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Armenia Competitiveness Fund Preliminary Report: Summary of research to-date and design thoughts :  Armenia Competitiveness Fund Preliminary Report: Summary of research to-date and design thoughts Prepared for Discussion Purposes by Aslan Global, Inc. September, 2005 The Competitiveness Imperative:  The Competitiveness Imperative Competitiveness has emerged as the leading framework for the economic development of nations Originated with Professor Michael Porter Led President Reagan’s Economic Competitiveness Council Founder of The Monitor Group, inspiration Strategy advisor to dozens of nations, both developed and developing Created Institute for Strategy and Competitiveness at Harvard Kaia Miller 10 year ongoing collaboration with Professor Porter and his Institute Monitor, Onthefrontier, Aslan Global Direct experience in El Salvador, Venezuela, the Middle East (Palestine, Israel, Jordan, Egypt), Rwanda, Bangladesh, Mozambique, Nigeria, Romania, Zambia, Dominican Republic, Brazil 4 years active participation in Armenia, Armenia 2020 McKinsey Global Institute Premier advisor to nations on competitiveness Working in Armenia, Armenia 2020 since 2002 Completed assessment of sector productivity, detailed analyses of IT and Tourism, additional sectors ongoing Porter/Miller and McKinsey provide world-class foundations to develop the Armenia Competitiveness Fund strategy Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives “Armenia Competitiveness Fund” The Challenge:  “Armenia Competitiveness Fund” The Challenge There are dozens of channels through which funds and support are flowing to Armenia and being used in various aspects of development, some more effective than others. Diaspora, development agencies and donors, other foreign investors, Armenian government In recent years among most donors and philanthropies there has been a trend away from humanitarian only support to include economic development support, particularly support for private sector enterprise development The current efforts are not linked to any national vision or economic development plan and are insufficient to achieve the dramatic increases in productivity and prosperity that Armenians both in Armenia and in the Diaspora, desire. There is little coordination among the disparate sources of support and the hundreds of projects underway Even “successful” efforts are realizing only incremental results There is an emerging sense of urgency among wealthy Diasporans to devise an economic development strategy with a strong focus on business development that will have real, dramatic and sustainable results. Wealthy Diasporans who have contributed significant funds want to have confidence that Armenia will have the support it needs longterm. They want real impact and regenerative investments. The central challenge is to develop an effective mechanism to pool external funds and other forms of support, link the mechanism to a sound, comprehensive, national economic development strategy embraced by relevant groups in Armenia, and achieve dramatic and sustainable results Desired results would focus on creating truly successful companies, attractive jobs in Armenia, and ultimately prosperity creation consistent with the ambitious levels articulated by Armenians in the Armenia 2020 visions. Slide6:  THE WELL - BEING OF ORDINARY ARMENIAN CITIZENS WILL VARY EVEN MORE PRONOUNCEDLY DEPENDING ON THE CHOSEN PATH Average nominal monthly salary, USD 2003 2020 50 100 600 200 400 Paraguay model: No change for better • Average people barely make their basic ends • Unemployment is pervasive, especially in rural areas • Quality of education deteriorates • Population emigrates massively 60 60 Paraguay model: No change for better • Average people barely make their basic ends • Unemployment is pervasive, especially in rural areas • Quality of education deteriorates • Population emigrates massively 60 60 Israel model: Living like in a backward Russian province • Average Armenians work in small factories and shops • Some middle class emerges, mainly in Russian - owned industries • Quality of education like in Soviet times • Best and brightest still emigrate 120 120 Israel model: Living like in a backward Russian province • Average Armenians work in small factories and shops • Some middle class emerges, mainly in Russian - owned industries • Quality of education like in Soviet times • Best and brightest still emigrate 120 120 Ireland model: Living like in Eastern Europe • Average Armenians afford buying furniture and cheap cars • Large middle class emerges, both in foreign and local companies • Quality of education moves towards European standards • Emigration is reversed 260 260 Ireland model: Living like in Eastern Europe • Average Armenians afford buying furniture and cheap cars • Large middle class emerges, both in foreign and local companies • Quality of education moves towards European standards • Emigration is reversed 260 260 460 460 Singapore model: Becoming masters of own life • Average Armenians afford modern housing conditions • Armenia becomes predominantly middle class society • Quality of education is among the best in the world • Armenians return massively from Russia 460 460 Singapore model: Becoming masters of own life • Average Armenians afford modern housing conditions • Armenia becomes predominantly middle class society • Quality of education is among the best in the world • Armenians return massively from Russia 45 45 Source: Armenia 2020/McKinsey Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How is it Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Backup: Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives “Competitiveness” is Productivity:  “Competitiveness” is Productivity “Competitiveness” is productivity It is determined by the productivity with which a nation uses its human, capital, and natural resources Productivity sets a country’s standard of living (wages, returns to capital, returns to natural resource endowments) Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries Nations compete in offering the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University Any project focused on building competitiveness is ultimately focused on increasing productivity. Labor productivity, for example, is one key indicator that should be used to measure the performance of any “competitiveness” initiative. This can be measured at company, cluster and national levels. “Competitiveness is Productivity” National Determinants of Productivity and Productivity Growth:  “Competitiveness is Productivity” National Determinants of Productivity and Productivity Growth A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local companies and local competition A “competitiveness” initiative needs to have components that ensure upgrading of both company-level strategies AND of the business environment. Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University Slide10:  The Microeconomic Business Environment Successful economic development is a process of successive economic upgrading, in which the business environment in a nation evolves to support and encourage increasingly sophisticated ways of competing Sophisticated and demanding local customers Local customer needs that anticipate those elsewhere Unusual local demand in specialized segments that can be served nationally and globally Presence of high quality, specialized inputs available to firms Human resources Capital resources Physical infrastructure Administrative infrastructure Information infrastructure Scientific and technological infrastructure Natural resources Access to capable, locally based suppliers and firms in related fields Presence of clusters instead of isolated industries A local context and rules that encourage investment and sustained upgrading e.g., Intellectual property protection Meritocratic incentive systems across all major institutions Open and vigorous competition among locally based rivals Productivity* Growth in Companies Drives the Economic Growth for the Country:  Impact on economy Higher demand Lower prices Higher salaries Net jobs created Higher investments Higher profits Higher demand Higher exports Lower unit costs Innovative products Surplus distributed Customers (lower prices) Employees (higher salaries) Owners (higher profits) Productivity* Growth in Companies Drives the Economic Growth for the Country Greater surplus Higher value added Lower labor/ capital costs Productivity growth in company X While looking at economic growth opportunities for the country, we focus on labor productivity of its economic agents as the main engine for wealth generation * Productivity is defined as total value added divided by number of employees participating in value creation Source: McKinsey Report for Armenia 2020 Slide13:  Microeconomic Competitiveness and GDP Per Capita Current Competitiveness Index (CCI) Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity.” The Global Competitiveness Report 2000, New York: Oxford University Press, 2000 1999 GDP per Capita* * Adjusted for Purchasing Power Parity Slide14:  Improving the general business environment is essential, but cluster development is needed to attain middle-income levels Developing economies should upgrade traditional clusters including agriculture, never abandon them Recruitment of foreign direct investment should focus on existing and emerging clusters, not generalized appeals Incentives should be weighted toward training, infrastructure, and other areas that upgrade the cluster versus general subsidies and tax holidays Existing MNCs can become nodes for cluster development The best way to retain companies is to make them part of a cluster to support higher local productivity Free trade zones should be organized around clusters, and regulations designed to encourage linkages with the local economy A formal structure for cluster development is an important component of economic development Private sector led Government convening and participation Seed funding for cluster assessment and the formation of cluster-based industry groups Cluster Development in Emerging Economies Some Principles Source: Michael E. Porter, Institute for Strategy and Competitiveness, Harvard University How Clusters Can Fit into a National Economic Development Program Example: El Salvador:  National Competitiveness Program EL SALVADOR 2021 Legal Reforms / Deregulation and Facilitation, etc. Institution building, capacity building, innovation potential, productive private-public dialogue Social investments geared toward increasing productivity Business Climate / Cross Cluster Issues Investment Promotion Technological Capabilities Export Promotion Regional Agenda Sub-national Agenda Coffee Cluster Apparel Cluster Handicraft Cluster Emigrant Cluster Electronics Cluster Other Clusters National Plan How Clusters Can Fit into a National Economic Development Program Example: El Salvador Source: Adapted from the National Competitiveness Program in El Salvador Slide16:  “Clusters” Include Companies, IFCs and Government Example: The California Wine Cluster Sources: Michael Porter / Institute for Strategy and Competitiveness at Harvard. California Wine Institute, Internet search, California State Legislature. Based on research by Harvard MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. State Government Agencies (e.g., Select Committee on Wine Production and Economy) Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Backup: Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives The Need for a Focus on Building Competitiveness in Armenia :  The Need for a Focus on Building Competitiveness in Armenia GDP per Capita (Constant Armenian Drams) Note: CAGR represents Compound Annual Growth Rate Source: Aslan Global Report for Armenia 2020, IMF World Economic Outlook September 2004 Armenian Real GDP per capita, 1990–2005 (2004, 2005 estimated) CAGR 1990–2003: -3.5% 1993–2003: 7.1% Although growth rates in Armenia have been impressive over the last decade, the sources of growth are unsustainable, including large infusions from the Diaspora and international institutions. To sustain the growth, Armenia must invest in supporting and creating successful companies and increasing labor productivity or “competitiveness”. Armenia’s Recent Economic Performance A Closer Look at Recent Drivers of Growth (USD Millions):  Armenia’s Recent Economic Performance A Closer Look at Recent Drivers of Growth (USD Millions) Total GDP Agriculture Industry Retail and wholesale Transport and communication Other services USD millions 1,899 1,847 1,911 2,117 2,367 Real CAGR Percent Nominal CAGR Percent Armenia experienced robust growth, which was driven by construction, retail and services largely boosted through generous external financing Armenia's tradable sectors performed worse than the average economy, with price deterioration resulting in almost no nominal gains in four years 7.8 3.6 7.3 23.0 12.3 5.3 7.8 5.7 -1.7 4.3 19.7 9.9 15.1 5.5 Construction 1998 1999 2000 2001 2002 * Without FDI, includes remittance, grants, concessionary lending and limited capital transfers As a percent of GDP 23.4 23.9 23.6 18.5 14.7 External financing* 1998 1999 2000 2001 2002 Source: McKinsey Report for Armenia 2020 Composition of Armenian PPP GDP, 2001:  Composition of Armenian PPP GDP, 2001 GDP at PPP, without informal sector, USD millions 10,618 GDP at PPP, with lower estimate of informal sector, USD millions 13,211 14,163 GDP at PPP, with upper estimate of informal sector, USD millions Agriculture Energy and utilities Mining and Metals Construction materials Chemical Industrial machinery Electronics and precision Jewelry and diamonds Food processing Textile and apparel Other manufacturing Construction Retail and wholesale Tourism (Hotels/restaurants) Telecom Transportation Banking and insurance IT/Software/Scientific research Other professional services Personal/communal services Health care and social services Education and culture Government and defense Total Armenian economy is heavily dominated by six basic sectors-agriculture, energy, food processing, construction, retail and personal services Tradable and higher value-added services sectors are weak, which results in lower quality of total output and limited wealth creation For the same reason, pricing level in economy is depressed: real economy, at PPP prices, is estimated to be 5 times larger than the nominal one: without structural improvements, the discount will persist in the foreseeable future Sectors Source: McKinsey Report for Armenia 2020; Armenian Statistics Yearbook 2001; IMF; interviews, team estimates Armenia’s Recent Export Performance USD Millions:  Armenia’s Recent Export Performance USD Millions * On a net basis, given that the industry performs only intermediate processing Source: McKinsey Report for Armenia 2020; IMF,Armenia National Statistics Service, 2002 183 161 197 247 294 Nominal CAGR Percent Armenia's export sector outperformed the rest of the economy; however