3.3 SPECIFIC REVIEW OF ASPECTS OF MANAGEMENT Eligibility and ranking criteria 3.3.1 The key documents used to guide the project selection and approval process have been reviewed, with a view to strengthening them and enhancing their utility in achieving the project purpose. In general our recommendations centre on giving more weight to enhanced competition in the microfinance market, broadening the notion of ‘innovation’ and relatively less emphasis on notions of projected replicability and financial sustainability. These recommendations are found in Annex D. Marketing strategy 3.3.2 The marketing of the FDCF by the fund managers has evolved in a steep learning curve. The initial strategy, especially in East Africa, involved newspaper ads and launch events based on targeted but extensive lists of invitees. These ‘hot lists’, as they were referred to, were based on lists provided by Enterplan, DFID, and reviewed and refined by Deloitte & Touche. These lists identified the organisations and companies the fund wanted to engage and encourage participation. The first round yielded around 500 concept notes of which the bulk did not meet the requirements. For subsequent rounds both the marketing and eligibility requirements were narrowed substantially. Key changes included: (1) requiring three years of audited accounts to exclude start-ups, and (2) allowing NGOs to apply only when partnered with a private sector entity. The information distribution process was then streamlined with the circulation of information leaflets and the concept note form. Finally as of the third round there was no more public advertising. 3.3.3 Some concentration of marketing was warranted. However, the narrow focus of present marketing efforts may exclude highly innovative financial service providers outside the mainstream formal financial sector. In the cases of India and Pakistan, not enough attention has been placed on the use of industry associations, relevant government agencies and other key informants to both publicise the programme and encourage applications from suitable bidders. In all geographic areas the domain knowledge of the fund managers has been queried, especially their ability to ‘drill-down’ and encourage applicants from the less obvious formal financial sector partners. Contribution of Assessment panels 3.3.4 The two-tiered assessment panel structure in theory was supposed to offer the following benefits: the regional panel, would contribute greater local context knowledge as well as direct familiarity with bidders; the international panel, whose members possess a range of high-level financial sector experience, would lend greater substantive experience, provide networking possibilities, and act as a fiscal watchdog. Not all of these assumed benefits have been borne out in practice. The division between the two levels of the assessment panels has contributed substantially to longer decision-making times, and played a key role in the low approval rate (54 per cent) of encouraged applications being ultimately funded. 3.3.5 The multiple assessment panel arrangement and the length of the management chain have not created an efficient or transparent image for FDCF. Bidders feel the decision-making process takes too long and they are often unaware why encouraged applications are not successful i.e. there appears to be a lack of constructive feedback. In addition, some regional panel members complained that they could not understand why certain applications were rejected at international level. An analysis of projects recommended by the regional panel but rejected by the international panel highlight that these applications were recommended with substantial caveats by the regional panel. The international panel may have been justified in rejecting them – or the regional panel might have been remiss in not advising the applicants as to reservations, and how modifications to the proposals could increase likelihood of success at international panel level. In summary, there was a serious communications gap, in that the regional panel was not adequately informed as to the reasons for international panel rejections, engendering a sense of bitterness and a questioning the value of their input to the overall decision-making process. This was especially evident among members of the East Africa regional panel. Even when informed, members of the regional panel have called into question the international panel’s knowledge of and sensitivity to the local environment and context in assessing applications. 3.3.6 Underlying all of these problems is obviously the multi-tiered decision-making structure. The regional panels, knowing that they are not the final arbiter, can approve with reservations, while the international panel is too far removed to provide remedial work for deficient applications. FDCF would be better served by eliminating one layer of review. With modified terms of reference to permit a more activist and participating contractor manager, either panel could be dropped. Eliminating the regional panels may entail the greatest cost savings, however potential clients seem more comfortable with a model in which the international panel is eliminated. Options for improving the assessment process 3.3.7 There are three options that could be adopted – none of which are complete maintenance of the status quo – as the FDCF moves forward: Option 1 (Modified two-tier system) – under this model regional panels, as described earlier, have the option to award a small grant to proposals and high potential concepts which can’t meet all criteria for full award. This option has the advantage of delivering funding to more applicants in a shorter time, however its main disadvantage is that it does not reduce the time for receiving a large award, which averaging as it does over six months, is faster than a normal DFID procurement process, is clearly perceived as too long by private sector applicants not experienced in working with donors. Option 2 (Eliminating the international panel). Although this would address the transaction time problem, it would deprive FDCF of a mechanism to objectively allocate resources between different regions. It will also make it difficult, unless there is also some international expertise participating in all regional assessments, to ensure uniformity in applying selection criteria. There could arise situations in which more capable (or risk tolerant) regional panels process more applications and consume the lion’s share of resources before other regions figure out how to work the mechanism. The reviewers feel these risks of geographic skewing of awards are small, but there is no obvious way to mitigate these risks without an international arbiter (of course, the FDCF manager could serve as this arbiter). Option 3 (Eliminating the regional panels) – under this model applications would be sent straight to the international panel. This also would address the transaction time problem but it would deprive the assessment of local and regional knowledge. It could also isolate FDCF from local opportunities and priorities. The reviewers recommend that, at a minimum, FDCF adopt Option 1, but Option 2 (with some form of international “quality control” and arbitration) is best for the long run. Disbursement and related issues 3.3.8 A widespread complaint of successful bidders is the slow disbursement process. In the early days of FDCF implementation, the fund managers seemed highly reluctant to allow advances to projects, maintaining that advances caused difficulties with DFID accounts departments. However, discussions with DFID account officials in both East Kilbride and within the Enterprise Development section in London contested this view. Their position was that up until very recently the fund managers did not possess suitable accounting and financial controls systems for grant funds provided by DFID and further they were not reporting disbursements made against projections. 