Assessment of impact investing policy in senegal dalberg 2012 by Impact Tracker

ASSESSMENT OF IMPACT INVESTING POLICY IN SENEGAL

DECEMBER 2012

Supported by the Rockefeller Foundation

Table of Contents List of acronyms ............................................................................................................................. 2 Executive Summary ....................................................................................................................... 3 1

Introduction ........................................................................................................................... 8 1.1.

Background and context ......................................................................................................... 8

1.2.

The role of government in impact investing ......................................................................... 11

1.3.

Scope of this study ................................................................................................................ 13

The need for impact investing in Senegal ............................................................................... 15 2.1.

Identifying Senegal’s social challenges ................................................................................. 15

2.2.

Which of Senegal’s social problems lend themselves to impact investing? .......................... 18

Demand: Building impact enterprises .................................................................................... 19 3.1.

Defining impact enterprises .................................................................................................. 19

3.2.

Entrepreneurial activity in Senegal ....................................................................................... 23

3.3.

Senegal’s impact enterprises ................................................................................................ 27

3.4.

Policies to promote impact enterprises ................................................................................. 30

Supply: Catalyzing private capital for impact ......................................................................... 34 4.1.

Sources of capital in Senegal ................................................................................................. 34

4.2.

Senegal’s impact investors .................................................................................................... 36

4.3.

Policies to increase supply of capital for impact ................................................................... 39

4.4.

Policies to direct capital towards areas of impact ................................................................ 40

Barriers to growth of impact investing ................................................................................... 43 5.1.

Demand challenges ............................................................................................................... 43

5.2.

Supply challenges .................................................................................................................. 46

5.3.

Challenges in directing capital to impact investing .............................................................. 48

Policy recommendations to shape and expand the market for impact investing .................... 50 6.1.

Raise awareness on impact investing ................................................................................... 51

6.2.

Stimulate the environment for impact investment activity .................................................. 54

6.3.

Conclusion ............................................................................................................................. 61

Annex A: Stakeholders interviewed in the course of this study ..................................................... 63 Annex B: Supporting information .................................................................................................. 65

List of acronyms ADEPME

AfDB AFIG

APIX ASEPEX BICIS BNDE BOAD BRVM CNCAS CPI CSR DASP DEF DFI DGID DPES ESG FDEA FDI FNPJ FONDEF FPE GDP

GIIN

Agency for the Development and Support of Small and Medium Enterprises African Development Bank Advanced Finance and Investment Group National Investment Promotion Agency Senegal Export Promotion Agency International Commercial and Industrial Bank of Senegal National Economic Development Bank West African Development Bank West African Regional Stock Exchange National Agricultural Credit Bank of Senegal Presidential Investment Council Corporate Social Responsibility Directorate for Private Sector Support Directorate for Women’s Entrepreneurship Development Finance Institution General Directorate for Tax and Property Economic and Social Policy Document Environmental, Social and Governance Women’s Business Development in Africa Foreign Direct Investment National Youth Promotion Fund Technical Education and Professional Training Fund Economic Promotion Fund Gross Domestic Product

GOANA HDI I&P ICT

IRIS LOASP MDG MFI NGO

OHADA PE PERACOD

REVA SCA SENELEC SME SPEC

SRI UK USA VAT VC WAEMU WDI

Global Impact Investing Network Grand Agricultural Push for Food Security and Abundance Human Development Index Investisseur & Partenaire Information and Communication Technology Impact Reporting and Investment Standards Agricultural, Forestry and Livestock Act Millennium Development Goals Microfinance Institutions Non‐governmental Organization Organization for Harmonized Business Law in Africa Private Equity Programme to promote rural electrification and a sustainable supply of domestic fuel Return to Agriculture Accelerated Growth Strategy National Electricity Company of Senegal Small and Medium Enterprise Sustainable Power Electric Company Socially Responsible Investment United Kingdom United States of America Value Added Tax Venture Capital West African Economic and Monetary Union Wealth Distribution Index

Executive Summary Background and context The Government of Senegal has clearly articulated its focus on addressing inequality, building local production and generating employment. Public resources alone will not be able to achieve these objectives, and it is therefore critical to harness private investment that can also generate social benefits. Dalberg Global Development Advisors in partnership with Senegal’s National Investment Promotion Agency (APIX) and with support from the Rockefeller Foundation have prepared this report to demonstrate that by using policy tools to catalyze impact investment,1 Senegal’s Government can direct private capital in pursuit of solutions to major social problems. Demand: Building impact enterprises It is well‐recognized that in an economy such as Senegal, entrepreneurship and enterprises, particularly small and medium enterprises (SMEs), are the engines of wealth creation and economic growth. However, in addition to supporting general SME activity, there is a critical need for enterprises that consciously seek to create a direct scalable social impact through their business models; these are referred to as impact enterprises. Impact enterprises – which can operate across sectors and range from cooperatives to social enterprises to for‐profit inclusive businesses – are different from ordinary enterprises in that their business model seeks to tackle social issues at scale through one or more of four paths:  Develop, or adapt existing, supply and distribution chains so as to increase the participation of local producers and suppliers;  Produce and/or supply much needed goods and services to low‐income groups in financially sustainable and scalable ways;  Develop business models that lead to the preservation of the environment and/or sustainable management of natural resources; and  Support the sustainable provision of high quality jobs, training and development opportunities to youth and/or marginalised groups. For impact investing to flourish there needs to be a hive of entrepreneurial activity. Comparing the number of new businesses per 1,000 people in Senegal (0.14 in 2009) with Kenya (0.45 in 2008) and Nigeria (0.42 in 2009) provides an indication of low levels of entrepreneurship in the country.2 Despite high levels of gross fixed investment in Senegal in recent years (27.9 percent of GDP in 2009 compared with 11.2 percent in Cote d’Ivoire and 19.6 percent in Ghana)3, the country has recorded low economic growth of around 4 percent4 mainly due to investments being made

Impact investing is defined as investments to create positive social and/or environmental impact beyond financial return. World Bank data (data.worldbank.org) 3 World Bank data (data.worldbank.org) 4 ‘Senegal Recent Developments and Prospects’ (www.africaneconomicoutlook.org) 2

disproportionately in activities or goods that are not directly productive.5 Remittances, which have ranged from four to 17 times greater than foreign direct investment over the last decade6, are also yet to be invested for the most part in directly productive activities.7 Access to finance has been identified by the private sector as the most problematic factor for doing business in Senegal, followed by tax rates and regulations, corruption and an inadequate supply of infrastructure.8 Impact enterprises, not only face the typical challenges that confront nearly all enterprises in Senegal but sometimes face further challenges due to the nature of their business models. Without the necessary framework to overcome these challenges and to allow individuals to grow their ideas into real investable opportunities, impact investing cannot flourish. The Government of Senegal has put in place a range of policies and interventions to promote enterprise development, and catalyze investment in specific sectors. Although these policies are not by definition impact investing specific, a broadly targeted SME policy can help to create an environment in which impact investing more readily occurs, and at greater scale. Examples of government interventions include: ADEPME;9 FONDEF;10 Direction de l’Entrepreneuriat Feminin (DEF); FNPJ;11 and the Organization for Harmonized Business Law in Africa (OHADA) “entreprenant” status. In 2006, the Senegalese government also established the National Bioenergy Strategy to help diversify Senegal’s energy sector. From an impact investing perspective this initiative seeks to catalyze both foreign and domestic private investment into biofuel production reducing the money spent on oil imports, protecting the environment and creating employment. Supply: Catalyzing private capital for impact For impact enterprises to grow and scale their activities, access to the right type of capital is critical. Building business models that generate significant social impact sometimes require investors to take on a risk/return profile that is unacceptable to traditional financiers. It is important to note however that impact investment does not by definition mean high risk or low rates of return. There are situations where a social issue creates a highly commercial growth opportunity (e.g. clean energy or agro‐industry), with the potential to deliver positive impact alongside market, or even above market, returns. Impact investors can be defined using the following criteria: a) positive social and/or environmental impact is part of their stated investment strategy; and b) social and/or environmental impact is measured as part of the success of the investment. In Senegal, impact investors range from DFIs, to MFIs, and from public investment funds to a handful of active international self‐identified impact investors with portfolios in Senegal; such as Root Capital, Etimos and E+Co. 5

For example, between 2000 and 2009, 73 percent of gross fixed capital formation was in construction (Senegal 2011 ‘National Competitiveness Report’) 6 World Bank data (data.worldbank.org) 7 Data from the African Development Bank (2007) show that only 5 percent of remittances in Senegal are used for productive investments while 34 percent are used for real estate, and 61 percent for family expenses 8 World Economic Forum, Global Competitiveness Report (2010‐11) 9 Agence de Développement et d'Encadrement des Petites et Moyennes Entreprises 10 Fonds de Développement de l'Enseignement Technique et de la Formation Professionnelle 11 Fonds National de Promotion de la Jeunesse 4

The Government of Senegal has put in place a range of policies and interventions to regulate and increase the supply of private capital for impact, and shift capital toward impact opportunities. For example, the Microfinance Act (2004) and the Law Governing MFIs (2008‐47) promote the sustainable access to microfinance services by marginalized communities and microenterprises. From an impact investing perspective microfinance services are considered a powerful instrument to fight poverty. The Investment Code (2004, revised in 2006) defines incentives implemented by the Government of Senegal to promote specific types of productive investment. It also seeks to encourage/promote a) new and existing enterprises, b) the creation of jobs, and c) the location of enterprises outside of Dakar, the capital city. Barriers to growth of impact investing A lack of awareness around the concept of impact investing in Senegal and what it really means is a primary barrier to the growth of the industry. Additional barriers identified are grouped based on demand‐side, directing capital and supply‐side challenges. Demand challenges: Lack of adequate financing sources to grow enterprises to a stage where they are ready to take on impact investments: The research highlights a distinct finance gap between US$ 1,000 to 100,000 that affects both SMEs in general and impact enterprises in particular, due to their size and the high risk nature of their business models. Limited capacity building service provision: Impact enterprises are often required to pioneer new business models that are tailored to the particular needs and constraints of the marketplace, and support in developing these business models is critical. Despite government efforts to provide capacity building services, programs are still considered inaccessible by many enterprises. No recognition of particular needs of impact (or social) enterprises: Enterprises whose business models try to address a social issue often face additional challenges. These particular constraints and the potential for social impact are not taken into account from a government perspective, and it would be beneficial if impact enterprises received incentives or concessions to lower their taxation burden and provide them with subsidized support. Lack of infrastructure and support services outside Dakar: Many of the country’s social challenges are more acutely felt outside of Dakar. The concentration of economic activities in the Dakar region means that most of the programs to support enterprises mainly serve the capital. Entrepreneurs based in more remote departments face additional challenges in terms of infrastructure and support services. Sector specific challenges: The interviews conducted under this study shed light on certain sector specific challenges hampering impact enterprises. For example, in the renewable energy sector the national regulator deals with both large‐scale and micro projects leading to inefficiencies and delays; and in the health sector, only individuals with a medical license can act as representatives of a company. 5