its share is still rather small 2 segments – diamond and food processing – accounted for more than 70% of export growth since 1998 In terms of impact on economy, export revenues, although growing, are still behind external financial assistance 12.6 60.1 34.6 16.0 3.0 7.0 3.4 1998 1999 2000 2001 2002 Exports as percent of GDP 9.6 8.7 10.3 11.7 12.9 Exports as percent of external assistance 41.1 36.7 43.7 63.0 84.5 Total exports Precious stones and articles* Food products Textile and apparel Base metals Mineral and chemical products Machinery and equipment Other -6.9 Increasing Focus on Economic Development Among Donors, but Lack of National Strategy and Coordination:  Increasing Focus on Economic Development Among Donors, but Lack of National Strategy and Coordination Early focus in many organizations on humanitarian relief has given way to increasing focus on economic development Ex: USAID and CAPS $17-20mm “Competitiveness” Project focused on clusters and business environment Armenia 2020 focused on economic development, including cluster development Increasing interest of organizations such as AGBU and Assembly to support economic development oriented activities Dozens of organizations are contributing to Armenia’s economic development, but there is little coordination of strategies and activities, and lack of leadership from within Armenia, particularly from the Government Plans for a national economic development plan have fallen short of expectations UNDP oversees foreign donor coordination efforts which are reportedly weak The number of local NGOs has increased exponentially since independence, but activities often focus on fund-raising rather than economic development Several attempts have been made to start programs focused on company-level support, with mixed results Attempts now defunct Lincy SME Loan Programs Armenian SME Investment Fund (w/IFC) Programs still in operation: Armenian Business Corporation 1994 (w/revised business model and significantly reduced in scope after bankruptcy in 1999): Izmirlian-Eurasia Small Business Loan Program 1995 BSTDB-IF JV Financing Facility Little specific focus on improving clusters or the business environment Some preliminary analyses done by Armenia 2020 through McKinsey No formal Cluster Working Groups formed to-date, although this will be a key component of the CAPS program Government has / has had active role in only a few cases Lincy Foundation donations to government-sponsored infrastructure projects Increasing Focus on Economic Development and Companies, but Gap in Clusters and Microeconomic Environment:  Increasing Focus on Economic Development and Companies, but Gap in Clusters and Microeconomic Environment Emerging Focus on Industry Cluster Development in Armenia:  Emerging Focus on Industry Cluster Development in Armenia A Beginning Increasing awareness / visibility of clusters and competitiveness in Armenia over the last several years Government and USAID recently initiated a cluster program as part of the CAPS Project Several “cluster projects” expected Armenia 2020 initiated strategic analyses of the business environment and several clusters Tourism completed; jewelry, healthcare and others proposed Future Priorities Link programs focused on companies to cluster development Include a robust cluster development program as part of a comprehensive national economic development strategy linked to an articulated, ambitious vision Training for cluster members, facilitated strategic processes, targeted investments by companies, IFCs and local and national governments Increase local leadership and initiative (private sector and government participation in and leadership of cluster strategy development and strategic implementation) Institutionalize the cluster process and make it open to any cluster able to organize and commit itself to a rigorous change process Design mechanisms for ongoing Public / Private Sector Dialogue to guide investments in the overall Business Environment Company-focused Initiatives to-Date are Insufficient to Achieve the Desired Prosperity Levels:  Company-focused Initiatives to-Date are Insufficient to Achieve the Desired Prosperity Levels Failed Initiatives Armenian Business Corporation 1994-1999: Goal: unifying the efforts of the Diaspora to assist the development of private business in Armenian and improve the social climate in the country. Activities: Loans to local businesses of which many went bankrupt leading to bad loans Armenian SME Investment Fund with IFC—target of $15mm from Diaspora never reached High levels of direct company support unallocated All but $20mm of the $170mm Lincy program originally established for company support redirected to infrastructure Small programs relative to ambitious national goals Black Sea Trade and Development Program-Izmirlian Foundation: $4mm joint-finance facility for SMEs Izmirlian-Eurasia Small Business Loan Program: highly successful (particularly among poultry producers), but small ($3mm Izmirlian contribution) ABC1999-2003: New business model--Businesses willing to undertake an equity JV in which ABC was majority owner. 7 JVs: fruit / vegetable processing, gas stations, potato production, stone mining, law office No program focused on investing in companies in targeted, high potential industry clusters or linked to an articulated national vision and strategy Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives The Armenia Competitiveness Fund Vision Four Primary Activity Areas:  The Armenia Competitiveness Fund Vision Four Primary Activity Areas Equity/Debt Investments Direct investments in existing private companies and start-ups in Armenia in targeted industry clusters Management of funds to-be-invested Investment Banking Services Mergers and acquisitions Strategic partnerships Potentially partner with existing investment banking firm to provide these services (e.g. Ameria, Troika Dialog) Cluster Competitiveness Strategic Advisory Services Management consulting and support services Talent pool Potentially partner with existing Armenian or international consulting firms to provide these services (e.g. McKinsey) Grant Program Direct grants for productivity growth Cluster-level: benefit multiple companies in a cluster (e.g. industry experts, research, institutes, etc) Regional / national level: benefit all companies (e.g. infrastructure, policy, etc.) Key objectives of the Fund are to make strategic investments to achieve rapid and dramatic growth in targeted industry clusters that will allow Armenia to achieve the ambitious levels of prosperity articulated in the Vision 2020 process. The vast majority of these investments will be direct equity investments in companies in Armenia, supported by critical related services: strategic advisory services, investment banking services and a direct grant program. The Armenia Competitiveness Fund Vision High Level 10 Year Plan:  The Armenia Competitiveness Fund Vision High Level 10 Year Plan 1 9 7 8 6 5 4 2 3 10 Year Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 1, 2 Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 3. 4 Cluster Strategy Development Investments and Support Realization of Gains Growth Phase Clusters 5. 