3.3.9 The advance issue appears now to be resolved. The fund managers today report on a quarterly ‘accountable grant’ basis1 (1) amounts received from DFID, (2) grant funds expended and (3) expenditures against projections. They are also now providing DFID with information on anticipated disbursements per quarter, including the levels of 1 There is a one quarter lag in the reports i.e. the report due 31 December 2002 covers the quarter to 30 June 2002 disbursements in advance to projects. As can be seen management and DFID appear to have learned useful lessons in this case and disbursement delays should be avoided in future. Information sharing 3.3.10 Both actual and potential partners asked for more information on approved projects and the implementation lessons learned. Wider information sharing and richer content (including a frank exposé of problems encountered and their resolution) could contribute to lesson-sharing among project partners as well as encouraging the application of suitable new entrants. The emerging ‘success stories’ being facilitated by the FDCF should be more widely shared with the formal financial sector and regulatory circles, to provide proof of the viability of pro-poor financial services. Lessons emerging from the use of the challenge fund process by the FDCF should also be more widely shared among DFID colleagues, to enhance replication of the challenge fund mechanism by other sectors seeking an effective means to engage and leverage private sector resources. Intellectual property rights 3.3.11 Intellectual property rights (IPR) protect applications of ideas and information that are of commercial value. The FDCF policy has been to request the grantee to share IPR with DFID. This is a principle commonly applied by Governments (and thus Government-related donors2) that any government/donor-supported project should not be the exclusive property of the fund-recipient. In this instance, Clause 22 of the standard FDCF agreement requires the grantee to give DFID a licence to use the project material, which would include the right to publish, copy and distribute all material include written material and software produced under a FDCF grant. 3.3.12 The FDCF policy on intellectual property right has been a contested issue, especially when the (proposed) project would use grant funding for developing software. It is crucial for a commercial institution that it should be able to keep control of the distribution of any proprietary software; otherwise it may loose a crucial competitive advantage. Several grantees in Southern and Eastern Africa raised the issue of IPR. For instance, Teba Bank legal department objected to signing a clause allowing co- ownership. DFID thereafter explained its position which is to require IPR co-ownership only on software developments made under grant funding. That means that if the initial software was acquired before the grant, the institution will retain exclusive IPR. Modifications and adaptations to the software made under grant funding will remain under IPR co-ownership status. This situation although more balanced is still a threat if 2 DFID Office Instructions Volume IV: B1/Page 971 as referred to in memo on IPR issues from Crown Agents Legal Advisory Services dated 17 September, 2002. the original software is available on the open market or the software is developed from scratch. 3.3.13 To avoid any more delay in signing contracts, the FDCF managers are now asking applicants to acknowledge that they have accepted the terms of the agreement, including the IPR clause. This might raise the awareness of the issue earlier in the process but does not bring relief on the main concern. Aware of the objections raised by FDCF grantees, an interesting alternative has been adopted by another DFID fund (FinMark Trust) which has adopted the following policies on IPR: “Where FinMark Trust provides 50 per cent or less of the cost of a project: the partner may retain full ownership of the intellectual capital created by the project, provided (i) that the partner makes use of the intellectual capital within a defined time frame and (ii) that a mutually agreed announcement takes place around the success of a project in general terms at its conclusion to encourage a demonstration effect. “Where FinMark Trust provides more than 50 per cent of the funding, it may require that the 3 intellectual capital be placed in the public domain.” The advantages of this solution is it takes into account the proportion of funding coming from the grantee as well as leaving some room for flexibility to the fund manager, however FinMark’s right to disseminate information on successful project in preserved. The FDCF may wish to consider adopting a similar policy. Lessons from other donor experience using similar mechanisms 3.3.14 A number of other donors are using various forms of matching grants or challenge funds to promote microfinance or other aspects of financial sector deepening. Annex V reviews some of this experience. Many of these programmes share frustrations that better quality applications are not coming in, and that partner’s lack technical capacity to move forward. Some donors (like the Inter-American Development Bank and IFC) are responding by being more pro-active in introducing partners to capable technical assistance providers. Some programmes (like USAID’s Innovation Grants Fund, IFC’s microfinance bank investments, and the IDB/MIF Line of Assistance) focus on larger initiatives and give out relatively few grants. Others (like CGAP and MicroSave Africa) are attempting to broadcast smaller grants to more institutions. Only IDB has carried out a formal review of its programme, but all donors are generally pleased with the “challenge fund” instrument as a way of attracting new, private sector partners. All other donors manage their programmes in-house, though USAID is considering possible out-sourcing management of its programmes. The only donor really trying to assess management costs against disbursements is the IFC, however it is running specialised equity investment funds, which as noted earlier have substantially different management responsibilities. 3.3.15 At their heart, the “lessons” of this other experience are subjective and need to be treated with some caution by DFID and FDCF management. However, there is some 3 FinMark Trust pamphlet, Making financial markets work for the poor. consensus as which qualities a new financing initiative should have in order to succeed in bringing new private sector partners to work with DFID or any other international donor agency. These qualities include transparency, low transaction costs, flexibility and shared risk/trust. Virtually all those interviewed see shortcomings in their existing funds in these respects, and are working on improvements. It is relatively new ground for development assistance. All regard this as promising, but difficult territory and all are continuing (if not expanding) their efforts.
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