Supply challenges: Lack of investment vehicles: Impact investment funds pool private capital and target it towards investment opportunities in impact enterprises. The lack of investment funds in Senegal (both impact oriented and traditional commercial funds) limits the volume of capital that can be harnessed globally and domestically, and directed towards enterprises. Limited deal flow: There is no database of impact enterprises available for consultation by impact investors, and the matching of companies’ financial needs with the available supply of impact capital is mainly done by word of mouth and informal networks. An absence of local connections constitutes a barrier of entry to the sector. Limited exit options: The equity capital markets in Senegal are still incipient, with limited liquidity and only one Senegalese company listed on the regional stock exchange. This serves as a disincentive to investment funds that need to profitably exit from their investments. Challenges in directing capital to impact investing: Competing incentives: Incentives to provide positive impact in one area sometimes provide negative impact in another. The suspension of customs duty and surcharges on selected imported products such as rice and powdered milk, while good for food security, discourages local agricultural production. Lack of clarity under the fiscal framework: Certain exonerations have led to confusion for both entrepreneurs and investors. For example, enterprises can benefit from the suspension of the VAT for three years. However, it remains unclear whether they are obliged to repay all the accumulated VAT after this period. Policy recommendations to shape and expand the market for impact investing The recommendations are structured to respond to the barriers identified in two broad ways: (i) Priority actions: Raise awareness on impact investing; and (ii) Short to medium term actions: Stimulate the environment for impact investment activity. Priority actions: Raise awareness on impact investing Adopt a Senegal‐relevant definition of impact investing: Defining impact investing and publicly putting it on the government’s agenda is an effective way of showing commitment to both impact investors and impact enterprises. The definition is the first critical step in developing a legal framework for impact investing, and ensuring the transparency of the sector. Communicate impact investing concept: Universities can be engaged to increase the awareness of the topic among professors and students; the diaspora can be engaged as a potential source of capital, and there are already governmental programs and organs in direct contact with enterprises that can be leveraged to increase the awareness of impact investing. Short to medium term actions: Stimulate the environment for impact investment activity Support business incubators: Many of the challenges identified can be tackled using a well‐designed program of government support to private incubators. Expected results of this initiative include the 6

promotion of the concept of impact enterprises, support to young entrepreneurs, increased competition in different sectors and incentives to start businesses in the formal sector. Support business plan competitions: Business plan competitions are one way to engage communities and entrepreneurs to search for solutions to social issues. Local governments can highlight a particular social issue affecting a community or region and request entrants to come up with sustainable business solutions to the problem. Leverage existing government programs: The development of entrepreneurship is already being addressed by government initiatives such as ADEPME, FONDEF, and ASEPEX. Currently the directive of such initiatives is to generate economic growth, but they can be leveraged to increase impact investing deal flow by including social impact on their agendas. Develop an incentive structure for impact enterprises: Once the government has defined the concept of an impact enterprise in the case of Senegal, it can use these criteria to determine which enterprises can benefit from targeted support. This support could include tax exonerations, or access to training grants or subsidized technical assistance services. Establish an impact investment trust fund: Learning from the experience of Ghana with its Venture Capital Trust Fund or the Inclusive Innovation Fund in India, Senegal could seek to establish an impact investment trust fund. This fund would serve as a fund of funds and would seek to encourage private domestic institutional and individual investors to co‐invest alongside it. Encourage adoption of regional SME stock exchange: One of the key challenges identified for investors is a lack of exit options in the market. A way to address this challenge is to establish an SME stock exchange, and this is something that is currently being considered at the WAEMU level. Undertake case‐by‐case analyses on fiscal framework and sector specific challenges: In addition to the broader recommendations made above, there is also a need for more detailed analysis to be undertaken at a sectoral level to identify the implications of specific policy and fiscal regulations that are hampering the activities of investors and entrepreneurs. To garner a broad base of support for impact investing Government can also use its policy tool kit to encourage existing traditional enterprises to generate more of a social impact. For example, Government, at both the national and local level, can be more targeted in selecting its service providers, and demonstrate a preference for enterprises that demonstrate social impact. By encouraging impact across all enterprises, Government will be better placed to advocate for impact investing without excluding traditional business which is also critical for Senegal’s growth and development.

Introduction

1.1.

Background and context

The Government of Senegal has clearly articulated its focus on addressing inequality, building local production and generating employment.12 It is evident that public resources alone will not be able to achieve these objectives and it is therefore critical to harness private investment that can also generate social benefits. Impact investing seeks to do this. Any investments that effectively deliver social13 benefit evoke a strong case for government support. Dalberg Global Development Advisors in partnership with Senegal’s National Investment Promotion Agency (APIX)14 have prepared this report to demonstrate that by using policy tools to catalyze impact investment, Senegal’s Government can leverage its resources and attract much larger sums of private capital in pursuit of solutions to major social problems. This study has been financed by the Rockefeller Foundation and will contribute to a broader pan‐Africa study that includes findings from Ghana, Kenya, Nigeria and South Africa. What defines and differentiates impact investments? Impact investing is defined as investments to create positive social and/or environmental impact beyond financial return.15 Investing for social and environmental impact is not new, but the recent concentration of efforts by investors, foundations, social entrepreneurs and others on this strategy has led to the recognition of impact investing as a fast‐growing asset class in its own right.16 Actors in microfinance, development finance, and clean energy have been active for decades, but recently it has become possible to see the disparate and uncoordinated innovation in a range of sectors and regions converging to create a new global industry, with increasing capital flows driven by similar forces with common challenges.17 Box 1.1: Example impact investment in Senegal

An example of an impact investment in Senegal is the Durabilis Foundation and Root Capital’s support to Terral. Given the increasing price of rice on international markets, Durabilis Foundation (a Belgian impact investor) identified an opportunity in the Senegalese market to sell and distribute locally produced rice. The business – Terral – aims to fill a gap in the supply chain of local rice production and consumption. Terral purchases rice from primary processors in the “Vallée du Senegal” in northern Senegal. Terral then packages the rice into smaller units and distributes it to wholesalers and distributors to sell to urban local consumers in Dakar. Terral’s activities are integrated throughout the rice supply chain. It partners with local primary processors to develop rice warehouses, and provides technical assistance to farmers to boost yield and improve the quality of seedlings. The working capital for the project is provided by two impact investors: the Durabilis Foundation and Root Capital. The potential economic impact of this enterprise is significant. Not only will local rice farmers have a new avenue for marketing their produce, but promoting local rice to the domestic market, if successful, could make

Yoonu Yokkute 2012 ‘Programme Presidentiel Macky Sall’ Throughout this report we use the term ‘social’ to mean ‘social and/or environmental’ 14 Agence Nationale Chargée de la Promotion de l'Investissement et des Grands Travaux 15 Definition used by the Global Impact Investing Network (GIIN) 16 JP Morgan (2011), ‘Impact Investments ‐ An Emerging Asset Class’ 17 Monitor Institute (2009) ‘Investing for Social and Environmental Impact’ 13

Senegal less dependent on expensive imports. As well as creating jobs and generating income and tax revenue, the project will also help address food security issues in the country. (Source: Durabilis Foundation)

It is also helpful to understand what impact investing is, by explaining what it is not. Impact investing distinguishes itself from other types of investment, such as corporate social responsibility (CSR), socially responsible investment (SRI) and general private sector investment in Senegal, in the following ways:  CSR has no single, commonly accepted definition. It can range from occasional gestures motivated by public relations, such as a company donating books to a local school, to a comprehensive set of policies, practices and programs, integrated throughout business operations and decision‐making processes that link respect for ethical values, people, communities and environment. Impact investing seeks to go further, and is premised on the fact that the core business model into which capital is deployed seeks to directly solve a social issue, rather than it being a company’s side activity. Box 1.2: Example of Corporate Social Responsibility

An example of CSR in Senegal is the "Jigueen Ni Tamit" program funded by Sonatel through PlaNet Finance (a microfinance institution in Senegal). This program seeks to promote women's entrepreneurship by helping women to gain access to financial services (credit and savings) and provide them with the tools to improve the management of their micro‐enterprises. Although, this program has had a significant social impact (e.g. in 2007, 500 micro‐entrepreneurs benefited from training and 3,000 women were trained on the management of micro‐enterprises and credit), Sonatel is not considered an impact investor because it grants the funds as part of its CSR activities and does not expect a financial return. (Source: www.rsesenegal.com)



SRI can be understood as investors encouraging corporations to improve their practices on environmental, social, and governance issues.18 Rather than simply minimizing negative impact, impact investing goes beyond SRI and focuses on proactively creating positive social or environmental benefit.19 As such, impact investors closely manage the social performance of their investments in addition to financial risk and return. Box 1.3: Example of Socially Responsible Investment

An example of SRI in Senegal can be seen with SOCOCIM a cement company in Bargny. SOCOCIM, which was acquired by Vicat (the third largest cement company in France) in 1999, has been supplying the Senegalese market since the 1950s and has also been exporting its cement to the surrounding countries. Quarry operations, by their very nature, have a negative impact on the environment. The Vicat Group works hard to reduce that impact, while developing and testing a variety of environmentally conscious practices, from improved extraction methods to the efficient processing and transporting of materials. In Senegal, the SOCOCIM implemented a "green belt program" where the cement quarry is located to offset the negative environmental impact. In collaboration with the Municipality of Bargny, SOCOCIM seeks to preserve biodiversity despite the presence of the quarry, and plant species suitable for biofuel usage in uncultivated areas. Although this creates an impact

US Forum for Sustainable and Responsible Investment (http://ussif.org/resources/sriguide/srifacts.cfm) InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’

from an environmental and community perspective this is not an impact investment as Vicat/SOCOIOM’s business model is not focused on proactively creating positive social or environmental benefit, but rather minimizing their inevitable negative impact (Source: www.vicat.com; www.rsesenegal.com)



The primary aim for general private sector investment in Senegal (i.e. traditional for‐profit enterprises) is to grow and provide value to shareholders. Although these enterprises pay taxes, provide employment, help to build infrastructure or indirectly achieve other valuable social or environmental outcomes, their primary purpose is not to achieve these outcomes. Impact investing only includes those investments made with the explicit intention of having a positive social impact, such as the preservation of the environment, the creation of quality jobs, or the provision of affordable health care in financially sustainable and scalable ways. The fact alone that an investment is made in a developing country such as Senegal is not sufficient to qualify it as an impact investment.

Box 1.4: Example of general private sector investment

An example of general private sector investment in Senegal is Emerging Capital Partners (ECP) investment in Teranga Gold Corporation. ECP is a private equity group investing in companies across the African continent. Teranga Gold Corporation is a gold company which was created to acquire the Sabodala gold mine and a large regional exploration land package located in Senegal, from Mineral Deposits Limited. This is not an impact investment as it is not seeking to solve a social problem. Although this investment will have incidental impact by generating employment and tax revenues, its primary purpose is not to achieve these outcomes. The primary objective is to increase reserves and production, which in turn should increase earnings and shareholder value. (Source: www.ecpinvestments.com; www.terangagold.com)

The above distinction between impact investing and other types of investment does not seek to classify some investments as “good” and others as “bad”. The authors of the report recognize the value of catalyzing overall investment activity in Senegal, but seek to make the case that there are certain types of enterprises that should be supported due to the social problems they are trying to solve, and capital to support these enterprises should be encouraged. How big is impact investing? Because this new style of investing is diverse and in a nascent stage of development, there is no way to tell exactly how big it really is. But the high level of activity and innovation in specific segments and geographies where data is available suggests that the industry is poised for growth.20 A recent report by JP Morgan (2010) suggests that the impact investment is emerging as an alternative asset class that offers the potential over the next 10 years for invested capital of US$ 400 billion – US$ 1 trillion and profit of US$ 183 – US$ 667 billion globally.21 A 2011 report by Dalberg Global

20 21

JP Morgan (2011), ‘Impact Investments ‐ An Emerging Asset Class’ JP Morgan (2011), ‘Impact Investments ‐ An Emerging Asset Class’. NB: JP Morgan have not endeavoured to measure the

entire impact investment market, but present a framework for measuring the potential scale of invested capital and profit. Applying this methodology to selected businesses within five sectors — housing, rural water delivery, maternal health, primary education and financial services — for the portion of the global population earning less than $3,000 a year, they find that this segment of the market offers the potential over the next 10 years for invested capital of $400bn–$1 trillion and profit of $183– $667bn. 10

Development Advisors estimated that at least US$ 3.2 billion of impact investing capital is invested or committed to be invested in West Africa each year.22 Who is involved in the market? Like any financial market, impact investing has a supply side, a demand side and a market in which exchange occurs, where rules govern the terms of trade and buyers and sellers set prices (see Figure 1.1).23 On the supply side providers of capital include governments, individuals, foundations, banks, and investment and retirement funds. The demand side is made up of companies, cooperatives, projects, and other vehicles in need of capital. Figure 1.1: Overview of the impact investing market

1.2.