6 Target clusters will undergo a four-phase / 5 year development strategy: Phase One—Strategy Development; Phase Two—Investments and Support; Phase Three—Growth; Phase Four—Realization of Gains. The first 2 clusters will begin to realize gains in Years 4-5. With 2 additional clusters initiated every 2 years beginning in year 2, each subsequent year a new cluster will enter the Realization of Gains Phase. At least every 5 years, each pair of clusters will undergo a Strategy Update Exercise. By the end of 5 years, there will be 3 robust clusters realizing strong growth, and by the end of 10 years there will be 7. Strategy Update Strategy Update Strategy Update Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Backup: Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives What Are the Challenges that Could Inhibit Success?:  What Are the Challenges that Could Inhibit Success? “Armenia Competitiveness Fund” Seven Critical Design Areas:  “Armenia Competitiveness Fund” Seven Critical Design Areas Interface with Contributors Financial Structure Governance Investment Strategy Support / Performance Measurement Interface with Armenian Government Interface with Other Development Players Managing the organization Coordinating strategy with other players Collecting the inputs Coordinating with ongoing projects: e.g. USAID, UNDP, World Bank, IMF, MCA, other bilaterals, Diaspora orgs., NGOs, etc Whom to target (Diasporans, international organizations? Other individuals? Communication strategy Transparency, accountability, objectivity, trust Organizational Structure Hiring and Compensation Type of fund Size / per cluster Distributions Key performance indicators Accountability for company performance Priority clusters Allocation of funds among equity investments, grants, consulting and investment banking Coordinating / ensuring relevant investments in upgrading the business environment Ongoing private-public sector dialogue 1. Interface with Contributors:  1. Interface with Contributors Fund will target interested Diasporans who share the vision of what Armenia needs to achieve its desired levels of prosperity Consider setting minimum investment levels Fund is open to other investors (e.g. non-Armenians, international institutions, etc.) providing there are no constraints on the use of the funds Key indicators will be defined to include not only traditional fund performance indicators, but competitiveness and productivity indicators at the company, cluster, regional and national levels in Armenia Contributors will receive regular communications on the performance of their investments. Contributors will have the opportunity to sit on the Board of the fund, potentially through a system of rotating seats. 2. Financial Structure:  2. Financial Structure Initial Fund Size: $200mm to cover the first two sets of cluster. Average of $50mm per cluster. The larger the cluster and the higher the potential growth rate, the bigger the allocation. This is aggressive but feasible given current levels for the first two cluster targets: Software: 110 companies today with total estimated revenues $40mm and 2600 employees. The McKinsey high growth scenario reflects growth 25% per year or total revenues of $238mm by the year 2010. Tourism: Total 2002 revenues of $80mm and 23,000 employees, with a high growth scenario expected level of $300mm by 2010 with 50,000 employees Consider having a pre-set management fee (e.g. 2%) to cover the Fund’s operations, salaries and bonuses Consider allowing contributors to direct their investments into specific clusters or types of activities Ideally they would be encouraged to contribute to the general fund Fund founders will need to decide what to do with the gains. Options include: Create an evergreen fund in which gains are reinvested into existing or new clusters. This releases some pressure on ongoing fundraising. Distribute gains directly to investors. This infuses a disciplining mechanism into the fund and a stronger incentive to make gains. 2. Financial Structure Fund Management Fee Benchmarks—Preliminary:  2. Financial Structure Fund Management Fee Benchmarks—Preliminary Mercer Management study of institutional asset management fees December 13, 2004 report 2,000 firms surveyed in 8 regions around the world: UK, Europe, US, Canada, Asia, Japan, Australia and New Zealand Main findings: “Highest fees are charged in asset classes with the greatest potential to add value; emerging markets equity is the most expensive Fees for equity strategies vary significantly between regions; Asia has highest fees while Canada has lowest Fees are consistently higher for small cap equity products than large cap products” Emerging market equity: Small cap equity products are consistently more expensive than large cap equity products, and there is no discernible difference in fees between style (e.g. core, growth and value). In the US, for example, small cap fees range between 0.82% (82bps) and 0.88% (88bps) for a $50m segregated mandate. In contrast, large cap fees vary between 0.55% (55 bps) and 0.58% (58 bps) for the same size fund. “Emerging markets equity is the most expensive regional asset class, with median fees for a $50m segregated mandate at 0.95%, or 95 basis points (bps), decreasing slightly to 0.9% (90 bps) for a $75m fund.” 3. Governance:  3. Governance The Board 10-12 Board members. Consider including major contributors as well as key outside experts on clusters and competitiveness (e.g. Michael Porter, Diana Farrell-McKinsey, etc). Limited terms with possible renewal to ensure openings for others interested over time and to encourage Board Members to create value for the Fund or not be renewed Minimal or no compensation for Board members, funded out of management fees Consider having a separate Advisory Board without the ability to vote or make decisions, but enabling the Fund to have a flexible group of experts to consult on critical issues. Could include Government officials Offices: New York and Yerevan. Consider offices outside Yerevan in a couple of target regions CEO Characteristics: high-caliber investment expert, philanthropically-minded, linkages with Armenia / some interest in Armenia Compensation: Salary and bonus paid out of a set management fee at slightly below market rates for top-level fund managers in New York (arguably there are psychic rewards to this Fund as opposed to other more mainstream funds). Conduct research to determine appropriate levels and structure of package Must be willing to spend a lot of time in Armenia, particularly during the first years Managers Characteristics / Responsibilities Number of managers: estimated 3-5 per cluster overseeing 5-10 investments Compensation: Salary and bonus paid out of a set management fee Conduct research to determine appropriate levels and structure of package Must be located in Armenia Support / Other staff as necessary Functional Administrative staff (HR, IT, etc) based in NY with counterparts in Armenia when necessary Communication / Transparency Use outside, non-Armenian auditors Publish / make available all non-competitive, non-confidential data Maintain productive relationships with Government and other Development Players Governance Fund Manager Compensation Benchmarks--Preliminary:  Governance Fund Manager Compensation Benchmarks--Preliminary “RESULTS OF 1999 COMPENSATION SURVEY OF INVESTMENT MANAGEMENT PROFESSIONALS RELEASED BY AIMR AND RUSSELL REYNOLDS ASSOCIATES” Key Findings Investment management professionals employed by mutual fund organizations typically earn 24% more than their counterparts in insurance companies, banks, investment advisors and securities firms.. The 1999 median total compensation for investment professionals at mutual fund companies is expected to be $196,000, followed by investment counseling firms and securities broker/dealers