Financing the Start-Up of WILMA Business Ecosystems in African Countries

Investment Banks for Social Capital

Paul ArmingtonPresident, World Institute for Leadership and Management in Africa

May 2009

WILMA has embarked upon a program to improve living standards in some of Africa’s poorest communities through the formation of businesses structured as joint ventures. These businesses will be partly owned by African Community Based Organizations (CBOs), which will provide the land, the initial planning, the labor, local connections, and services to the local community such as health, education, and micro-finance. Commercial firms from more developed areas will also be part owners, and they will provide much of the expertise, technology, working capital, and long-distance connections needed to launch these joint ventures. To increase efficiency and sustainability, WILMA’s business model clusters small business start-ups to take advantage of technical linkages, supply-demand relationships, and common land-use needs. The result is the Joint Venture Commercial Estate (JVCE), a community center for business and social services that relies on its own profits for sustainability. It is basically an African adaptation of the Northern business model of industrial park.

The JVCE model addresses the problems that stifle the plentiful supply of would-be entrepreneurs and thus the growth of small business in Africa:

Distances to markets and suppliers, poor transport infrastructure, high fuel costs

Poor health, education, and social services near production sites

Lack of local business planning and management capacities

Lack of local ownership and control, and therefore lack of community support

No access to affordable long-term finance

The JVCE model is nested within a socio-economic and financial structure called the WILMA Business Ecosystem. It is described by the following diagram. The left side of the diagram shows the structure of production, representing vertical integration through partnership with a large “nodal” firm (whose strategy may be well described in the work of C.K. Prahalad on finding the now-famous “fortune at the bottom of the pyramid”). The right side shows the structure of support through education for entrepreneurship, business incubation services, and finance that is suitable for start-ups and early-stage “social business.” WILMA adopts Professor Yunus’ definition of social business as any for-profit business whose profits are used for “social” purposes and/or are owned by “social” beneficiaries, such as the CBOs that WILMA helps with its leadership and management services. JVCEs and CECs (see definitions in the diagram’s key) are thus all social businesses.

Heading the financial side of the diagram is a company that we here label an Investment Bank for Social Capital (hereafter also called an “IBSC”). This box holds an unfilled need. This gap in WILMA’s Business Ecosystem presents a challenge for imaginative investment bankers of the

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future who, given present conditions in their industry, may be looking for ways to apply knowledge of capital markets to the financing of social enterprise for development in Africa.

Start-up of a WILMA Business Ecosystem

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WILMA’s concept of an IBSC recalls the ancestor of modern investment banking in developed countries, the merchant bank of the early industrial age. WILMA is seeking to institutionalize this sort of relationship banking within the WILMA Business Ecosystem. WILMA aims to create a network of investment banks for social capital (“IBSCs”) located in countries where she is helping to build the leadership capacities of CBOs for sustainable development. By “sustainable” we mean, in part, not dependent in the long run on the use of foreign-owned savings.

What should be the principles of this 21st-century merchant bank? Here is a list:

1. The IBSC should itself be a social business, registered in an African country and owned and controlled by its residents.

2. The entities that the IBSC borrows from and sells shares to should be qualified social entities under national law, such as the central bank, government, social funds (pension, retirement, social security), development finance institutions, program-related investments of non-profit organizations, and private equity investors that wish to take responsibility for the public weal.

3. The companies that the IBSC lends to or buys the shares of should be financial intermediaries that are approved by a national authority as qualified lenders to micro, small and medium social enterprises.

4. The direct use of foreign-owned savings should be minimized in favor of mobilizing domestic savings, so that domestic residents become the owners and creditors of indigenous social business.

5. Transactions and obligations should be in local currency, such that the circular flow of domestic savings and investment (that further feeds the income and savings stream) encounters no foreign currency risk or currency conversion fees.

6. The IBSC borrows through long term (e.g., 15 year) instruments, paying domestic private savers real rates of interest reflecting the targeted growth of the country’s output or real income.

7. The IBSC lends to qualified intermediaries through similar long-term instruments, earning an interest rate spread sufficient to cover its costs including reserve-building.

8. The IBSC leverages its borrowing from the government with offerings to private social investors, with results in jobs and incomes for previously marginalized areas of the economy that justify the continuing support of the government.

9. Over time the IBSC creates a growing body of national shareholders in indigenous social business, hence building “the entrepreneurial economy” and a rising “middle class” of capital owners.