The role of government in impact investing

Government can participate directly in the market or influence impact investing through policy or regulation. It can seek to increase the amount of capital for investment (supply development); increase the availability or strengthen the capacity of capital recipients (demand development); or adjust the terms of trade, market norms, or prices (directing capital).24 Globally, there are many thousands of policies that influence impact investors in some manner. It is important to note that these policies are not designed and created as ‘impact investing policies’ per se, but rather aim to correct market failures or spur new private sector activity in underserved areas or innovative themes. In India, for example, the Central Bank has required all public and private banks to direct a fixed percentage of lending to “priority sectors”, which it defines as underserved or priority areas for economic growth. Another example of public policy actions that support impact investing can be found in Ghana. The Venture Capital Trust Fund Act of 2004 established the Ghana Venture Capital Trust Fund to provide financial resources for the development and promotion of venture capital financing for small and medium enterprises (SMEs) in Ghana. SMEs are considered as the engine of growth for the Ghanaian economy. Therefore, by supporting the financing of SMEs, the Ghanaian government aims to create jobs and wealth in Ghana. Senegal too has a range of policies that could be beneficial to impact investment. The Investment Code (2004) for example provides incentives to investors that create new enterprises, create jobs, and develop enterprises in underserved regions of the country. Further, under the OHADA reforms, the introduction of a new status for small entrepreneurs (“entreprenant”) with a “light” legal regime

Dalberg (2011) ‘Impact Investing in West Africa’ InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’ 24 Ibid 23

enables entrepreneurs to register and operate a business more easily, building the pipeline of opportunities for impact investors and investors alike. Introducing a framework for the design and analysis of impact investing policy This report bases its analyses on a framework developed by InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University25 for impact investing policy design and analysis (see Figure 1.2 below). The role a government chooses to play in a policy intervention may be as a direct participant in the market, contributing resources like any other investor or consumer, or as an outside influence, through regulation or by building the infrastructure necessary for impact investments and markets to grow. Governments have a wide variety of tools and can play an influential role in shaping and expanding the market for impact investing.26 Figure 1.2: Framework for impact investing policy design and analysis

In addition to classifying policy, it is also useful to evaluate policy in line with core characteristics that address how a particular intervention may activate the desired market activity. InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University27 have developed specific criteria (see Box 1.5) to design and assess policy. These criteria are used in this report to analyze existing policy examples and are taken into account in making overall recommendations to the Government of Senegal.

Ibid Ibid 27 Ibid 26

Box 1.5: Six criteria to design and assess potential policy

Source: InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’

1.3.

Scope of this study

Understanding how policy interacts with private capital markets to increase the supply, demand for, or direction of capital, is crucial for impact investors navigating the market in Senegal as well as for policy developers and other stakeholders. This study seeks to raise awareness among Senegal’s policy‐makers on the role impact investment can play in tackling the broad range of social issues that the country faces, and make recommendations on how government intervention can increase this type of investment. The focus of this study is not on the general enabling role of government in markets, such as the provision of basic infrastructure and improving the general business environment, but rather on specific efforts to catalyze investment opportunities that yield deliberate and substantial social benefit. The findings underlying this study are based on in‐depth interviews with key actors in government, financial institutions, enterprises and enterprise support organisations, and an analysis of Senegal’s policy environment. This study has also greatly benefitted from the insights and discussions of the Presidential Investment Council’s 2012 Working Group on ‘How to Increase the Social Impact of Private Investment’. The study does not seek to size the market for impact investing in Senegal or provide a comprehensive mapping of on‐going activities in the investment space. Rather, this study provides an introductory approach to impact investing and supporting policies in Senegal, and makes high‐ level recommendations on key points for Government to consider. This study provides a basis for further exploration, and the next critical step for APIX, the Presidential Investment Council and Government is to identify when and what impact investing policy(ies) might be justified.

Structure of the report The remainder of this report is structured as follows:  

  

Chapter 2 seeks to better understand the role that impact investing can play in Senegal by firstly identifying the social problems that the country faces; Chapter 3 introduces the demand side of the impact investing market and the concept of “impact enterprises” before looking at existing policy interventions to promote demand in Senegal; Chapter 4 examines the supply of impact investing capital in Senegal, and evaluates existing Government interventions in these areas; Chapter 5 presents the barriers to impact investing in Senegal identified in the course of the study; and Chapter 6 makes recommendations on interventions the Government may consider to increase the flow of impact investing capital into the country.

The need for impact investing in Senegal

Impact investing requires the use of investment to back a (potential) solution to a social issue. The starting point in evaluating the potential for impact investing in Senegal is therefore to identify the major social issues that exist. This section examines Senegal’s social challenges at a high‐level to provide the context for the remainder of the report.

2.1.

Identifying Senegal’s social challenges

Senegal, a member of the West African Economic and Monetary Union (WAEMU) is officially classified by the World Bank as a lower middle income country, with approximately 51 percent of its population living below the poverty line.28 Senegal, with a population of 12 million and a GDP of US$ 13 billion, has recorded an average annual growth rate of 4 percent between 2000 and 2010 despite energy, food and financial crises during the period.29 Although Senegal’s distribution of wealth is better than most benchmarks, one of the country’s great challenges is to achieve sustained economic growth in a way that benefits all Senegalese. Inequality in Senegal, as measured by the Gini coefficient,30 was 39.2 over the period from 1992‐2007, according to the Human Development Index, placing Senegal 65th over that period of time out of 142 countries for which data were available.31 The latest available data from the World Development Indicators (2005) show that the top 20 percent of the population owns nearly 46 percent of all of the country’s wealth; while the bottom 20 percent has only 6 percent (Figure 2.1).32 Figure 2.1: Wealth distribution in Senegal (%)

Source: World Development Indicators 2005 (latest available data). Calculated as the ratio of total income received by the 20% of the population with the highest income (the top quintile) to that received by the 20% of the population with the lowest income (the bottom quintile).

The Government of Senegal has clearly articulated the country’s development priorities, and strategies to meet the Millennium Development Goals (MDGs) in its third Poverty Reduction

World Bank data (data.worldbank.org/country/senegal) Senegal 2011 ‘ National Competitiveness Report’ 30 Measure of the deviation of the distribution of income among individuals or households within a country from a perfectly equal distribution. A value of 0 represents absolute equality, a value of 100 absolute inequality 31 World Bank data (data.worldbank.org/country/senegal) For purposes of comparison, over the same period the Gini coefficient in Togo was 34.4, in Ghana was 42.8, in Cote d’Ivoire was 46, and in Kenya was 47.7. 32 Ibid 29

Strategy Document – Document de Politique Economique et Sociale (DPES) 2011‐2015. Figure 2.2 below uses this document to summarize the range of social, economic and environmental challenges that the country faces. Figure 2.2: Major challenges faced by Senegal

Source: Government of Senegal, DPES 2011‐2015; Dalberg analysis

Although Senegal has made progress in recent years towards the MDGs, it appears that only goal 3 (gender equality), goal 4 (reduce under five mortality rate), goal 6 (combat HIV/AIDS and other diseases) and goal 7a (access to water) will be achieved by 2015. Maternal health, education and employment are some of the key social challenges impacting on the nation’s development.

Figure 2.3: Senegal’s performance against a selection of MDG indicators

Source: Senegal MDG data (UNDG); Dalberg analysis *Some data from 2009 **Achievement probabilities are taken from the 2007 MDG report and updated using the 2010 report and analysis of recent trends; no data for MDG 6 – combat HIV/AIDS and other diseases

Few Senegalese have access to health facilities and the maternal mortality rate remains high. Moreover, only half of the population has medical insurance.33 Under the health and primary education pillar of the 2010‐2011 global competitiveness report, Senegal has its worst ranking (118th out of 139 countries).34 In the economic sphere, challenges around access to finance, agriculture, infrastructure and productivity also present significant burdens to the country. It is problematic to measure unemployment and job creation levels due to the lack of reliable and recent data, but according to the latest national employment survey conducted in 2005, the employment rate is 38.7 percent, which means that out of 100 persons of working age, fewer than 40 have a job.35 More than 3 million people in Senegal, about 25 percent of the total population, suffer from seasonal or year‐round hunger.36 This is the combined effect of longstanding underinvestment in agriculture and high vulnerability to food shocks and external factors. Poor competitiveness of the agriculture sector (51 percent of labour force, but only 16 percent of GDP) hinders food security and

Senegal 2011 ‘ National Competitiveness Report’ Ibid 35 Ibid 36 USAID, 2010, Feed The Future Strategic Review 34

jeopardizes economic growth.37 Nevertheless, it should be recognized that the Government’s growing investment in agriculture (of more than 10 percent per year) has opened the door for progress in food security.38 The urban electrification rate of 77 percent is lower than the world average (93 percent) but higher than Africa’s average (67 percent), whereas the rural electrification rate of 16 percent is lower than Africa’s average of 23 percent.39 When it comes to availability of electricity, Senegal has an average of 6.8 hours of power outages a month; higher than the sub‐Saharan Africa mean of 5.3 hours.40 The cost and availability of electricity has a significant bearing on the overall productivity and competitiveness of enterprises. With regards to the environment, due to its geographical position alongside the Sahel, Senegal is exposed to the adverse effects of climate change coupled with poor distribution of housing that increases the population’s vulnerability to drought, flooding and disaster risk.

2.2.

Which of Senegal’s social problems lend themselves to impact investing?

From this broad range of challenges it is necessary to ask the question: Which of these issues can be tackled at scale using impact investing, i.e. investments into enterprises rather than requiring charitable or government solutions? It is important to note that although impact investing represents one potential solution to some of Senegal’s social problems it is not a panacea and should not be seen as a replacement for government or donor support. There are many problems that are too intractable or complex for impact investing to make a meaningful difference, or that do not lend themselves to a sustainable or scalable business opportunity. Chapter Three takes an in‐depth look at the demand side of impact investment and the importance of “impact enterprises”.

Senegal 2011 ‘ National Competitiveness Report’ USAID, 2010, Feed The Future Strategic Review; In 2009, the country finalized its Comprehensive Africa Agriculture Development Programme (CAADP) Investment Plan, setting a long‐term vision for agricultural development as the primary driver of economic growth. The coordination of the Investment Plan is housed in the Office of the Prime Minister, further emphasizing Senegal’s desire to elevate agriculture’s economic and food security profile. 39 Senegal 2011 ‘ National Competitiveness Report’; World Energy Outlook, 2011 Electricity Access Database 40 World Bank data (data.worldbank.org) 38

Demand: Building impact enterprises

It is well‐recognized that in an economy such as Senegal, entrepreneurship and enterprises (particularly SMEs41) are the engines of wealth creation and economic growth. Enterprises, formal and informal, invest, create jobs, produce, and export and distribute value added. There is some debate as to whether investment in SMEs, in and of itself, constitutes impact investing. Although SME finance is much‐needed and critical for Senegal’s economic growth, it is also important to recognize that not all SMEs create social benefit at scale. This is particularly true in the case of Senegal where many SMEs focus on trading activities.42 Therefore, in addition to supporting general SME activity, there is a critical need for enterprises (small, medium and/or large) that consciously seek to create a direct scalable social impact through their business models. This Chapter introduces the concept of “impact enterprises”, examines the overall business environment in which enterprises operate in Senegal, and analyses examples of policies in place to support the demand side of impact investing.

3.1.