at $185,000, insurance companies at $150,000, banks at $128,000, plan sponsors /endowments /foundations at $104,200 and lastly pension consulting firms at $95,000. The 1999 median total compensation for all survey respondents is expected to be $150,000. Portfolio managers and analysts focusing on global or international investing generally earn more than their domestic counterparts. In fact, the expected 1999 median total compensation for a portfolio manager of domestic equities is $153,000 and for global equities it is $211,000. In 1999, a portfolio manager of domestic fixed income is expected to earn $158,000, while a portfolio manager of global fixed income is expected to make $185,000. Those serving institutional clients are generally rewarded with higher median total compensation than those working with a high net worth client base. Bonuses are given on the basis of: an organization's overall business performance (a factor in the bonus determination of 60 percent of those surveyed) an individual's own investment performance (45 percent) an organization's investment performance (42 percent) an individual's business development performance (40 percent). Debra J. Brown, an executive recruiter in Russell Reynolds Associates' Investment Management Practice, notes, "Incentive compensation is most significant at mutual fund firms and securities broker/dealers, accounting for roughly half of the median total compensation at these organizations. This finding is consistent with their pay-for-performance cultures and the trend towards greater differentiation in remuneration." Investment Strategy Target Investments:  Investment Strategy Target Investments Clusters Clusters 1-2: Tourism, IT Clusters 3-4: Banking, Jewelry Clusters 5-6: Food Processing, Electronic and Precision Clusters 7-8: Metals, Health Care Grants Non-company-specific cluster enhancing investments (e.g. training, consulting, market research and outreach, etc.) identified in the Strategy Development Phase Business Environment: labor protection, private ownership, tax policy, management capability, cluster specific investments to benefit multiple companies, cross-cluster investments to boost productivity. Identified in the Strategy Development Phase. Slide38:  17 SECTORS OF ARMENIAN ECONOMY WERE SELECTED FOR INITIAL PRODUCTIVITY ANALYSIS Selection criteria: • Services and products marketable • Growth potential in productivity and/or employment • Potential for exports • Relative comparability with US Source: Armenia 2020/Mckinsey Report 17 Sectors covered: 5 Sectors not covered • Agriculture • Energy, gas and water • Education, science, culture, arts • Government and defense • Other manufacturing and services • Chemicals • Mining and minerals • Metals • Materials • Construction • Industrial machinery • High - tech equipment • Jewelry and diamonds • Food processing • Textile and apparel • Retail and wholesale • Tourism and restaurants • Banking and insurance • Health care • Communication • Transportation • Software and IT Services Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Employment and Labor Productivity of Selected Armenian Sectors*, 2001:  Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Employment and Labor Productivity of Selected Armenian Sectors*, 2001 * Armenian statistics Yearbook 2001; IMF; U.S. Census Bureau; Team estimates Sectors Mining Share in employment Total employment = 1,264 thous. Percent Nominal labor productivity USD per employee Real productivity at comparable prices Percent of US sector productivity Metals Jewelry and diamonds Telecom Tourism and restaurants Construction Banking and insurance Food processing Textile and apparel Industrial machinery Electronics and precision equipment Construction materials Health care Retail and wholesale Transportation Total Average for economy = 1,690 Average for economy = 11.5% IT software Source: McKinsey Report for Armenia 2020 Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Estimated Employment / Productivity Growth Potential of Selected Sectors:  Armenia 2020 Research Highlights Guiding Potential Investment Decisions: Estimated Employment / Productivity Growth Potential of Selected Sectors Mining Negative (-5-0% CAGR) High (5-10% CAGR) Sector Employment growth potential* Low (0-5% CAGR) High (>10% CAGR) Real productivity growth potential* 1 Metals 2 Telecom 3 Tourism and restaurants 4 Construction 5 Banking and insurance 6 Food processing 7 Textile and apparel 8 Industrial machinery 9 Electronics and precision 10 Construction materials 11 Health care 12 Retail and wholesale 13 Jewelry and diamonds 14 Transportation 15 1 12 13 3 15 6 9 5 8 7 10 11 4 2 14 Low 0-5% CAGR) Medium (5-10% CAGR) 16 IT software 16 2003-2010 * Compared to current employment/productivity in the sector Source: McKinsey Report for Armenia 2020. Based on team analysis; World Bank; UNDP Armenia 2020 Research Highlights Guiding Potential Grants: Universal Productivity Constraints Across Selected Sectors:  Armenia 2020 Research Highlights Guiding Potential Grants: Universal Productivity Constraints Across Selected Sectors Small domestic market Low High Medium-term adjustment capability* Low High The estimated impact of the constraints on overall productivity* 1 Unequal income distribution of population/ Low purchasing power 2 Country risk and cost of credit 3 Low salaries/ wages 4 Legal protection of labor 5 State ownership 6 Inefficient private ownership 7 Tax enforcement 8 Tax policy 9 Efficiency of public administration 10 Corruption/ Abuse of power 11 Expensive land transportation 12 Trade with neighbors 13 Competitive intensity 14 Privileges to businesses 15 Management capability 16 Labor trainability 17 1 17 12 13 3 15 6 9 5 8 7 10 11 4 2 19 16 14 18 Obsolete Assets Informality 19 18 * As a share of productivity gap Source: McKinsey Report for Armenia 2020: 0% 3% 7% >20 years 5-10 years 10-20 years Armenia 2020 Research Highlights Guiding Potential Grants: Required Microeconomic and Institutional Reforms:  Armenia 2020 Research Highlights Guiding Potential Grants: Required Microeconomic and Institutional Reforms Microeconomic diagnostic focusing on major sectors of economy Development of major initiatives in each priority sector Development of major initiatives across all sectors of economy Building public-private consensus on major reform priorities Remove regulatory entry barriers (e.g. telecom, aviation) to best practice companies Eliminate formal and hidden privileges, reinforce competition and bankruptcy laws Improve entry conditions in nascent sectors (e.g. non-bank financial services, high-tech) Reform regulatory framework for natural monopolies (e.g. power transmission, airports, water, rail, mining) Set and enforce standards in sectors with asymmetry of information issues (e.g. education, healthcare) Improve standards in banking sector and drive towards further consolidation Reform the public administration Reform tax, corporate and labor market regimes to reduce the burden on lawful players Drive towards equal enforcement of simplified and less restrictive laws and regulations Source: McKinsey Report for Armenia 2020 Typical Needs Resulting from Cluster Strategies:  Typical Needs Resulting from Cluster Strategies Successful cluster processes will identify several needs to make the clusters competitive that the Armenia Competitiveness Fund could consider addressing: Company Specific Support Direct financing / investment for companies’ growth strategies New start-ups Management personnel / advisors (marketing advice, market research, financial management, etc., capable employees) Cluster-specific Support Outside experts, advisors Marketing outreach such as participation as a cluster in international trade shows and cluster marketing materials International networking Training and research institutes Infrastructure investments specific to the industry cluster Cross-cluster Business Environment Support General infrastructure investments that benefit multiple clusters (roads, airport, etc) Legislation support Relevant government agency strengthening (e.g. ADA) Customs International trade negotiations and trading partnerships Trade delegations to neighboring countries 5. Support / Performance Measurement:  5. Support / Performance Measurement The Consulting Services division of the Armenia Competitiveness Fund Structure will provide needed support to client companies and help ensure the success of the investments Investment funds can be earmarked for desired / necessary support The investment banking arm will identify potential partners, mergers and acquisitions The grant program will expedite critical cluster, regional and national level investments that are necessary, in coordination with the Government and other donors to avoid duplication of effort Key performance indicators Individual client company performance Profitability and profitability growth Total revenues and revenue growth Labor productivity (revenues / employee) Cluster performance Profitability and profitability growth for client companies Total revenues and revenue growth Labor productivity (revenues / employee) Regional / National performance Profitability and profitability growth for client companies Total revenues and revenue growth Labor productivity (revenues / employee) Consider early indicators prior to realization of growth and gains Client satisfaction surveys Dollars invested Number of companies participating New companies founded New partnerships formed Others 6. Interface with the Armenian Government:  6. Interface with the Armenian Government Coordinate Grant Program Activities with government to avoid duplication and maximize impact E.g. the Armenian Development Agency (ADA) sponsors period trade shows, leads market development delegations abroad and other activities that Fund clients could benefit from Discuss plans with key government officials before initiating the Fund to gain support and address any possible concerns Consider including a government representative on the Board, or as part of an Advisory Board to ensure continued coordination and connection to the country’s emerging national vision and comprehensive economic development strategy 7. Interface with Other Development Players:  7. Interface with Other Development Players Foster productive relationships with relevant donors and NGOs working toward similar goals UNDP is the local Donor Coordinator and holds periodic meetings of donors Refer clients to donor programs that might provide additional support E.g. CAPS program for specific clusters Training programs Outside industry experts Others Coordinate Grant Program Activities with donors to avoid duplication and maximize impact Ensure transparency and openness to the degree possible Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Backup: Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives Izmirlian Foundation:  Izmirlian Foundation Est. 1994 by family of Swiss-Armenians Headquartered in Geneva Mission: Improving the lives of Armenians throughout the world Izmirlian-Eurasia Small Business Loan Program In 1999 Izmirlian contributed $3mm to existing Eurasia program Eurasia managed the program Up to 2 yr loans and $125k for Armenian SMEs Loans made in partnership with 3 Armenian banks which changed over time Rate set at 15%: Eurasia received 5%, bank received 10% Prospective borrowers submit application jointly evaluated by Eurasia and bank Borrowers subjected to monthly or quarterly monitoring by both bank personnel and Eurasia employees Banks and the Izmirlian shared the non-payment risk --50% each for loans made with Izmirlian funds Results by year-end 2003 Less than 1% of loans past due Less than 5% of loans written off 20% of loans made to repeat borrowers Noted for contribution to the poultry industry Changes in 2003-2004: Finance Company The 2 foundations planned to establish a finance company owned 50% by each Bypass banks: “At some point banks have to . . . make their own loans and not use our money.” Black Sea Trade and Development Bank – Izmirlian Foundation Joint Finance Facility In 2003 Izmirlian and BSTDB each contributed $2mm to launch a joint finance facility for Armenian SMEs Provide loans in dollars or euros for capital expenditures and working capital requirements $125k – 500k Maximum term 5 years 12% interest rate (vs. 18% average lending rate in-country) Financial returns to Izmirlian used to support philanthropic activities in Armenia Netherlands Management Cooperation Program audited companies and offered technical assistance through retired executives Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia” Lincy Foundation Loan Programs for Armenia:  Lincy Foundation Loan Programs for Armenia Foundation est. by Kirk Kerkorian, an Armenian-American billionaire and philanthropist Late 1990s visited Armenia and was asked by the government to assist the homeland In 1998 a loan program to assist SMEs was signed by Government, Central Bank and Lincy Foundation $100mm 6 year loan without interest to government from Lincy Government proposed and administered the original organization of the project Government would loan to Armenian banks at no more than 3% per annun Banks would provide qualified businesses with loans $100k - $1mm loans at no more than 15% interest rate Firms had to be majority-owned by Armenian citizens Government created a project implementation office and a special commission to approve loans No Lincy employees involved but frequent Yerevan – Los Angeles communication When commission approved a loan, the request would be presented to Lincy to assure projects met criteria est. by US IRS (no arms or hazardous materials, environmentally safe production, etc) 2000-2001—Government went back to Lincy concerned that it was too much money. New MOU $95mm direct grant for infrastructure $45mm SME loan program $30mm for loans or equity investments in majority foreign-owned companies—bypassed banks and government was in charge of loaning this money directly Results $45mm SME loan program $20mm of the $45mm had been loaned to SMEs / 44 projects--Cannery, paint production facility, case-iron melting facility, green-house Government requested, and Lincy agreed, that remaining $25mm be allocated to infrastructure “ . . . Seems like Mr. Kirkorian trusted the money to the president and the government . . . “ $30mm foreign investment program received 35-40 business plans / 4 approved by Government no loans or equity investments were ever made discontinued and reallocated to infrastructure Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia” Armenian Business Corporation:  Armenian Business Corporation 1991 Government invited 600 Armenian businesspeople from Diaspora Est. Armenian Business Forum Use members to mobilize charitable funds for Armenia and seek foreign investors “We were working with the local government knowing that only 20% of the humanitarian assistance was reaching the people. ABF tried to bring investors . . . None of them succeeded. They all lost their shirts and returned