufacturing sectors. This is the quarterly report of the MICF consulting team for the period of July – September 2015. The report highlights progress and issues that have arisen during these three months of implementation.

SECTION 2. MICF OPERATIONAL ACTIVITIES

The following sections highlight the activities of the MICF consultancy team during the reporting quarter. The sections follow the sequential order of activities that have occurred during the past quarter.

2.1 DISCUSSIONS WITH DONOR PARTNERS UNDP is working with other development partners in order to leverage financing for new windows and the Fund Managers have been providing support to this effort. In the month of August, 2015 discussions were held with the following development partners:

International Fund for Agricultural Development (IFAD), US$2.5 Million has been committed for opening of Irrigation Window. The Fund Managers provided their comments on the proposed Project document and a joint UNDP/IFAD meeting is scheduled to take place in November, 2015 to finalise the implementation plan. It is expected that the window is likely to be opened during the first quarter of 2016.

European Union (EU), MICF project director provided a write-up on challenge funds and had

discussions with the EU private sector specialist, in order to further enhance their understanding of the instrument and the programme in general. A consultant hired by EU is set to hold a meeting with fund management team in November, 2015 to get more details which will provide inputs into the Project Concept Note to be submitted for EU member states approval by April, 2016,

KfW Development Bank: UNDP gave a briefing to Fund Managers on prospective funding of

US$3 Million for another window whose details are as yet to be worked out. It is expected that the Fund management team will meet the KfW delegation in November, 2015 to provide more clarity on the instrument and how KfW funds could potentially be leveraged.


DFID, UNDP and fund management team together with the project director held a meeting to provide an update on the project and to agree on funds disbursement for the projects. A new funds disbursement schedule was agreed and Fund Management are working with grantees to process claims so that the current remaining funds held at UNDP will be claimed by companies before end of this year; all claims are to be submitted by 5th December, 2015 in order to ensure settlement by the end of 2015. The following provides the new disbursement plan between UNDP and DFID:

2.2 MILESTONE VERIFICATION Agronomy Technology Limited has been contracted through the MICF to implement a highly innovative project which aims to develop a software package, smallholdr.com that combines a cloud-based server and a custom mobile application that can intelligently gather and deliver information to smartphones in the hands of agribusiness extension workers and ultimately to smallholder farmers themselves. This is a technology that is attempting to track production, provision of technical backstopping, traceability of inputs and produce and finally integrate this together in a single platform for its client. End to end integration of the supply chain has never been attempted before in Africa and this project is at the technology frontier in trying attempt such an approach. A site visit to Malingunde in Lilongwe was undertaken on 6th August 2015 to meet the farmers and extension workers while a visit to the company was made on 5th August 2015 by the MICF team to conduct a physical examination of their first milestone claim. The first milestone involved the company undertaking system developments which comprised integration of 3 modules and development of client side apps (single user platform), putting in place a register of 2500 farmers and collecting legacy data.

Figure 1: Some Farmers and Extension Workers during Milestone Visit

October 2014

£400,000.00

February 2015

£700,000.00

December 2015

£1,278,505.00

July 2016

£852,336.00

October 2016

£1,319,711.00

November 2016

£449,448.00


Extension workers reported that during farmer registration testing exercise, the farmers were very cooperative and are eager to participate in the exercise. Extension workers expressed that training on the use of smart phones of gadgets can be improved for efficient registration by using some lead extension workers, early adaptors of the technology who can help to further train others who are slower in acquainting themselves with the technology. The system developed consists of two main components - an online data management system and customised smartphones (or tablets), a mobile application was developed which is in sync with the online system. The Mobile App called smallholder.com has been developed. The menu of the app entails the following: i) training for farmers; ii) training for extension workers; iii) farmer attendance; and iv) crop information. . The evaluation had concluded that the first milestone had been met and MICF disbursed the first milestone payment, equivalent to US$51,300 in September 2015.