Defining impact enterprises

In order for impact investors to have both a social impact, and generate a financial return they need to be able to find scalable “impact enterprises”.43 These enterprises ‐ which can operate across sectors and range from cooperatives to social enterprises to for‐profit inclusive businesses ‐ are different from ordinary enterprises in that their business model seeks to tackle social issues at scale through one or more of four paths (see Figure 3.1). These paths draw on the Global Impact Investing Rating System’s (GIIRS) list of socially‐ and environmentally‐focused business models, summarizing the different models into four key impact areas.44

In Senegal, Small Enterprises include micro‐enterprises and very small businesses that meet the following criteria and thresholds: Between one and twenty employees; Basic accounting system in place; Revenue excluding annual taxes is less that FCFA 50 million. Medium Enterprises meet the following criteria and thresholds: Less than two hundred fifty (250) employees; Accounts certified by a registered member of the National Order of Chartered Accountants; Revenue excluding taxes annually between FCFA 50 million and FCFA 15 billion; Net investment less or equal to FCFA one billion. 42 Activities of resale, in their existing state, of products bought from outside the enterprise 43 The term “impact enterprise” is used by the Rockefeller Foundation. The terms “inclusive business” and “market‐based solution” are also used in the literature to refer to businesses that engage in a beneficial way with the base of the pyramid (BoP). A key difference between these and the term “impact enterprise” used in this report is the inclusion of the environmental aspect which doesn’t necessarily apply to the BoP and which is an integral part of impact investing. Further, the term “social enterprise” is often used to refer to businesses which have a social impact. This report has refrained from using this term as it is often associated with non‐profits that use business models and earned income strategies to pursue their mission. The term “impact enterprise” is broader taking into account social enterprises as well as other for‐profit ventures that create social benefits. 44 Global Impact Investing Rating System (www.giirs.org) 19

Figure 3.1: Different ways in which an enterprise can have a social impact

Using the GIIRS list of socially‐ and environmentally‐focused business models, each path can be explained as follows:  Path 1: Develop, or adapt existing, supply and distribution chains so as to increase the participation of local producers and suppliers. This includes sourcing through fair wage certified suppliers, and supporting small‐scale suppliers by providing technical assistance/capacity building, entering into future contracts, or buying goods from local artisans. Or, the enterprise itself is a producer cooperative where owners are supplier members who organize production.  Path 2: Produce and/or supply much needed goods and services to low‐income groups in financially sustainable and scalable ways. The product or service provided by the enterprise benefits low‐income consumers by providing services such as the following: access to basic services, health care and products, improved economic opportunity for product users, improved market access through physical or technological infrastructure, or access to education, or producing a product in and for the local economy that had only been available through import.  Path 3: Develop business models that lead to the preservation of the environment and/or sustainable management of natural resources. The product or service conserves the environment through one of the following: Providing or being powered by renewable energy or cleaner‐burning energy than market alternatives, reducing energy and/or water use, reducing waste, promoting land of wildlife conservation, reducing toxic/hazardous substance and input materials; pollution prevention and remediation, or educating measuring, researching, or providing information to solve environmental problems.  Path 4: Support the sustainable provision of high quality jobs, training and development opportunities to youth and/or marginalised groups. Under this path, the company could 20

use a micro franchising or micro‐distribution model, focus on employing workers from chronically underemployed populations (including but not limited to low income, poor, very poor) and/or extensively training and investing in these workers. To better understand the concept of “impact enterprises” it is also useful to draw the Impact Reporting and Investment Standards (IRIS) project, which introduces social impact objectives and environmental impact objectives (Figure 3.2).45 If an enterprise’s mission is to pursue one or more of the following objectives it can typically be classified as an “impact enterprise”. Figure 3.2: IRIS social and environmental impact objectives

Source: www.iris.thegiin.org

Table 3.1 gives examples of how entrepreneurs and impact investors globally are using business approaches to seek to solve social issues that Senegal can learn from and adapt to its local context. It is noteworthy that the size of investments can range from a few thousand up to several million dollars depending on the size of the enterprise.

Impact Reporting and Investment Standards (http://iris.thegiin.org/indicator/environmental‐impact‐objectives‐od4108) 21

46 Table 3.1: International examples of impact enterprises and impact investors solving social issues

Social issue Access to sustainable energy Access to clean water Access to sanitation Waste management Improving rural livelihoods Job creation Health education

Access to healthcare

Example ‘impact enterprise’ business models Enersa: Haiti‐based producers of solar street lights and other products Toyola: energy efficient cook stoves that limit the amount of wood needed Husk Power System: biomass generated power plants using agricultural waste and by‐ products There are several models of using reverse osmosis technology to purify water and supply community sites for low‐cost purchase by the liter Ecotat: Augmented sanitation facilities for the urban poor CASCAF: collection, sorting and recycling of waste into manufactured products Sagex: produces soy and corn for local consumption Fruiteq: buys organic and Fair Trade fresh mangoes from more than 500 small‐scale producers Altea, Finapack: production of specialized packaging for sourcing to local companies Trainis: capacity building and training services Books of Hope: production and supply of audio books in local dialect to educate people on common health issues There are several models of rural clinics and hospital models that provide targeted affordable services for common health issues Vue et Vision: sells affordable prescription glasses to marginalized populations

Nutrition Access to medication Education Access to finance

Insta Products: local production of fortified porridge for sourcing to UNICEF, WFP, USAID etc. Drishtee: last mile access to pharmaceutical drugs and other consumer products through community kiosks Genemark: production of generic medicines Bridge Intl Academy: chain of low cost, for‐profit schools that deliver quality education to poor communities at just under USD 4 per month Sinergi: investment company supporting SMEs Afrique Émergence & Initiative: microfinance institution

Country Haiti Ghana

Impact Investor AIDG E+CO

India

Acumen Fund

Kenya Haiti Cameroon

Acumen & Aavishkaar Venture Management AcumenFund UN funded project Investisseur & Partenaire

Burkina Faso

Root Capital

North Africa Mali

AfricInvest Investisseur & Partenaire

Several

Global (US)

Acumen Fund

Several

Acumen Fund & Aavishkaar Venture Management

Ivory Coast

Investisseur & Partenaire

Kenya

Acumen Fund

India

Acumen Fund

Cameroon

Investisseur & Partenaire

Kenya

LGT Venture Philanthropy

Niger Ivory Coast

Investisseur & Partenaire Investisseur & Partenaire

Information sourced from the websites of the different impact investors 22

3.2.

Entrepreneurial activity in Senegal

All impact investments start with an entrepreneur with an idea. For impact investing to flourish there needs to be a hive of entrepreneurial activity that seeks to address social issues at scale in a financially sustainable way. To encourage the development of impact enterprises it is firstly necessary to understand the overall business environment in which entrepreneurs in Senegal operate, and their financing needs. Senegal’s private sector The Global Entrepreneurship Monitor (GEM) is the most widely used framework for evaluating the state of entrepreneurship in a country. Senegal is not currently part of the GEM survey, but comparing the number of new businesses per 1,000 people in Senegal (0.14 in 2009) with Kenya (0.45 in 2008) and Nigeria (0.42 in 2009) provides an indication of low levels of entrepreneurship in the country.47 While there is substantial variability from year to year in the creation of new enterprises in Senegal, overall business density has remained relatively flat between 2000 and 2009 due to similar numbers of business closures.48 The legal and regulatory aspects of doing business (e.g. administrative tax burdens and the time and cost involved in registering property) have discouraged entrepreneurship and new business formation and resulted in large numbers of informal firms, which have labour productivity levels that are only seven to 10 percent that of formal ones.49 The private sector in Senegal has an atypical profile with the economy heavily dominated by its manufacturing and services sectors. Between 2000 and 2009, on average, these sectors accounted for less than half of Senegal’s workforce but 84 percent of total GDP, while the 51 percent employed in agriculture collectively accounted for only 16 percent of GDP (see Figure 3.2).50 The low levels of agricultural productivity can be explained by high levels of informality in the sector (see Figure 3.3), a low degree of mechanization and a high dependence on irregular rainfall. The structure of the economy shows great disparity between sectors in terms of contribution to total GDP and importance to job creation in the country. It is comprised of about thirty major enterprises that provide the bulk of tax revenue, 250,000 small and medium enterprises (SMEs), of which about 33,000 are registered, and the remainder operates in the informal sector.51 Of total corporate taxes, 75 percent is paid by about 15 large companies, and nearly 40 percent is paid by telecommunications companies.52 SMEs represent over 90 percent of Senegalese enterprises, concentrating 30 percent of the jobs and only 20 percent of value added.53 The high level of informality is one of the main reasons identified by the Government for the country’s low productivity which results in an output level still considered insufficient to lower poverty levels substantially.54 47

World Bank data (data.worldbank.org) Senegal 2011 ‘ National Competitiveness Report’ 49 Ibid 50 Ibid 51 AfDB Senegal Country Strategy Paper 2010 ‐ 2015 52 Senegal 2011 ‘ National Competitiveness Report’ 53 Ibid 54 Ibid 48

Figure 3.2: Output and Employment Composition, 55 % of total employment, % of GDP

Figure 3.3: Formal and Informal Sector Contribution to Total value‐Added, 2005 – 2009 Average56

Productivity in all sectors of Senegal’s economy is hindered by the degree of informality. In agriculture, labor productivity of the informal sector – which comprises 98 percent of producers ‐ is 10 percent of that of the formal sector. Moreover, between 2000 and 2009, the labor productivity of the formal agriculture sector grew more than 10 times faster than that of the informal agriculture sector.57 Low productivity means fewer resources for entrepreneurs and smallholder farmers to create wealth and jobs. Markets remain underdeveloped offering even fewer incentives to growth. Taxation rates, bureaucracy, and costs to register and close companies are among the possible causes for such high levels of activity in the informal sector. However, the lack of awareness of potential benefits of the conversion from the informal to the formal sector is also a challenging issue to be addressed. Formalizing enterprises and organizing activities under cooperatives empower entrepreneurs, smallholder farmers, fishermen and other classes by providing them with negotiating power, coordination of class interests and easier access to finance. Senegal has a strategic geographic position and a relatively competitive framework for exports, including the absence of taxes on exports, low shipping costs, relatively open markets, and favourable logistics. Since 2005 however, services have been the primary export driver, growing five times faster than manufactured goods.58 As a member of the Central Bank of West African States (BCEAO), Senegal uses the CFA franc (FCFA) which is pegged to the Euro. Although this offers price stability (low inflation)59 a strong euro usually translates into a loss of price competitiveness of export products. Despite high levels of gross fixed investment in Senegal in recent years (27.9 percent of GDP in 2009 compared with 11.2 percent in Cote d’Ivoire and 19.6 percent in Ghana),60 the country recorded low

Ibid Ibid 57 Ibid 58 Ibid 59 In the past decade, the annual inflation rate in Senegal has remained relatively low, averaging about 2.1 percent per year 60 World Bank data (data.worldbank.org) 56

economic growth of around 4 percent.61 This is mainly due to investments being made disproportionately in activities or goods that are not directly productive. From 2005 to 2009, 73 percent of all gross fixed capital investment was made in construction.62 Remittances, which were four to 17 times more significant than FDI flows over the 2000‐2009 period, are also yet to be invested for the most part in directly productive activities.63 Data from the African Development Bank (2007) show that only 5 percent of remittances in Senegal are used for productive investments while 34 percent are used for real estate, and 61 percent for family expenses.64 Donor support to entrepreneurial activity in Senegal As part of their program of cooperation with Senegal, several donors are involved in supporting entrepreneurship and the private sector development. For example:65  French Development Agency (AFD): AFD has established a credit guarantee line with several financial institutions in Senegal (SGBS, BICIS, Bank of Africa, Alios Finance) to facilitate access to credit for SMEs. Companies with high social impact such as SPEC and Laiterie de Berger have benefited from this fund. In addition, the AFD has supported national initiatives to support the development of SMEs, particularly through the funding of the Bureau de Mise à Niveau, an institution that provides business development support services. Other partners that have also supported this program include the European Union, the Center for Enterprise Development and UNIDO. PROPARCO is a subsidiary of AFD that provides direct funding to the private sector, and in particular supports the development of SMEs, and seeks to preserve the environment and improve livelihoods.  German cooperation: Within its bilateral cooperation framework with Germany, Senegal has benefited from financial and technical support, which has enabled the implementation of the PERACOD program (Programme for the Promotion of Renewable Energy, Rural Electrification and Sustainable Energy Supply for Disadvantaged Populations). The objective of this program is to provide access to modern energy sources in rural area. This program was supported by GIZ which is also involved in initiatives such as the German‐Senegalese Program to Support Competitiveness and Growth of SMEs (PACC/SME/PMF).  Centre for Enterprise Development (CDE): The CDE is an initiative of the European Union created to support business development in low‐income countries. In Senegal the CDE supports companies to identify and mobilize resources for investment. It also provides technical assistance including: project definition, feasibility studies, and financial support for research funding.  Belgian Technical Cooperation: Within the framework of Senegal‐Belgium cooperation, Belgium has implemented initiatives to strengthen the microfinance sector, especially with the Support to Microfinance program, which aims to reduce the level of rural poverty in Diourbel, Fatick, Kaolack and Kaffrine regions. This program aims to improve access to microcredit in these regions, and to improve the capacity of microfinance institutions and other state structures working to provide financial services. 61