because of strong Mafia thief organizations.” ABC: 1994-1999 1994 President asked for help to pull Armenia out of depression ABF created Armenian Business Corporation (ABC) ABF became inactive ABC registered as a for-profit ordinary joint-stock company 32,000 shares / total capitalization $320k Participants were all members of ABF and came from 17 countries Goal: unifying the efforts of the Diaspora to assist the development of private business in Armenian and improve the social climate in the country Activities Loans to local businesses of which many went bankrupt leading to bad loans Shareholder in 2 privatized SOEs ABC: 1999-2003 1999 desire to liquidate: full time managing bad loans Shareholders exited at small loss, down to 821 shares Hovsep Seferian new president New business model Businesses willing to undertake an equity JV in which ABC was majority owner “if they want to steal, they steal their own funds.” When approached for financing ABC would: Determine if there was a market Site inspection Business plan approved by managing committee New LLC established to implement project Day to day business left to minority partner w/recognition that ABC could change management 2001 listed on Armenian stock exchange SEC presented obstacles but ABC persevered By end 2003: 10 employees and 251 owners Assets exceeded capitalization, company finalizing application to issue new shares to be sold in Armenia and Diaspora at a premium 7 JVs (fruit / vegetable processing, gas stations, potato production, stone mining, law office Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia” Armenian SME Investment Fund w/ IFC:  Armenian SME Investment Fund w/ IFC May 2000 IFC commissioned feasibility study through US Trade Development Agency to assess demand for long-term capital by Armenian SMEs Concluded long-term financing needs were not being met IFC sponsored creation of an investment fund to provide adequate financing for SMEs in Armenia IFC would play key role as leading investor up to $5mm Armenian diasporans and others interested would raise additional $15mm Approved June 2002 Fund would be managed by private investment bank in NY owned by Diasporan Provide equity and quasi-equity to qualified SMEs JVs with multinational partners, particularly businesses with strong diaspora connections Investments in existing Armenian SMEs needing capital to expand Seek companies with products and services for export $15mm target never reached Source: Johnson and Sedaca, “Diasporas, Emigres and Development” Eurasia Foundation:  Eurasia Foundation Est. by US Govt. in 1993, primarily funded by USAID; subject to regulations est. by the US OMB and USAID An independently managed grant and loan organization with offices in the 12 NIS Mission: help establish and reinforce democracy and market-driven economies in the NIS 1995 Small Business Loan Program to foster entrepreneurship in Armenia and Ukraine Armenia Small Business Loan Program Provide long term working capital and capital expenditure financing to new and existing Armenian businesses Foster dev. of small business lending capacity in Armenian banks by introducing a proven lending methodology that can support small businesses and offer low loan loss ratios 1995-1999: $3.8mm to 133 SMEs, 900 new jobs In 1999 renamed Izmirlian-Eurasia Small Business Loan Program Recognition of $3mm grant from Izmirlian Largest grant outside the US Govt. contribution; doubled the program size For program description see Izmirlian Foundation overview Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia” Other Future Options Discussed in the Literature:  Other Future Options Discussed in the Literature Pan-Armenian Development Bank Goal: est. investment fund of mid-large scale Diaspora investors Managed by experienced Diasporans Take equity stake in existing or new companies Identified challenges Investor requirements of a sound investment climate Potential resistance from domestic actors Lessons from other experiences Armenian SME Investment Fund: timing is not right Nature of private-public partnership must be thought through Other issues Strategy Coordination with other donors, including MCA Armenian Sovereign Diaspora Bonds Program Examples: Israel Bonds (success); Bangladesh, china, India, Lebanon, Pakistan, Philippines Pros: Possibility for a diaspora or patriotic discount (Grigorian and Gevorkyan) Longer maturity funds (Grigorian and Gevorkyan) Reduction of rollover risks (Grigorian and Gevorkyan) Grave consequences of default or mismanagement represent self-imposed mechanism to adopt sound economic and public governance policies (Grigorian and Gevorkyan) Cons: Need ability to market the bonds Remittance-backed Bonds Example: El Salvador—Banco Cuscatlan: Securitized cash flows from remittances Pros: Cons: Levels of remittance flows are not guaranteed; counter-cyclical foreign exchange flows (more remittances when times are bad) Source: Gevorkyan and Grigorian, “Armenia and Its Diaspora: Is There Scope for a Stronger Economic Link?”, Johnson and Sedaca, “Diasporas, Emigres and Development” Agenda:  Agenda The Challenge The Case for an “Armenia Competitiveness Fund” What is Competitiveness and How Is It Created? Why a Competitiveness Fund Makes Sense Now in Armenia The Vision for the “Armenia Competitiveness Fund” Critical Design Issues for the Armenia Competitiveness Fund Discussion and Recommendations Backup: Lessons Learned from Other Initiatives Selected Armenian Initiatives Selected non-Armenian Initiatives Enterprise Ireland and Its “Competitiveness Fund”:  Enterprise Ireland and Its “Competitiveness Fund” “Enterprise Ireland” is the Irish Government agency responsible for the development of Irish industry. Core Mission: “to accelerate the development of world - class Irish companies to achieve strong positions in global markets resulting in increased national and regional prosperity.” 5 main areas: Existing target sectors: work with individual client companies in targeted sectors providing access to knowledge, expertise, and resources for change (current sector focus: Food, Software and International Services, Industrial Products, Engineering and Electronics, Lifesciences and Chemicals, Construction, Paper-Print-Packaging, Consumer and Timber) Groups of companies: facilitate linkages, build networks, provide sectoral leadership, and shape business infrastructure Start-ups: High priority given to accelerating the number of new, high potential start-ups New Sectors: Actively encourage the emergence of new business sectors (Software and Services, Digital Content, Biotech, Photonics, Nanotechnology, Functional Foods, Regions: work with specific regions to develop existing enterprises, increase the level of start-ups and enhance the business environment Total income 2003: 235mm euros (of which over 90% comes from Parliamentary grants and 6% from the agency’s own resources) The agency established a “Competitiveness Fund” in 2003 The Objective: to help older SMEs in traditional sectors to upgrade and modernize their operations and to become internationally competitive measured through gains in output and productivity Budget: €10 million. Has supported 97 enterprises Fund is open for applications every two months. Available grants range from €150,000 to €225,000 (25-45% of eligible costs) depending on the company's location and are not available to firms which have developed major plans for funding over the past three years Funding awarded on a competitive basis for projects that “substantially contribute” to