Satemwa Tea Estates Limited has been contracted by MICF to establish a small holder based supply chain for herbs, flowers and fruits to be used for naturally flavoring specialty tea. Satemwa Tea Estates (STE) is a family owned tea and coffee estate located in Thyolo. The estate has been in operation for over 100 years and was incorporated in 1923. The company produces a wide range of Black, Green, Oolong, White and Dark teas. Satemwa is the first Tea Company in Malawi to venture into the low volume- high value artisanal tea market. This venture was mainly to counter the fluctuating world prices of tea which depend on supply and demand that are dictated by other larger growing nations such as Kenya in Africa and India in Asia. The Company ventured into the production of Green, Oolong and White tea as a trial and when this proved to be successful, the product was launched into the retail market in Malawi and abroad.

The company submitted documentary evidence to the MICF team in order to substantiate their claim for Milestone-1. In addition, a site visit to Thyolo was undertaken on 18

th June, 2015 by the MICF

team to undertake a physical examination of the claim. The first milestone requires the company to identify and build capacity of smallholder herbs growers. The means of verification for this Milestone included the following:

1. Setting up an extension service serving smallholder herbs growers 2. Development of administration and logging system using Information Technology system 3. Setting Up Export Markets for Specialty Tea 4. Procurement of Packaging Materials for Specialty Tea

During the site visit, it was observed that the project has set up an agriculture extension program lead by an out grower manager who has been specifically recruited for this purpose. During the visit random farmers were selected from the “List of registered farmers” that was provided by the company and they were interviewed. The company has conducted training programs in the following areas: 1) Smallholder farmer herb growing, 2) Specialty Tea plucking standards for Msuwadzi Small Holder farmers, and 3) Specialty Tea plucking standards for internal STE pluckers. The training for these


three groups was delivered through both theoretical group meetings in classrooms at STE premises and practical field demonstrations. Further support will be provided on harvesting techniques and fertilizer application. As part of its strategy to establish the Export market and to firm up potential demand, key investments have been made towards setting up export markets for speciality tea by setting up an overseas marketing office in Belgium. The company has also provided samples of marketing materials developed and produced for speciality tea. The first milestone had been met and the MICF disbursed the milestone payment, equivalent to US$ 46,260 by the end of August 2015. Sunseed Oil Company Limited was contracted by MICF to locally produce fortified fridge-free margarine and baking fat products. By choosing a new method of production, the project intends to address health concerns that have been raised with the process of production of margarine in recent years which involved hydrogenation of vegetable oils during the production process which produces “Trans fat” which is not a natural fat and hence the body finds it difficult to absorb. This new method of production which does not produce “trans fat” is currently being adopted by Companies across the world. The shelf life of the product will also be longer in this process as compared to the previous method. A site visit to Mchinji was undertaken on 1st July, 2015 to meet the farmers and a visit to the company on 2nd July 2015 by the MICF team to conduct a physical examination of the claim which was followed by various interactions with the management of the company. The second milestone requires the company to train 10,000 Sunflower farmers on sunflower production and provide improved High Oil Content seed to 250 farmers. During the milestone visit, it was observed that farmers who received the training were able to grow the crop as per the expectation of the company but were not adequately prepared to handle the large volume of produce which they harvested and hence increasing the possibility of post-harvest losses. It was noted that farmers were removing seeds from the sunflower head manually after harvesting which is a long time consuming process increasing cost of production due to high labour cost and at the same time decreasing the quality of the seed due to high breakage. The company has taken this into consideration and will be making available low cost threshers imported from India during the season 2015-16. To further strengthen the linkage between the farmers and the company in terms of providing services to farmers, agreements have been made with Dalitso General Suppliers Limited to use their premises as a Technical Support Centre. This will enable the company to track the produce supplied by each farmer and to ensure that they receive the agreed price for their produce. The Technical Centre, once operational will provide targeted technical backstopping to these farmer groups/co-operatives. The second milestone had been met and the MICF disbursed the second milestone payment, equivalent to US$160,000 by the end of September 2015.