‘Senegal Recent Developments and Prospects’ www.africaneconomicoutlook.org Senegal 2011 ‘ National Competitiveness Report’ 63 Ibid 64 “Migrant Remittances: A Development Challenge,” African Development bank, 2007. Hard data in this study is from 2005. 65 Sourced from agency websites 62



USAID: USAID has launched an initiative in Senegal with the objective of ensuring the growth, productivity and competitiveness of the agriculture sector. The project aims to encourage investment in the agricultural sector and to significantly increase the contribution of agriculture to the national economy. USAID seeks to do this through building capacity in agricultural value chains, promoting entrepreneurship at each link and to boost local production by strengthening initiatives competing with imported agricultural products.

Enterprise financing needs Different activities in the development and operation of an enterprise will call for different types of funding. ‘Seed capital’, ‘growth capital’ and ‘working capital’ differ in terms of duration, risk tolerance, instrument used and the source, as laid out in Table 3.2 below. Table 3.2: Summary of enterprise finance needs

Seed Capital

Growth Capital

Working Capital

Description

Start of the business until funds from its own activities are enough to sustain the enterprise

Expansion or restructuring of activities

Day‐to‐day operations

Duration

Long‐term

Short to medium‐term

Risk tolerance

High

Medium to low

‐ Debt ‐ Equity ‐ Quasi‐equity ‐ Own capital ‐ Microfinance institutions (MFIs) ‐ Venture capital funds ‐ Angel investors ‐ Friends and family

‐ Debt ‐ Equity ‐ Quasi‐equity

‐ Debt

‐ Own capital ‐ Commercial banks ‐ Private equity funds

‐ Own capital ‐ Commercial banks

Most common instruments Typical providers of capital

Source: Stakeholder interviews and research; Dalberg analysis

Access to finance has been identified by the private sector as the most problematic factor for doing business in Senegal, followed by tax rates and regulations, corruption and an inadequate supply of infrastructure (see Figure 3.3). 66

World Economic Forum, Africa Competitiveness Report (2011) 26

Figure 3.3: Senegal’s most problematic factors for doing business, Africa Competitiveness Report 2011

Although the size and depth of Senegal’s banking and financial system has improved considerably during the past decade, Senegal’s 2011 National Competitiveness Report highlights that the sector is still characterized by its relative lack of sophistication, limited access to credit information, and high levels of non‐performing loans. These factors have resulted in limited availability and high cost of credit to the private sector, particularly SMEs.

3.3.

Senegal’s impact enterprises

Impact enterprises, not only face the typical challenges that confront nearly all enterprises in Senegal – such as difficulty in accessing finance, exporting competitively, attracting and retaining human capital, achieving economies of scale, creating trusted brands — but also face further challenges. For example, they may sell to a hard‐to‐reach customer base with severely limited resources, or they may engage suppliers with limited capabilities and high volatility in production. These businesses are often required to pioneer new business models that are tailored to the particular needs and constraints of the marketplace.67 Without ideas, and the necessary framework to overcome these challenges and to allow individuals to grow these ideas into real investable opportunities, impact investing cannot flourish. A number of impact enterprises are already Different ways in which an enterprise can have a established in Senegal, addressing social and social impact environmental issues and acting in sectors 1) Develop, or adapt existing, supply and distribution chains so as to increase the ranging from agriculture to health, from participation of local producers and suppliers; environment to infrastructure. The impact 2) Produce and/or supply much needed goods enterprises that were identified in Senegal and services to low‐income groups in financially sustainable and scalable ways; represent a broad range of corporate forms, and 3) Develop business models that lead to the have received investment from a variety of preservation of the environment and/or sources, but what they all have in common is sustainable management of natural resources; their objective to generate social and/or 4) Support the sustainable provision of high quality jobs, training and development environmental benefits in the country. Four opportunities to youth and/or marginalised examples are presented below of how impact groups.

Acumen and Monitor 2012 ‘From Blueprint to Scale’ 27

enterprises generate impact through one or more of the paths introduced in Figure 3.1. Agricola International68 (generates impact through paths 1, 2 and 4) Agricola International, a hybrid for profit and not‐for profit organization, develops barren land into profitable drip‐irrigated plots through an innovative system of “franchising”. Under this system, the business ownership is transferred from the land owner to various farmers by signing land leasing contracts, and the productive assets are organized under a productive enterprise. Training, coaching and technological, financial and material support is also provided to guarantee productivity and sustainability of the model. Agricola’s vision is to address mass poverty by empowering poor individuals and giving them access to resources to engage in agricultural activities. However, Agricola is constrained by land laws that do not allow the division of land in smaller plots and lease agreements. Import incentives also present a major challenge to Agricola, since the local agricultural production competes with subsidized imported products. Without the appropriate regulatory framework, Agricola’s business model cannot reach scalability. INENSUS69 (generates impact through paths 2 and 3) INENSUS, a German company specialized in services and products in the field of decentralized energy systems, entered into a public private partnership with Senegal’s government program to promote rural electrification (PERACOD) in 2009. Its business model is to supply electricity to off‐grid villages in Senegal by combining wind and solar power with a diesel generator. In order to guarantee the sustainability of the project, inhabitants of the village must apply the electricity to productive activities, to increase the revenue streams of the village. INENSUS partners with microfinance institutions to raise micro loans to new businesses such as rice millers, peanut peelers and tailors. The company has faced a number of challenges since its establishment and growth. Due to cumbersome Government procedures, the delay in the granting of licenses and in the approval of a unique tariff model hindered the growth of the company and the start of projects in new villages. La Vivrière70 (generates impact through paths 1, 2 and 4) La Vivrière is an enterprise that focuses on the processing and sale of local cereals. The entrepreneurial adventure began with funding received through a World Bank project. The enterprise started with a modest budget of FCFA 35,000 (approximately US$ 70) and was able to develop gradually, through the continuous improvement of production techniques. The company now has more than fifty employees (90% of whom are women), the vast majority of which come from rural areas. It offers two types of products: rolled products (thiéré, araw, thiakhry) and non‐rolled (soungouf, sankhal). La Vivrière products are sold locally in supermarkets and also exported to distributors in Europe (mainly France), Canada and the United States. During the early years of the company, production was undertaken manually, and was highly labour intensive. Then, with funding from the CDE (Centre for Enterprise Development), La Vivrière was able to mechanize the production of millet flour. Funding from the ADF (African Development 68

www.agricolainternational.org and interview with Agricola Founder and CEO www.inensus.com and interview with INENSUS Managing Director 70 Entretien avec la directrice de la Vivrière 69

Foundation) then allowed the company to produce sankhal mechanically. However, the production of thiéré, araw, and thiakhry, which makes up the majority of La Vivriere’s business remains traditional. The enterprise has struggled to find funding to allow it to mechanize all its production lines. Further, despite the willingness of the government to promote consumption of local produce, and to promote exports of processed products, local businesses operating in the grain processing sector are subject to VAT at 18% with no preferential pricing for the acquisition of raw materials. Despite the social and economic impact in terms of employment of women and value creation that La Vivrière is creating, the Director does not consider itself as an impact enterprise. The primary objective is to make the business profitable. That said, the company in its current form allows fifty families from disadvantaged backgrounds to have a stable job and a decent income. Proplast71 (generates impact through paths 3 and 4) Founded in 2010, Proplast is a recycling enterprise based Thies, Senegal. The company was initially supported during its creation by an Italian NGO and Cabinet Espère, a social investor. The company aims to clean the streets in Senegal of plastic waste while creating stable jobs through its recycling and sale. Proplast has three missions: an environmental mission which is to collect and treat more than 150 tonnes of plastic waste treated each year and thereby remove more than 273 tonnes of CO2; a social mission which is to employ more than 600 people in the collection of waste and sale of recycled plastic, and an economic mission which is to sell more than 150 tons of goods and generate turnover of FCFA 40 million (about US$ 80,000). The company faces several constraints however that are hindering its development. First, the amount of plastic waste they are able to collect is still relatively low. Second, the capacity at their processing plant needs to be increased, and third, the idea of recycling plastic waste is still very new in Senegal which limits their market. To grow the business and increase its impact, Proplast is seeking capital to establish processing centers in Dakar, purchase new equipment and further train its staff. SPEC72 (generates impact through paths 2, 3 and 4) SPEC is the first and only solar panels manufacturer in West Africa. SPEC’s shareholders, a group of Senegalese engineers, saw an opportunity to promote the solar panels industry in Senegal and in Africa by the transfer of technology and the establishment of local production, to ultimately substitute the importation of solar panels. Its business model also comprises the development of a network of local service providers, incentivizing small local businesses contracted to distribute and install SPEC’s products to individuals. It also partners with commercial banks and insurance companies to provide final users with appropriate credit lines to purchase the solar panels. SPEC aims to reduce the dependence on oil imports and to promote technological innovation in a critical sector for Senegal, since the chronic energy deficit and the high cost of electricity supply are 71 72

Présentation par le directeur général de Proplast www.solar.sn and interview with SPEC Managing Director 29

considered priority issues by the government. Access to finance and the tax incentives for imported solar panels are identified as the main constraints to SPEC’s growth. The sector is still underdeveloped in Senegal and government support is considered crucial to promote growth of SPEC and other companies with business models that lead to the preservation of the environment and sustainable management of natural resources. Nest for All73(generates impact through path 2) Nest for All’s business model is based on the development of a network of medical centers specialized in maternity and child care. The target patients are from marginalized populations who do not have financial resources to pay for private healthcare but value service quality, which is not always found in the public health network. Before becoming a business, Nest for All’s founders competed in different business plan competitions and participated in an incubation process. Pitching for competitions and receiving feedback on the concept of the business allowed the entrepreneurs to refine the idea. The incubation process provided them with business plan development support, and networked them with investors. Nest for All also received a financial prize which allowed the owners to capitalize the company, reducing the need for debt. Many obstacles delayed the start of Nest for All’s activities. The first barrier faced was difficulty to access information regarding the legal framework of a new company. Even when government entities were approached, the information received on the benefits and differences between each possible corporate structure differed from one representative to the other. Secondly, one of the shareholders of the company planned to exchange a real estate asset for shares. However, the taxes charged were very high and almost prevented the transaction. Even with no cash involved in such capitalization, heavy taxes had to be paid by the company and by the individual. Additionally, the registration of the enterprise with the Health Ministry imposed additional complex challenges. The legal framework for private clinics dates back to 197774 and it does not allow non‐doctors to establish enterprises in the health sector. The above case studies demonstrate that in order to increase impact, government policy has a key role to play in supporting existing impact enterprises, and in providing the necessary legal and regulatory frameworks to catalyze growth in the number of impact enterprises overall.

3.4.