WILMA Social Enterprise Incubation Centers (SEICs, as depicted in the diagram) need their national IBSC to be a one-stop shop for their financing requirements. SEICs demand customized packages of finance including share capital as well as long-term bond finance. IBSCs are thus brokers for marketing the equity of SEICs, an activity that complements their management of fixed-income securities. IBSCs also serve as connectors of SEICs to providers of recoverable grants for capacity building and start-up operating capital (3-5 year zero-interest loans with flexible repayment dates). IBSCs invest in SEICs and serve on their boards, a relationship that should be a source of continuing strength for the governance of SEICs.

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Seen from a legal standpoint, an IBSC is a Partnership registered in any given African country. The Partners constitute an affinity group of individuals who are predominantly natives of this country and have deep knowledge of it. They may not all be permanent residents. Some may be students graduating from foreign universities and returning home, rather than joining the country’s permanent diaspora. Some may be non-natives with school connections to returning natives. WILMA, working through its Local Network Partner for this country, offers to be a long-term advisor to the Partnership and stands ready to be a Limited Partner having duties specified in its operating agreement.

For the start-up of an IBSC, special foreign advisors may play key roles. They are paid competitive fees for their services but do not have management control. The national government or its central bank regulates the IBSC, setting rules and guidelines for the use of national pension and retirement funds and other sources of domestically-owned savings, but national authorities do not own or manage the business. While foreign social investors may help to leverage domestic savings for the building of the WILMA Business Ecosystem in the country, they do not own the IBSC or control its management. Therefore, the viability of the IBSC depends crucially on the quality of the leadership and management that its Partners provide.

Leadership training for an IBSC

WILMA proposes to help build IBSCs in Africa as part of its education program called SEED (Social Enterprise and Entrepreneurship for Development).1 WILMA personnel offer to lead a series of on-line forums for groups of Young Professionals (YPs) who intend to become founding partners of IBSCs in their native countries. This career opportunity is being presented by WILMA to students at selected universities in Africa and in the USA who expect to receive their graduate degrees (MBAs or comparable credentials for business leadership) within one academic year of the start of the forum series. WILMA advertises this opportunity through universities’ career advisory services and pertinent student clubs, which may then help WILMA to select and recruit the YP groups and to advise the online forums.

Each YP group averaging about 5 students has its own forum, as well as access to the forums of other groups that are meeting concurrently.2 WILMA encourages the interest of the selected universities in this extracurricular study, and pro bono participation in the forums by particular faculty members may be invited by the students. Each YP group may include students from more than one university in the native country, and it may also include natives or non-natives of this country graduating from a U.S. university. Such diversity of educational backgrounds can be a source of strength for the leadership team and ultimately for the Partnership.

The series of forums is expected to treat the following topics:1. Concepts: Financing the Start-up of the WILMA Business Ecosystem in [Country] 2. Business Strategy: The [Country] Investment Bank for Social Capital

1 See www.wilma.us/toolkit/WILMA-SEED.ppt .2 The online service will be the WILMA Community interactive web site, presently under construction by Agency Me (www.agencyme.com ).

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3. Sources of Funds: A Special Purpose Vehicle for Bond Finance in [Country]4. Equity and Related Programs of a One-Stop Shop for SME Finance in [Country]5. Users of Funds: Survey of Initial and Longer-Term Clients, Projects, and Needs6. The Business Plan and Human Resources: Principles, Practices, and Lessons 7. A Preliminary Business Plan of the [Country] Investment Bank for Social Capital

The chair of each forum will be the president of WILMA or one of WILMA’s Global Network Partners, assisted by invited senior commentators who bring special expertise on the topics being discussed. Invited senior commentators receive an honorarium.

The tangible output achieved by each forum, serving as a milestone of the group’s progress, will be a paper jointly produced by the YP team. Each forum will last up to one month, and the paper will be due by the end of the month. The activity of each forum will proceed in real time at the team’s preferred pace and will end when they are satisfied with the output. WILMA anticipates that the first forum will be in October 2009 and will end in April 2010.