2.3 THE TERMINATION OF A MICF CONTRACT The project director held a teleconference with the company directors of Moringa Miracles Limited (MML) in September 2015 to understand the problems involved in implementation of their project. The MICF examined the two aspects of the company’s request for support: i) the request to split milestone 1: establishing partnerships with NGOs and identification of 1,660 farmers in the original contract into two components; and ii) on-going funding efforts. The request to split milestone 1 into two milestones was assessed carefully. Although there was a recognition of the need from a company perspective to split the milestone into two “sub” milestones, this could not be accepted as the conditions set by the MICF Investment Panel for financing the project required that the first milestone demonstrated MML’s financial and managerial capacity to the implement the project to the scale identified in the proposal. Furthermore, by September 2015 they had been unable to secure a major commercial investor into the project. Pearl Capital Partners pulled out of a US$ 1 million equity position whilst bridging finance with National Bank has not been approved. However, with financing less likely to arrive in the immediate future – and not likely before December 2015, this will provide very little time to conclude the original project within the remaining time frame allocated to the first round of the MICF and to the scale that was proposed in the company’s successful proposal to the fund. Thus from the discussions and subsequent email communication it was apparent that the company, at the moment, lacks capacity to execute the project. Hence the MICF terminated its contract with MML in September 2015.

2.4 MONITORING OF MICF PORTFOLIO OF PROJECTS Throughout the quarter, the fund management team continued with its close monitoring of all projects within the MICF portfolio:

Kwithu Kitchen: the team travelled to Mzuzu in August 2015 to have discussions with the company on progress so far. The company faced some delays because it had to seek Mzuzu City approval to commence construction works on the factory. The building plans have since been approved and the company has commenced works. Furthermore, ordering of the processing equipment is underway; Company has received a 30,000 jars export order to Mozambique and was at the time of the meeting facing challenges due to limited processing capacity. However, it will go ahead and pursue the opportunity by trying to negotiate for a staggered delivery The MICF Team was provided with a briefing in September 2015 by the Director and Management of Kwithu Kitchen on progress that the company is making towards the construction of the foundation for the factory and the new solar technology it will install due to the unreliable power supply from ESCOM. The management of the company also provided a briefing on its current marketing plan as well as it procurement strategy for equipment.

Afrisphere: Discussions were held at the company’s premises in Lilongwe in August 2015.

The company has resolved to go for both milestone 2 and 3 together. Both of which are focused on setting up the farmer extension services and building the abattoir. The Directors of the company met with the MICF Project Director in London, in September 2015 and provided him with a briefing on how far the company has progressed in terms of project implementation. An update was also provided on the progress being made on procurement of the abattoir equipment from Turkey, recruitment of Veterinary Doctors from Holland and the condition of the Bonsmara bulls in Malawi that are currently under quarantine.

Dairibord: A teleconference was held in August 2015 with the company with an agenda to

get the company’s commitment to provide resources and to execute the project as per prior


commitment. The company has since written a commitment letter to provide resources and execute the project within the timeframe;

Exagris: Discussions were held at the company’s premises in Lilongwe to check progress on

their milestone claim in August. The MICF Project Director also visited the board of Exagris in London during September 2015 to be appraised of progress towards reaching their milestone. Based on these meetings the company made a commitment to spend on the remaining items under milestone 1 and submit a claim by October, 2015.

Universal Industries Ltd: The MICF Team met with the General Manager- Finance and

General Manger-Operations of the company throughout August and September to review the progress being made on the project implementation. The MICF Team were provided with an update on the progress being made on the fabrication of the Mobile Processing Units and an explanation was provided on the current economic scenario was adversely affecting the performance of the company. It is noted that the company is experiencing financial difficulties and the MICF will be investigating this further with the company and their financiers in the coming months.

2.5 RISK ASSESSMENT OF MICF PORTFOLIO OF PROJECTS Throughout the quarter the MICF team undertook a regular update of the potential risks that the overall portfolio of projects faced. The MICF Risk Tracker is used as a management tool to assess how risks could be managed and to identify those projects that need closer and more detailed supervision. The risks are agreed by the MICF fund management team on a qualitative basis with 1 representing virtually no risk to 5 signifying very high risk / potential to severely impact on achievement of an individual project outcomes and goals. Furthermore risks are categorised according to:

Technical Viability: This is the risk associated with the incorporation of a technology / process that is fundamental to the success of the project.