an improvement in competitiveness Activities targeted: achieving World Class Manufacturing status, supplier development programs, management and training of staff, employment of a key person, capital grant for new machinery/ automated machinery Black Sea Trade and Development Bank (BSTDB):  Black Sea Trade and Development Bank (BSTDB) Est. 1998 Parent corporation: Black Sea Economic Cooperation Regional bank including 11 shareholder countries Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey and Ukraine Headquarters in Greece, Turkish president, vice-presidents in 2002 were Russian, Romanian and Ukrainian An 11-person Board of governors oversees a 12-person Board of Directors. They are both composed of experts, ministers and advisors nominated by each member state. Initial capital $300mm w/ plans to increase to $1.5bn Mission: encourage development and promote cooperation among shareholder countries Activities Support regional trade and investment Provide financing for commercial transactions and projects in order to help member states establish stronger economic linkages Priority on SME financing (both private and public) No policy conditions attached to loans Development and trade finance projects in the energy, telecommunications, transportation, manufacturing and tourism sectors Funding strictly limited, in terms of both cash (up to $20 million) and percentage (up to 35 percent) for individual projects. Source: Gillespie and Andriasova, “Diaspora Support for Business Development in Armenia” Slide58:  Overview Interest-bearing securities issued since 1951 by the State of Israel, backed by the full faith and credit of the Israeli Government. Sold in the US by the Development Corporation for Israel (DCI), a registered broker/dealer headquartered in New York with offices throughout the country. Individuals who buy bonds must pay taxes on the interest but states do not. Generally, Israel Bonds can be transferred to US organizations recognized as tax-exempt. Usually the organization is required to hold the Bond until maturity.1986: dispute with the IRS. IRS argued that the 4% interest rate on Israel bonds was "artificially" low, and a partial gift to the State of Israel. Gifts to foreign governments are not tax deductible, and the IRS proposed to tax bondholders for the difference between the 4 percent rate they were earning and the prevailing market rate. ' Protests ' Congress adopted special exemption. Target Contributors Initially targeted primarily to Jews Saw purchase of bonds as a way to support State of Israel Did not mind a lower rate of return than market interest rates (until end 1980's: 4%) Beginning in the mid 1970's Israel tried to target small banks and financial companies by offering commercial interest rate Since 1990's: Jews (of the next generation) have again become main target. To attract them: interest rates closer to market ones. 1998: Jubilee bonds for anniversary of the State. Impact on Israel’s Development: Proceeds from the sale of Israel bonds and other securities are designated by Israel’s Finance Ministry for general use. Bonds have been used to finance projects in transport, agriculture, power, industry, communication, and other industries. They have secured US $25 bn. Israel has repaid US$20 bn to investors so far. Moody’s rating is below US Treasury bonds but high for Middle East. Sources: Gevorkyan, A and D. A. Grigorian, “Armenia and Its Diaspora: Is There a Scope for a Stronger Economic Link?”, Armenian International Policy Research Group Working Paper No. 03/10, forthcoming in the Armenian Forum: A Journal of Contemporary Affairs, 2003. Bank of Israel: http://www.bankisrael.gov.il/deptdata/neumim/neum163e.pdf Israel Bonds Program Slide59:  A risk capital fund Mission: to support private sector development and provides funding opportunities for small and middle size companies in Afganistan” Target capitalisation of $ 30 - 50 m. Private capital from Afghan Diaspora, development finance institutions (including Asian Development Bank) , donors An independent management company, Afghanistan Capital Partners (ACAP) has been created to manage the ARF Will offer risk-reduced investments with financial returns as well as co-investment opportunities to investors, as well as increased contacts with international business and Diaspora plus access to capital to entrepreneurs. Debts, mezzanine and equity capital for small and medium size companies in Afghanistan. Sources: Burnett, Victoria, “Renewal Fund Seeks Private Capital for Loan Market (Afghanistan), Financial Times, June 2004. Afghanistan Renewal Fund Slide60:  The ADB Group is a multinational development bank supported by 77 nations, or member countries, from Africa, North and South America, Europe and Asia. The group consists of three institutions: The ADB, the African Development Fund (ADF) and the Nigeria Trust Fund (NTF). Mission: promote economic and social development through loans, equity investments and technical assistance. ADB is required to give special attention to national and multinational projects and programs that promote regional integration. 2003: total lending and grant operations of the group stood at $2.6 bn. Sources: “ADB Delivers from a Solid Base”, The Banker, June 1, 2004. African Development Bank Slide61:  An International Development Agency promoting entrepreneurship (part of the Aga Khan Foundation Network) Mission: A for-profit institution, the Fund helps “to build economically viable enterprises through strong equity participation combined with management and technical expertise and support”. Size: AKFED operates as a network of affiliates with more than 90 separate project companies employing over 15,000 people and controlling assets in excess of US$1.5 billion. Funders: The Aga Khan (regular funding + endowment), the Ismaili community, national and international development agencies, individual and corporate donors. Emphasizes "hands-on" approach (development of human resources) and equity investment Brings together international investment and know-how with local experience and entrepreneurial skills, creating partnerships among local institutions and individuals, leading multilateral development agencies and development banks. Direct participation in the management of companies in which it invests Aga Khan Fund for Economic Development Slide62:  A regional multilateral development finance institution established in 1966. Mission: reduce poverty in Asia and the Pacific Capital controlled by 58 member countries 42 are Asian Japan and the United States are the largest shareholders Of the capital subscribed by shareholders, 7% has been paid-in; the remaining can be called up if the bank is unable to honor its debt obligations. Governance: Highest policy-making body is Board of Governors, which meets annually (one representative from each member state) The ADB President, assisted by four Vice-Presidents and a Managing Director General, manages the business of ADB. How it works Provides loans to developing member countries at preferential conditions and to private borrowers for projects including power stations, water supply systems, toll highways etc.. Loans are matched by borrowings on the capital markets. Limited commitments to the private sector (loans and equity participations). Conservative policies in terms of asset liabilities management, liquidity, and market risks. The Asian Development Bank has constituted a liquidity reserve consisting

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