The end product of the forum series is a preliminary business plan for an IBSC in the students’ native country. This plan is produced from a prototypical plan by adapting it to national rules, needs, and resources. While this plan deals centrally with financing functions, it includes a vision of the uses of finance for local development in the native country. Thus, the IBSC business plan links with the planning of at least one local Social Enterprise Incubation Center (SEIC) and at least one Joint Venture Commercial Estate (JVCE). This planning for the uses of funds goes on concurrently under the WILMA SEED program.3

As they complete their studies, the graduates in each YP group decide whether they will continue in this WILMA program or not. Those who wish to continue become WILMA interns for one year. This period will be June 2010-May 2011 for those beginning the course this October. During this internship, the YP group works in the native country to do the detailed research required to complete the business plan for the IBSC, bringing it to investment grade, while building relationships of trust with future stakeholders: advisors, regulators, suppliers and demanders of its funds in the native country. Ideally, each group will stay for a few weeks or months with a number of hosting institutions in the country so as to learn their differing perspectives on the task at hand. Each group will have a unique experience.

Financing the course

WILMA expects to charge a fee of $5,000 per student for this course of training. The willingness and capacity to pay and/or take on debt to invest in the future is viewed as an important qualification for entry to this career. Students entering the course may borrow from a WILMA Student Loan Fund set up to help finance this course. Applicants should ensure that their university (or they themselves) will absorb local overhead costs of the forums, including use of computers, internet fees, and space.

3 WILMA’s present work in Egypt provides illustrations of plans for SEICs and JVCEs, at these links: www.wilma.us/toolkit/Sekem-SEIC.pdf and www.wilma.us/toolkit/Assiut-JVCE.pdf .

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WILMA assigns each YP group a Sponsoring Agent in the native country. The Sponsoring Agent may be the country’s central bank (which is typically the overseer of financial sector development) or other government agency having a regulatory or social interest in lending to SMEs; or it may be a major private lender, such as a pension fund; or it may be the nodal firm of the WILMA Business Ecosystem in that country. WILMA engages the Sponsoring Agent for the IBSC start-up in a country before committing itself to lead the respective forum series. The Sponsoring Agent initially contributes $10,000 to WILMA Inc. (a private foundation in Washington D.C.) to cover WILMA’s costs of selecting the YP group and of preparing resources and content for its forum series. After the YP group has formed and has committed to pay its fee for the course ($25,000 for an average group of 5 students), the Sponsoring Agent contributes $100,000 toward the costs of the training itself ($25,000 of which is budgeted as collateral for student loans) and toward the costs of WILMA’s services to the YP group during the following year of its internship. WILMA expects to support each group’s internship with services of planning, coordination, advocacy, monitoring, evaluation, and reporting.

WILMA does not expect to pay stipends to its YP interns, as they are expected to earn well from the company that they are creating through their “sweat equity.” Interns are expected to finance their travel costs through their universities’ funds and/or the WILMA Student Loan Fund. Host organizations in the native country will cover their costs of living locally. Launching the IBSC

The result of a YP group’s internship year is a team ready to register a Partnership, with an actionable plan for fundraising that, when launched, provides start-up capital for the Partnership. Then over time the Partnership manages funds to generate income to cover operating costs and build reserves.

The IBSC initially finances established intermediaries that are qualified by the central bank or other public authority to lend to SMEs, including micro-finance organizations that are funded by foreign donors and social investors. Meanwhile, WILMA works with ground-level partners to start up the downstream parts of the WILMA Business Ecosystem in the country: SEICs and their CECs and JVCEs and their CBOs, as depicted in the diagram above. The new opportunity for domestic finance offered by the national IBSC energizes the work of building the rest of the WILMA Business Ecosystem, turning the visions of local leaders and entrepreneurs into real opportunities. Economists may call this process “import substitution for finance”, protecting the “infant industry” of social capital. This is WILMA’s view of the high road to genuine independence for any place that has become too dependent on outside aid.

To begin this development strategy in a given country, WILMA needs to have a Local Network Partner to take the lead responsibility of WILMA’s program for this country. WILMA in Washington works through this Local Network Partner to find a Sponsoring Agent in this country. These partners prepare a budget to guide the spending of the Sponsoring Agent’s initial contribution ($10,000 of seed money for preparing the education course). They agree on a Letter of Intent that outlines the “rules of the game,” as summarized in the present document, and make a plan to engage the interest of selected universities in the given country and in the USA.

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The existence of enough interest by qualified students then drives the process from the start of the forum series to the launch of the IBSC. If this process makes good progress during June-September, WILMA will start the first set of forums in October 2009.

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