Financial Viability: This is the risk that the project will not be able to continue profitably due to

concerns over the current business model, or due to a lack of funding, or other financial issues related to the financial institution or the business.

Development Impact: The risk associated with the project falling short of its development

indicators, due to the overall performance of the project to date or due to unforeseen circumstances in the environment in which the project operates.

The following provides a snapshot of the risks for projects within the agricultural window:



In terms of significant and pressing issues faced, the following were highlighted during the quarter:

Exagris: The previous financial difficulties that the company faced has seen an improvement and are making significant progress towards implementation of their first

Kwithu Kitchen: The company has made progress in processing large new orders and

hence risks were reduced by 0.5 from the previous quarter The following provides a snapshot of the risks for projects within the manufacturing window:

In terms of significant and pressing issues faced, the following were highlighted during the quarter:

Universal Industries: There has been a considerable slowdown in the progress made on the project due to financial constraints faced by the company. It has also been reliably informed that the company is unable to borrow from the lending institutions in Malawi due to restrictions placed by the Reserve Bank of Malawi in September 2015. Hence the overall risk has been increased by 1.0 to the highest risk category of 5.0. The project is being monitored on a weekly basis by the fund managers to ensure that any progress is reported and MICF is fully aware of any improvement on the current situation.

Moringa Miracles: The company has not been able to make any significant progress on

Milestone-1 even after 6 months of commencing the project. The MICF contract for the project has been subsequently terminated,


SECTION 3. OUTSTANDING ISSUES AND LESSONS LEARNT

3.1 OUTSTANDING ISSUES There were no real outstanding issues related to the implementation of the MICF during the quarter. The adverse economic conditions in the country continue to hamper the implementation of MICF projects and have resulted in some of the largest companies facing financial difficulties. For some such as Exagris, the ability to access external equity and debt financing has allowed them restart their project and likely to see faster implementation in the months ahead. For others such as Universal Industries that remain focused on the domestic market, the current situation of falling demand, declining exchange rate, and general economic instability has meant severe financial difficulties. These issues are being reviewed closely to examine what help if any could be provided by the MICF to some of these companies.

3.2 LESSONS LEARNT TO DATE The MICF Team continues to engage with companies throughout the quarter. The level of interaction has been significant and has revealed a number of areas where the MICF needs to consider during the implementation of both this round of project and subsequent rounds.

Continued Support to the Milestone Verification Process The verification process continues to highlight the need to provide a much greater deal of support to companies of all sizes across the MICF portfolio in terms of ensuring they had the requisite documentation to verify their claims. Whilst a number have progressed to their second milestones, it is disappointing to note that there remain misunderstandings of the level of detail that the MICF requires – particularly those companies that have very limited understanding of donor processes and requirements. This continues to lead to a number of delays in the milestone verification process.

Understanding Systemic Change The MICF team engaged substantially with DFID financed external evaluators during the quarter as part of a wider process of evaluating the performance of DFID’s private sector portfolio in Malawi. As part of these discussions the issue of systemic change was discussed with the team. Given the diversity of environments in which market system programmes operate, implementers and evaluators often seek flexibility to define a system in ways that are locally appropriate, such as in the case of Malawi. However, what is interesting to note is that there is no agreement about how to define systemic change. Indeed, many publications and donor financed programmes often refer to systemic change without defining it at all. The following table provides some of the three most widely used definitions of systemic change. The first two definitions refer to change within systems in general, while the third refers specifically to change within market systems:


The definitions and descriptions of systemic change share an emphasis on shifts in the underlying structural elements and patterns that characterize the system. While these structural changes may be instrumental to achieving the desired development outcomes for the target beneficiaries, it is important to remember that systemic change is not the final objective. Instead, systemic change is treated as an intermediate outcome that derives its significance from the role that it plays in achieving inclusive economic growth at scale. It is important to note in this context that the challenge fund instrument in itself is not designed to achieve systemic change through its interventions. This has been described as its main ‘Achilles heel’. The best proposals may come from a wide range of different types of innovation, and there is no a priori reason to expect even very successful projects to necessarily trigger systemic change beyond the projects own domain. A challenge fund may have successfully given a kick start to a commercial initiative that would not otherwise have gone ahead in that way, at that time. After challenge fund support ends, the business may grow and develop, may provide incomes earning opportunities to numbers of the poor, and may even be replicated.