Policies to promote impact enterprises

Policies that build demand include those that build institutional capacity, create enabling structures, and contribute generally to the development of impact enterprises, projects and capital recipients.75 The Government of Senegal has put in place a range of policies and interventions to promote enterprise development, and catalyze investment in specific sectors. Although, these policies are not by definition impact investing specific, a broadly targeted SME policy can help to create an environment in which impact investing more readily occurs, and at greater scale.76 For example:

Interview with Nest for All Director and with Investisseur & Partenaire Investment Director Réseau sénégalais “Droit, Éthique, Santé” ‐ http://rds.refer.sn/ 75 InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’ 76 Ibid 74



L’APIX is responsible for promoting investment in Senegal. In addition to working to improve the business environment to attract both domestic and foreign private investment, APIX is also engaged in promoting private sector development more broadly. This includes initiatives such as the one‐stop shop that allows a business to be created in 48 hours. ADEPME77 was created to support the development of SMEs. Its role is to advise entrepreneurs interested in creating a business on registration procedures, understanding the market, and governance and financial management. FONDEF78 provides enterprises with capacity building support. FONDEF finances training projects for SMEs and provides them with technical expertise. FONDEF funds up to 75 percent of total training budget, and the beneficiary SME covers the remaining costs.



Direction de l’Entrepreneuriat Feminin (DEF) aims to improve women's access to economic information, to credit and markets, by strengthening their technical and managerial abilities. The DEF manages a Fund for the Promotion of Women Entrepreneurs which serves as a refinancing fund for financial institutions (banks, micro finance institution) supporting projects led by women, a guarantee fund for loans granted to women, and a fund for technical assistance and support to development projects led by women (institutional support).



FNPJ79 is designed to finance micro‐projects led by young people, from one million to five million CFA francs. The FNPJ intervenes in the form of credit lines available to young people via microfinance institutions. The fund is intended to fight against youth unemployment.



Organization for Harmonized Business Law in Africa (OHADA) “entreprenant” status: In December 2010, Senegal (as a member of OHADA) adopted the first set of changes to the existing OHADA laws, which included the introduction of a new status for small entrepreneurs (“entreprenant’) with a “light” legal regime, enabling them to register and operate a business more easily. The aim is to encourage thousands of informal entrepreneurs to join the formal economy, thereby enabling them to access finance and support.

The focus on building local, productive, formalized enterprises serves to stimulate entrepreneurship and create a pool of investment‐ready enterprises for investors. To ensure that these enterprises have the desired impact, government has also put in place policies to guide investment and the creation of enterprises towards specific sectors that will seek to address social and/or environmental problems. The Government’s Accelerated Growth Strategy (SCA), for example, acts in five priority sectors – agriculture and agro‐industry; fishing and aqua‐culture products; textiles and clothing; ICT; and tourism, cultural industries and handicrafts. Each sector is divided into production clusters and regional clusters, and SCA serves as a technical facilitator of dialogue between each cluster’s actors,

Agence de Développement et d'Encadrement des Petites et Moyennes Entreprises Fonds de Développement de l'Enseignement Technique et de la Formation Professionnelle 79 Fonds National de Promotion de la Jeunesse 78

assisting in the development of value chains. The policy case study in Box 3.1 takes a more in‐depth look at government interventions to create investment opportunities in renewable energy sector. Relevant elements of the six criteria80 are used to highlight key lessons that can be learnt from an impact investing perspective. Box 3.1: Policy case study: National Bioenergy Strategy

In 2006, the Senegalese government established the National Bioenergy Strategy to help diversify Senegal’s energy sector. The objective of the strategy was to produce 1.1 billion liters of biodiesel from Jatropha. Each of Senegal’s 321 rural communities were supposed to plant 1000 ha of Jatropha seedlings provided by the government. From an impact investing perspective this initiative seeks to catalyze both foreign and domestic private investment into biofuel production reducing the money spent on oil imports, protecting the environment and creating employment. Social issues that the National Bioenergy Strategy seeks to address directly and indirectly  Dependence on oil imports ‐ a huge source of financial and energy instability  Preservation of the environment with the reduction of carbon emissions related to the use of fossil fuels  Job creation in rural areas through the mass production of jatropha Areas of success  There have been considerable new investments to expand jatropha cultivation throughout the country. Some examples of land allocated to biofuel investors between 2008 and 2010 include:81 o Afrique Energie obtained 11,000 ha of land in the Anambe river basin (South East of Senegal); o Plantations Vertes, a Spanish company was allocated 20,000ha in the rural community of Mbane (north of Senegal) o Senethanol/Senhuile, an Italian company received 20,000 ha in the rural community of Fanaye (north of Senegal).  3.3 million jatropha seedlings planted between 2007 and 200982  Construction of SOPREEF oil works for Jatropha oil production in 201283 Lessons that can be learnt Targeting: Due to the fact that this policy is very broadly targeted and incentivizes a whole sector of activity, a broad range of actors can seek to benefit. In this regard the involvement of foreign investors as opposed to local producers has raised cause for concern about the extent to which the initiative may actually negatively impact rural farmers. Coordination: By focusing on using land for biofuel production this policy potentially conflicts with policies such as GOANA (The Grand Agricultural Offensive for Food Security) which focus on food security. There is a risk that the increased presence of private investors can increase the likelihood of land use conflict between food, farmers and fuel and result in negative rather than positive impacts. In 2011 it was reported that there were violent clashes between villagers that were angry that thousands of hectares of land had been given to an Italian investor to grow food crops for biofuels. Villagers feared that this could result in the loss of grazing land and lead to their displacement.84 Implementation: The Government sought to provide the necessary institutional context and structure to support the effective delivery of the policy. Senegal entered into agreements that contribute directly to the country’s ability to scale up its biofuel industry. In 2006, Brazil, India, and Senegal signed a cooperation agreement to promote the development of Senegal’s biofuel production capabilities. Brazil will contribute scientific and technological information while India intends to provide the capital for the biofuel ventures. Senegal will provide the labour and land resources. For the implementation of the biofuels program, a

Criteria introduced in Chapter One; Box 1.1 The Wilson Center 2012 ‘Energy and Food Security in sub‐Saharan Africa’ 82 Government of Senegal, Direction of Agriculture 83 Réseau International d’Accès aux Energies Durables 84 September 2011 ‘Senegal: Biofuels Boost Land‐Grab Conflict in Country’ (ww.allafrica.com) 81

technical committee with different stakeholders is set up under the supervision of the Ministry of Agriculture. The Senegalese Institute for Agricultural Research (ISRA) is responsible for the production of the needed plants.

Supply: Catalyzing private capital for impact

For impact enterprises to grow and scale their activities in Senegal, access to the right type of capital is critical. Building business models that generate significant social impact often requires investors to take on a risk/return profile that is unacceptable to traditional financiers. Impact investors are prepared to take on this risk/return profile with the expectation that these enterprises have the potential to address a social problem. It is important to note that impact investment does not by definition mean low rates of return. There are situations where a social issue creates a highly commercial growth opportunity (e.g. clean energy or agro‐industry), with the potential to deliver positive impact alongside market, or even above market, returns. This Chapter begins by examining the sources of capital available in Senegal and how to classify the impact investors. It then takes an in‐depth look at active impact investors in the country before evaluating existing government initiatives to catalyze the supply of impact investing capital, and direct capital to impact enterprises.

4.1.

Sources of capital in Senegal

In Senegal, enterprises can, in theory, access finance from a range of sources. These include the traditional commercial banking system, microfinance institutions (MFIs), a handful of private equity (PE) and venture capital (VC) funds, development finance institutions (DFIs) and Public Funds such as the Fonds de Promotion Economique, which has recently been transformed into a bank targeting SMEs.85 Table 4.1 presents the different characteristics of each of these sources of finance. As shown in the table, these different actors either invest directly into enterprises or indirectly through PE/VC funds and MFIs for example. Table 4.1: Characteristics of different sources of funding existing in Senegal86

Typical investment size (US$)

Instruments used

Additional services provided

Sources of finance

Microfinance institutions (MFIs)

< 20,000

Debt and other microfinance products, e.g. insurance

Minimal

DFIs Institutional investors PE/VC

Angel investors

< 50,000

Equity, debt

Business development services

Own capital

Friends and family

< 50,000

Equity, debt

Minimal

Own capital

Commercial Banks

> 500,000

Debt

Minimal

Deposits

Development Finance Institutions (DFIs)

> 500,000

Equity, debt, quasi‐ equity, guarantees, trade finance

Technical assistance / managerial advisory services

Government resources

85 86

Soon to be ‘National Economic Development Bank’ (BNDE) Dalberg (2011), ‘Impact Investing in West Africa’ 34

Typical investment size (US$)

Instruments used

Additional services provided

Sources of finance

Venture Capital Funds

500,000 ‐ 2,000,000

Equity, debt, quasi‐ equity

Business development services

Institutional investors DFIs Private individuals

Public Funds

500,000 ‐ 2,000,000

Debt, guarantees

Technical assistance / managerial advisory services

Government resources

> 2,000,000

Equity, debt, quasi‐ equity, trade finance

Business development services

Institutional investors DFIs Private individuals

Private Equity Funds

Source: Stakeholder interviews; Dalberg analysis

Within this group of actors, impact investors can be defined using the following criteria: a) positive social and/or environmental impact is part of their stated investment strategy; and b) social and/or environmental impact is measured as part of the success of the investment. The latter criterion serves as a way to demonstrate that social and/or environmental impact is core to their investment approach. Figure 4.1 provides a typology for classifying impact investors based on their intent for impact and expectation of a financial return. Traditional investors are solely profit maximizing; impact investors optimize financial returns with an impact floor or optimize social impact with a financial floor; and philanthropists have no expectation of a financial return. Figure 4.1: Segmenting different sources of finance from an impact investing perspective

Source: Monitor Institute (2009); Dalberg analysis

Traditional investors In Senegal, commercial banks and private equity funds would be classified as traditional investors. These actors all focus on maximizing financial returns. Even though they may take into account environmental, social and governance (ESG) principles in their activities there is no intent for social impact. SMEs still account for only a small percentage of commercial bank’s loan portfolios as they are deemed as too high risk. In 2008, large companies held 88.1 percent of customer loans, while SMEs accounted for only 6.7 percent.87 Private equity funds have a very limited presence in Senegal. At the time of the writing of this report only one private equity fund – AFIG was headquartered in Senegal. The presence of Africa‐ and West Africa‐focused international funds is acknowledged,88 but Senegal has very little deal flow when compared to other countries in the region such as Nigeria and Ghana. Philanthropy Donors and NGOs in Senegal are typically classified as philanthropy due to the lack of expectation for financial return. These actors, although focused on social impact, tend to award grants to enterprises or other implementing agencies. It is important to note that the different actors can move in and out of the different quarters of the matrix based on their activities. For example, if an NGO were to start making loans to further their impact objective, or if a commercial bank established a more concessional credit line for low cost schools for example, this would classify them as an impact investor.

4.2.

