I thought I’d kick-start what I hope will be a somewhat regular feature on this blog, which is some insights, observations, and general glimpses of the real world encountered as we work on implementing new impact evaluations. I know some of our readers take umbrage with the term “the field” but I’m sure it is preferred to “Mission musings” , although maybe “Random rambling” might be appropriate.
I recently got back from travelling to Cape Verde to help set up an impact evaluation of a World Bank financed program that offers matching grants to micro, small, and medium enterprises (MSMEs) – part of a new cluster of impact evaluations being undertaken through the DIME-FPD program at the Bank. These matching grants are a popular element of World Bank private sector loans in a number of countries, and are also used by governments such as Argentina and Malaysia. In a typical program, the matching grant program pays for 50 percent and the firm for 50 percent of the costs of activities like training workers, hiring a consultant to work on business planning, marketing, product development, etc.
Things progressed well, with all the counterparts seemingly on board with the planned impact evaluation strategy, and an excellent local partner involved – so fingers crossed for launch in the next couple of months.
One thing that surprised me a bit in discussions was to find that a reasonably common use of a previous matching grant program and of a somewhat similar program run by another government entity is to finance business plans or feasibility studies which have the main purpose of enabling the firm to obtain financing from a bank or external partner. Like MSMEs in many countries, lack of financing is a key complaint of the MSMEs I spoke with in Cape Verde, with one owner noting that the only ones to lend money to firms like his were the 3Fs: friends, family, and fools!
What surprised me was that according to both public and private sector people, these business plans often do work in getting firms financing (albeit with banks still demanding guarantors or collateral as well). I’m surprised because it is common for banks to be very risk averse in lending to small businesses, and lend on the basis of what assets they have, rather than how good their idea is (e.g. see this paper from an attempt we made to get firms loans in Sri Lanka). In contrast, the business plan does seem to be taking into account forward-looking prospects, and I’m surprised that risk-averse banks pay heed to this. But maybe they view them more as signals of firm quality – either some agency believes enough in the firm to devote resources to helping them with such a proposal, or the firm is professional enough to get this put together. A typical business plan preparation apparently costs around $1500, and are being used by firms to apply for loans of say $8,000-40,000, at annual interest rates of 8-12%. For loans on the smaller side, the cost of this business plan is a substantial increase in the effective cost of the loan, since firms don’t seem to use the plans for much more than obtaining financing.
One of the potential externalities of matching grant programs in developing countries is sometimes argued to be building the local market for consulting services. Discussions with a few firms suggested that this had occurred over the period of the past matching grant program, but that there is still a culture of firms being reluctant to pay for soft services. In one of the earlier qualitative interviews taken by my collaborator, she was given the telling quote “if you tell them to buy consultancy services instead of a computer, they will hit you”.
I therefore spent a bit of time trying to figure out how consultants build (and lose reputation), and how firms found out about consultants. The most typical answer was “Cape Verde’s a small place, people find out through networks”. But this seems to have some limitations – people are reluctant to badmouth too much someone they also might see in social situations, and while it makes it relatively easy for a firm to find a consultant to do what others have already used consultants for, if they are the first one in their social circle who wants to e.g. get quality certified, they have more difficulty identifying someone of good quality. The public sector plays some role in overcoming this barrier it seems through its small business development unit ADEI starting to build a database of consultants.
Nevertheless, I think it is no accident that the most developed markets for consultants are in the more tangible business services – accountants, website developers, people offering language training – with less developed markets in providers of less tangible business products like business systems development, quality control mechanisms, human resource management, strategic planning, etc. These are the types of management practices our experiment in India found to have pay-offs for larger firms, but the consulting market in providing these services seemed incomplete even in a much larger market with larger firms. In such cases, matching grant subsidy programs might help entice firms to take a chance on services with more information asymmetries that they might view as too risky at full prices. I look forward to seeing what sorts of things firms apply to do.