SECTION 4. WORKPLAN FOR THE NEXT QUARTER

The work-plan for the next quarter follows the plan set out within the 2014 Annual Report with some adjustments to take into account implementation progress to day. It is also important to note that the speed at which is it is possible to move within the implementation phase will be determined by: i) how quickly the milestones can be achieved by companies; and ii) the macro-economic situation and business enabling environment faced by companies does not deteriorate further.

Source

Definition

Parsons and Hargreaves (2009, n.p.)

“[S]hifts in patterns (similarities and differences) of system relationships, boundaries, focus, timing, events and behaviours over time and space.”

The SEEP Network (Osorio-Cortes and Jenal 2013, p. 7)

“Transformations in the structure or dynamics of a system that leads to impacts on large numbers of people, either in their material conditions or in their behaviour.”

DFID and SDC

“Change in the underlying causes of market system performance – typically in the rules and supporting functions – that can bring about more effective, sustainable and inclusive functioning of the market system”


MICF Work-Plan: October - December 2015

Activity

Coordination

Meetings with DFID

Updating UNDP on progress

Programme Management

Implementation Phase of Projects

Develop Project Level M&E

Monitor Project Risks

Knowledge Manangement System

Grantee Management

Development of Market Analysis Study

Lessons learnt

Draft of Market Analysis Study

Monthly MICF Report

Quarterly MICF Report

Activity

Deliverable

Oct-15

1 2 3 4 5 6 7 8 9 302110 11 12 13 14 15 28 29 31

Implementation Phase

Deliverables

22 23 24 25 26 2716 17 18 19 20


Activity

Coordination

Meetings with DFID







Grantee Management

Development of Market Analysis Study

Lessons learnt

Presentation to Donors

Monthly MICF Report

Final Market Analysis Study

Activity

Deliverable

Nov-15

1 2 3 4 5 6 7 8 9

Deliverables

22 23 24 25 26 2716 17 18 19 20 2110 11 12 28 29 30


13 14 15

MICF Work-Plan: October - December 2015: Continued


MICF Work-Plan: October – December 2015: Continued

Activity

Coordination

Meetings with DFID







Grantee Management

Lessons learnt

Presentations to PSD Steerting Group

Monthly MICF Report

Activity

Deliverable

Dec-15

1 2 3 4 5 6 7 8 9

Deliverables

22 23 24 25 26 2716 17 18 19 20 2110 11 12 28 29 30 31


13 14 15


SECTION 5. CONCLUSIONS

The MICF has during the third quarter has focused primarily on the process of implementing its portfolio of projects. As is to be expected there were some minor teething problems that the MICF consultancy team is trying to rectify, particular with respect to the submission of milestone claims. It is envisaged that as companies become more experienced in implementing these projects, and meeting the more exacting requirements of the MICF, this problems will dissipate. With a challenging marco-economic conditions, the low level of domestic demand, and high cost of finance, many of the companies within the MICF portfolio are cutting back expenditures to core business and this is having a moderating influence on the pace of milestone disbursements. Furthermore, competition in certain markets means margins are becoming thinner, competition for raw material becoming more challenging due to the poor harvests, allowing leaner and smaller types of market players benefit at the expense of larger more established manufacturers. However, despite these challenges a number of firms, particularly within the MICF portfolio remain optimistic about the future and are actively taking steps to manage risks continue the current pace of project implementation.

.

Documents

Malawi Innovation Challenge Fund (MICF) 2015 report MIC… · Malawi Innovation Challenge Fund (MICF). The initial management contract for the challenge fund in 2014 was considered