Senegal’s impact investors

In general, impact investors seek to combine financial returns with social impact by making debt and/or equity investments89 in private, high‐growth companies that have the potential to deliver some measurable social or environmental benefit. Given the nature of the enterprises they are investing in, and in order to manage some of the risk, impact investors typically provide additional managerial advice and capacity building support as part of their investment. Building on the success of microfinance in demonstrating the commercial viability of an overlooked asset class, impact investors believe that you can achieve a commercial or quasi‐commercial return and outsized social impact by betting on innovative entrepreneurs addressing underserved markets. In Senegal, impact investors range from DFIs, to MFIs, and from public investment funds to venture capital funds. There are several DFIs with active portfolios in Senegal.90 IFC, for example, invested in four different projects in 2011, including a loan of €22.5 million for the construction of the Diamniadio toll highway.91 The African Development Bank (AfDB) currently has a portfolio of eleven projects, focusing on diverse sectors such as health, sanitation and energy.92 DFIs act not only through direct investments made into enterprises, but also by investing in investment funds which in turn invest in enterprises or microfinance.93 The objective of such investments revolves around

Senegal 2011 ‘ National Competitiveness Report’ For example Aureos which has investments in Senegal is now based out of Ghana 89 These are by far the most common financial instruments used but impact investing can involve the use of many other instruments such as quasi‐equity or mezzanine financing 90 Including Proparco (France); BIO (Belgium); African Development Bank (AfDB); International Finance Corporation (IFC); FMO (Netherlands); DEG/KfW (Germany) among others 91 Internatioanl Finance Corporation (www.ifc.org) 92 African Development Bank (www.afdb.org) 93 Dalberg (2011), ‘Impact Investing in West Africa’ 88

improving the investment climate, supporting SMEs and fostering sustainable development of sectors of the economy.94 MFIs are also widely spread in Senegal,95 reaching 13 percent of the population.96 There is over US$ 400 million in outstanding loans, and compared to other WAEMU countries, Senegal presents the best optimization of expenses and financial returns, having, on average, the sole self‐sufficient institutions in 2009 in West Africa.97 Although the vast network of MFIs in Senegal serve micro‐ enterprises, their typical investment size is not robust enough to meet the needs of SMEs. In order to address the specific problem of access to finance for SMEs, the government of Senegal has set up investment and co‐investment public funds such as Fond de Promotion Economique (FPE). Examples of instruments and services provided by these funds vary from loans, directly granted to the enterprises, offer of guarantees, to cover commercial banks risks, financial advisory, to comply with financial institution requirements and incentives to improve processes and activities. There are a handful of active international venture capital‐style investors with portfolios in Senegal. Venture capital funds are not by definition impact investors. But, in the case of Senegal, by focusing on more risky SMEs and early stage ventures, and tracking their impact, these investors are accepting a financial trade‐off for social impact. Three examples of impact investors active in Senegal are presented below. Root Capital98 Root Capital provides loans and financial advisory services to rural small and growing businesses, especially those not currently reached by commercial lenders. Root Capital established a West Africa focused office in 2010, replicating the business model it uses elsewhere of funding, delivering financial training and strengthening market connections for small and growing agricultural businesses. Root Capital organizes smallholder producers under cooperatives to formalize their businesses, prepares them to receive the funding required, and provides training and capacity building. One of Root Capital’s investees is Terral, an impact enterprise that purchases rice from local farmers in the Vallée du Sénégal and is responsible for packaging and distributing it to urban local consumers in Dakar. To grow its presence in Senegal with projects like Terral, Root Capital faces certain challenges. Firstly, Root Capital needs reliable financial information, including production and sales data and cash flow statements. When producers organize themselves under the cooperative form, tracking this type of information is easier due to legal requirements. However, producers in Senegal are claimed to be resistant to adopt this legal form of association, hindering investments by Root Capital. And secondly, there is a lack of awareness by loan recipients on how impact investing funding operates. Root Capital’s loan requirements are less strict in terms of collateral and

www.proparco.fr, www.afdb.org, www.ifc.org, www.kfw.de Dalberg and RDMA (2012), 'Etude sur l’accompagnement des ressortissant sénégalais établis en France dans la réalisation d’investissements productifs collectifs au Sénégal’ 96 Ministry of Women, Children, Women Entrepreneurship and Microfinance ‐ www.microfinance.sn 97 Ibid 98 www.rootcapital.org and interview with Root Capital Senior Loan Officer for Francophone West Africa 95

guarantees when compared to commercial bank loans, and often agricultural producers from rural areas confuse it with philanthropic capital and feel less committed to make repayments. Etimos Africa99 Etimos Africa is an international financial consortium that finances microfinance institutions, producers’ cooperatives linked to Fair Trade markets, and social enterprises. In 2009 Etimos opened its Senegal branch to consolidate its presence in Africa. Etimos’ investors seek to finance projects with high social impact and financial viability. Etimos supplies a wide range of products to finance organisations in developing and emerging markets. These products include loans, export credit facilities (advance on contracts) and equity capital. To maintain its sustainability and to contribute to the improvement of the microfinance environment, Etimos also provides technical assistance to partner MFIs, especially the smaller ones, in terms of client evaluation processes, monitoring of loans, accounting and general management. Increasing investments in Africa is part of Etimos’ strategic plan. In Senegal specifically, Etimos has faced barriers to its growth both in financing microfinance institutions and producers’ organizations. The microfinance sector in Senegal benefits from diverse supporting programs. Such programs include access to public loans by MFIs and capacity building programs.100 The government efforts are recognized as important for the sector’s development and for Etimos’ activities. However, the lack of consistent monitoring by government on its loans creates a network of leveraged MFIs that are not able to manage their debt portfolios. As a consequence, Etimos needs to adapt its own lending instruments to make repayment possible by these highly leveraged MFIs. Regarding financing producers’ organizations, Etimos identified the difficulty of sourcing deals in Senegal as one of the most significant challenges to grow its operations. Investisseur & Partenaire101 Investisseur & Partenaire (I&P) is a private investment company that has been active in Africa since 2002. Its mission is to contribute to the emergence of a sustainable private sector in Africa, especially in francophone Africa. I&P’s business model is to develop a long term partnership with SMEs and MFIs through investment and technical assistance. Such assistance comprises support for accounting, governance, sales and marketing, quality, human resources, and information systems. The access to high quality managerial training and the analysis of the target markets and sector value chain are recognized as valuable advisory services I&P provided to investees such as Laiterie du Berger and Nest for All in Senegal. Instruments used are debt and equity in the early, development and turnaround stages of companies. When using equity, I&P usually operates with minority participation – on average, 61 percent of shares of I&P companies are held by local partners.102 The main barrier I&P faces in Senegal is the difficulty to source deals. In eight years of activity, only seven investments have been made, and hundreds more opportunities reviewed and turned down.

www.etimos.it and interview with Etimos Africa Regional Coordinator and Investment Officer www.microfinance.sn 101 www.ip‐dev.com and interview with I&P Investment Director and Investment Officer 102 I&P Activities Report 2009 ‐ 2010 100

Even with the seven companies selected, extensive monitoring and training upfront was required to ensure the success of the investment. The case studies above highlight the need for government intervention to support impact investors’ operations. Furthermore, it appears that although globally there is significant impact investing activity, the volume taking place in Senegal is still very limited. In order to increase the volume of impact investing activity in the country, Government policy has a key role to play in creating an environment where the demand for impact capital is increased, and the supply of capital is directed to impact enterprises.

4.3.

Policies to increase supply of capital for impact

Policies dealing with investment rules or requirements, and policies that provide co‐investment, increase the supply of impact investing capital by mandating such investment or by enticing investors through risk‐sharing with government.103 The Government of Senegal has put in place a range of policies and interventions to regulate and increase the supply of private capital for impact. For example, FPE (now National Bank for Economic Development ‐ BNDE) provides long‐term finance to SMEs that commercial banks would otherwise view as too high risk to lend to. FPE was established by the government, with financial assistance from donors, to make credit available to entrepreneurs to support their establishment and growth. This policy intervention seeks to develop both demand (strengthening enterprises) and supply (through providing loans). FPE served to refinance loans provided by banks to SMEs, and between 2000 and 2006, funded a total of 4,294 projects worth FCFA 25 billion (approximately US$ 50 million).104 However, despite the expertise developed by the FPE in the provision of credit lines for small businesses, its activities were hampered by exchange rate losses on the financing it received from the African Development Bank (its main donor) and a depletion of resources.105 In this context the Government has taken the decision to transform FPE into a SME development bank ‐ BNDE to provide loans to SMEs. BNDE is a majority state owned institution but will look to take on private investors for up to 40 percent of its assets. In this regard the West African Development Bank (BOAD) has provided FCFA 1 billion FCFA (about US$ 2 million). BNDE’s aim is that in addition to SME financing, it will also support SME capacity building activities, and partner with ADEPME. Recognizing the importance of microfinance in the impact investing space, the case study below (Box 4.1) takes a more in‐depth look at government interventions to regulate the supply of capital. 103

InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’ 104 FPE web site 105 Source FPE – La BAD a financé une ligne de crédit de 47 milliards de FCFA en 1991 39

Box 4.1: Microfinance Sector Policy

The Microfinance Act (2004) and the Law Governing MFIs (2008‐47) promote the sustainable access to microfinance services by marginalized communities and microenterprises. They organize and coordinate different actors in the sector aiming to increase the supply of capital. From an impact investing perspective microfinance services are considered a powerful instrument to fight poverty, and include microloans, savings, insurance, and payment services. Social problems that the legislation seeks to address directly and indirectly  Limited availability of credit and other financial services to the private sector  Lack of investment in productive sectors  Unemployment Areas of success  13 percent of the population are registered as clients of MFIs  Over US$ 400 million in outstanding loans  36 percent of the total loans amount are for women  86 percent of the policy’s accompanying action plan has been successfully financed by donors  Compared to other WAEMU countries, Senegal presents the best optimization of expenses and financial returns. In 2009, it was the only country to reach financial self‐sufficiency on average  Innovations in the field such as the recent introduction of micro insurance and financial education programs for the population. Lessons that can be learnt Targeting: Both pieces of legislation are narrowly targeted at a specific type of impact investing capital and clear social outcomes. Nevertheless criticisms of the policies (in particular the 2008 revision) include the fact that by implementing such rigorous regulations for the sector, smaller MFIs that cannot meet these requirements have been forced to close. These MFIs typically provide services in the more rural, hard to reach areas, where the potential for impact is great (NB: 60 percent of all MFIs are located in urban areas, resulting in many rural zones still without access to microfinance services).106 There is potentially a need to provide specific incentives or more favorable conditions within the policy to encourage microfinance activities in these more remote areas. Commitment: The unique risks and challenges around the microfinance sector, as well as its potential for impact require specific commitment from government. In this regard the government and its development partners have been very supportive. The state has provided FCFA 130 million (about US$ 250,000) for the capacity building of actors in microfinance, the Belgian Development Cooperation has provided FCFA 3.9 billion (about US$ 7 million) in support of the policy, and FCFA 1.77 billion (about US$ 3.2 million) to improve microfinance services.107

4.4.

Policies to direct capital towards areas of impact

Policies directing capital change the way existing investments are made in capital markets, shifting more toward impact opportunities. Policies that direct existing capital change the perceived risk and return characteristics of impact investments by adjusting market prices and costs and improving transaction efficiency and market information.108 The government has demonstrated its intent to reform the fiscal regime to improve financial intermediation, envisioning changes to the venture capital and leasing legislation, among others.109 106

Ministry of Women, Children, Women Entrepreneurship and Microfinance ‐ www.microfinance.sn Ibid 108 InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard University (2011), ‘Impact investing – A framework for policy design and analysis’ 109 Direction générale des impôts et des domaines (2012), ‘Note de stratégie de la réforme fiscale’ 107

This builds on key pieces of legislation, such as the Investment Code (presented in the case study in Box 4.2 below), which seeks to incentivize investors to direct capital towards impact opportunities. Box 4.2: Investment Code

The Investment Code (2004, revised in 2006) defines incentives implemented by the Government of Senegal to promote specific types of productive investment. Trading activities are specifically excluded from the area of application of the present Code. From an impact investing perspective the Code seeks to promote investment in specific sectors including: agriculture, manufacturing, health, education and training. It also seeks to encourage/promote a) new and existing enterprises, b) the creation of jobs, and c) the location of enterprises outside of Dakar, the capital city. Social problems that the Investment Code seeks to address directly and indirectly  Lack of investment in productive and social sectors  Lack of investment in underserved interior of the country  Unemployment and poverty Areas of success  Current data indicates that progress is being made towards addressing unemployment challenges. In 2009, 2010, and 2011 the average number of permanent jobs per enterprise planned by foreign direct investors was 36, 49, and 32 respectively.110 Or, from a total of 304 businesses over the three years, 11,521 permanent jobs were planned. But, given Senegal’s high unemployment rate of 38.7 percent, much more business and job creation efforts are needed. Lessons that can be learnt Targeting: A broadly targeted policy such as this one is focused on overall economic growth and is less likely to catalyze discrete social and/or environmental outcomes. Although sectors such as agriculture, manufacturing, health, education and training are incentivized, infrastructure investments make up the bulk of investment activity. In 2011, infrastructure investments made up 62 percent of the FCFA 650 billion invested through APIX.111 Infrastructure investments can potentially lead to an indirect social/environmental impact but their discrete benefits to social problems are less easily identified. In some cases they may even end up having a negative social impact. Further, the Code specifies that the cost of the proposed investment must be equal to or higher than FCFA 100 million. This criterion means that smaller size investments, which the category of new ‘impact enterprises’ typically fall under are not incentivized. Transparency: Transparency in the substance and mechanism of policy is important for investors, and is likely to be an important factor in determining market participation. Under the Investment Code although the specific incentives and the methods of providing benefits and procedures for application are clearly laid out, there is one area in particular that has led to confusion among investors. Article 18 refers to a “suspension” of VAT over a period of three years. Given that this is not an exoneration it is unclear how this is a benefit to investors, and is considered a major liability. Coordination: The Investment Code works in coordination with other existing policies – in particular the General Tax Code. Further, in order to ensure that there are no conflicting or overlapping incentives, the Investment Code makes clear that ‘activities eligible under specific Codes or under the statute of free export enterprise are excluded from the area of application of the present Code, as well as materials benefiting from other specific regimes’.

Implementation: Although the government has provided an institutional context and infrastructure (through APIX) that supports the efficient implementation of the Code a key shortcoming is the lack of a comprehensive system to actually measure the impact of the Code itself – in particular the social impact on the population. It was also raised by investors interviewed in the context of this study that APIX could do more to promote the benefits of the Code and its activities to a wider audience.

110 111

APIX data APIX June 2012 data 41

The above examples demonstrate that Senegal’s government has put in place policy interventions to regulate capital, and guide and increase the supply of capital to generate social benefits. Although these policies are not impact investing specific by definition, they do serve to achieve similar ends. Despite these government interventions, the use of private capital to generate social and/or environmental returns is still very limited in the country. The barriers to the growth of impact investing activity are expounded on in the following Chapter.

Barriers to growth of impact investing

Drawing on the above analyses it is evident that there are on‐going impact investing activities both on the demand and supply side, and key government interventions are in place that serve to create a broad environment in which impact investing can more readily occur. What is also evident is that these activities are few and far between. This Chapter presents the key barriers to growth of impact investing identified in the course of this study from a policy perspective. These challenges are structured based on supply and demand and summarized in Figure 5.1 below. Figure 5.1: Overview of impact investing challenges in Senegal

Although the barriers to the growth of impact investing in Senegal can be grouped based on demand, supply and the market, a common theme that runs throughout is the lack of awareness around the concept of impact investing in Senegal and what it really means. Entrepreneurs that may be generating social benefits are not aware of impact investors as a potential source of growth capital. Traditional investors and philanthropists in Senegal are not aware that they can both make a sustainable social impact and generate a financial return at the same time. There is skepticism around how impact investing differs from corporate social responsibility, and a perception among many that all investment in a developing country such as Senegal is impact investment. Further, there is no communication or dissemination of impact investment activity and success stories. In order to develop the sector, there is a need for broad recognition both within government and among actors on what impact investing entails and how it can be used to solve some of the nation’s most pressing issues.

5.1.

Demand challenges

The growth of impact enterprises across the country is critical for impact investing to be used as a sustainable tool to create social and/or environmental benefits. There are a range of barriers in place, however, which hampers this growth. Lack of adequate financing sources to grow enterprises to a stage where they are ready to take on impact investments Despite the various sources of funding presented in Chapter Three, the existing finance landscape in Senegal does not satisfactorily meet enterprise finance needs. Figure 5.2 maps Senegal’s sources of 43

finance for enterprises based on an estimate of their typical risk tolerance and deal size, and distinguishes between traditional and impact investors using the framework introduced in Chapter 4.112 Figure 5.2 highlights a distinct gap that affects both SMEs in general and impact enterprises, due to their size and the high risk nature of their business models. Figure 5.2: Mapping Senegal’s sources of finance by risk tolerance and deal size

*E.g. FPE (now BNDE) **E.g. Investisseur et Partenaire, ETIMOS and Root Capital ***Using Mix Market data for eight MFIs the average loan size per borrower in 2011 was US$ 1,090 Source: Desk research and stakeholder interviews; www.mixmarket.com; Dalberg analysis

Impact investors either loan very small amounts (microfinance) or make larger equity or debt investments (US$ 100,000 and above). The transaction costs and risk to operate within the gap between these two amounts deters both traditional and impact investors alike; this however is the critical finance needed by fledgling impact enterprises. In order to grow the industry, enterprises need to be supported to grow to a stage where they are able to take on capital from impact investors, or government could absorb some of the risks/costs to make it more feasible for impact and traditional investors to loan or invest smaller amounts. Although government has taken some steps in this direction through credit guarantees and enterprise support programs the success has been limited. Limited capacity building service provision As articulated in Chapter Three of this report, impact enterprises face particular challenges given that they may sell to a hard‐to‐reach customer base with severely limited resources, or they may engage suppliers with limited capabilities and high volatility in production. These businesses are often required to pioneer new business models that are tailored to the particular needs and constraints of the marketplace, and support in developing these business models is critical. Some individuals and organisations have responded by providing a range of services. However the market is fragmented, with varying levels of quality in service provision and little information 112

It is important to note that the size of each bubble does not represent the volume of investment or number of actors, but rather the parameters in terms of deal size and risk tolerance that each group of actors typically operate under 44

available on the value of these services. Despite government efforts to provide capacity building services, programs such as ADEPME and FONDEF are still considered inaccessible by many enterprises. The main causes identified are the lack of knowledge of such initiatives by enterprises and the high complexity of the application process and the time needed for approval. Further, no national quality controls or standards exist and there is limited data availability and/or transparency on the outcomes of capacity building service provision, due largely to weak monitoring and evaluation systems. The business development services that impact enterprises need include business plan development, accounting and finance training and managerial skills development. Investment decisions are tightly linked to the management organization, transparency and reliability of information of enterprises. Operations are also an important aspect taken into consideration by investors. Many businesses start without taking into consideration the sector value chain, its constraints, and future scalability. In some cases, such analyses are too complex to be conducted by early‐stage entrepreneurs. But they are important to determine the amount, the duration and the instrument to be utilized by the investor. No recognition of particular needs of impact (or social) enterprises Enterprises whose business models try to address a social issue often face additional challenges when compared to traditional enterprises. Examples of such additional challenges may be analyzed using the framework in Figure 3.1. Path one of the framework describes enterprises whose business models depend on supply and distribution channels involving local actors. In many cases, such channels are inexistent or not in a mature state and the company will have to invest in their development. Path two describes the supply of goods and services to clients with a low purchasing power. Such activities are highly constrained in terms of revenues because of the target clients. Path 3 often demands new technologies and innovation, to put in place business models aimed at the preservation of the environment and the sustainable management of natural resources. Finally, path 4 demands an investment in training and developing marginalized groups to transform them into a skilled and educated workforce. Taking into account these particular constraints and the potential for social impact of impact enterprises, it would be beneficial if these enterprises received incentives or concessions to lower their taxation burden or provide them with subsidized support. Lack of infrastructure and support services outside Dakar Dakar is the capital and industrial, service and financial center of Senegal. The city generates 68 percent of Senegal's GDP and 80 percent of the country's industries are located in the metropolitan region.113 Despite an ostensible desire for decentralization, local authorities have little administrative responsibility and no fiscal or commercial powers.114 Further, from an impact investing perspective, the country’s social challenges are greatest outside of Dakar. For example, Dakar has more than 60 percent of all physicians in the entire country, even though it represents only 23 percent of Senegal's total population.115 The concentration of economic activities in the Dakar region means that most of the programs to support enterprises mainly serve the Dakar region. Entrepreneurs based in more remote 113

The Global Development Research Center World Trade Organization (2009) 115 WHO (2010) ‘How to recruit and retain health workers in underserved areas: the Senegalese experience’ 114

departments face additional challenges compared to those based near the capital in terms of infrastructure and support services. Infrastructure gaps affect the viability of businesses, e.g. unpaved roads compromise distribution channels and the poor supply of electricity increases costs and reduce efficiency. Both private and public support services to enterprises are concentrated in the Dakar region. Based on the interviews conducted for this study, a limited number of experienced lawyers, accountants and other service providers is also observed in regions outside of Dakar. Enterprises outside Dakar also claim to have limited access to government programs designed to support SMEs. Sector specific challenges The interviews conducted under this study shed light on certain sector specific challenges hampering impact enterprises. These examples are not exhaustive. For example:  In the energy sector, the government implemented a program, PERACOD, to supply electricity to off‐grid villages, through public‐private partnerships. The program attracted impact enterprises such as INENSUS described in Chapter 3. However, no specific legal framework was designed or adapted for such small‐scale energy providers. Currently, the regulator for SENELEC, the national electricity company of Senegal is the same as for micro energy providers such as INENSUS. The lack of distinction between the differing needs of these two kinds of companies leads to inefficiencies and delays in terms of developing appropriate tariff models and getting the necessary approvals. This affects both the sustainability of the enterprise as well as its potential impact.  In the health sector, besides registration with APIX, all enterprises have to be registered with the Ministry of Health. However, as described in Chapter 3, only individuals with a medical license can act as representatives of a company under the Ministry’s regulations. The first constraint this norm imposes is the need to have a doctor as the corporation’s representative even if he/she is not one of the investors or one of the managers of the company. The second constraint is that in medical school, graduates are not trained in business administration to own private clinics or hospitals. In Senegal, related courses are given in business and management schools, to students that, under the mentioned norm, cannot be registered as owners of such structures.

5.2.

Supply challenges

In order for government to leverage the private sector’s support in addressing the nation’s social problems there needs to be a significant increase in the supply of impact investing capital. The following barriers serve to limit the supply of capital available. Lack of investment vehicles Impact investment funds pool private capital and target it towards investment opportunities in impact enterprises. The lack of investment funds in Senegal (both impact oriented and traditional commercial funds) limits the volume of capital that can be harnessed globally and domestically, and directed towards enterprises. Several factors can explain the lack of investment vehicles. Fund management is a special skill which is not available domestically. From a language and cultural perspective, it is easier for international 46

fund managers from key financial markets such as the USA or UK to begin their activities in Anglophone West African countries, rather than Francophone countries such as Senegal. Senegal is also not seen as very attractive from an investor perspective. The Global Venture Capital and Private Equity Country Attractiveness Index (see Figure 5.3) ranks Senegal 99th out of 116 on its scale. Figure 5.3: Private Equity Attractiveness Index

Source: IESE (2012) The Global Venture Capital and Private Equity Country Attractiveness Index; Dalberg analysis

That being said, the few investment funds active in Francophone West Africa value the benefits of being able to operate regionally and benefit from harmonized regulations and business law under WAEMU and OHADA. Limited deal flow Another reason as to why investment fund activity is limited in the country is the lack of deal flow. Impact investors identified the shallow pool of impact enterprises to invest in as a major constraint to the growth of their activities in Senegal. Ideally, impact investors would first build a robust pipeline of opportunities to be analysed. From there, the best investment opportunities would be selected taking into consideration the balance between financial and social returns. Sourcing impact investing deals in Senegal is challenging. There is no database of impact enterprises available for consultation by investors. Therefore, the matching of companies’ financial needs with the available supply of impact capital is mainly done by word of mouth and informal networks. For this reason, having local connections becomes fundamental to start an investment fund in Senegal and its absence constitutes a barrier of entry to the sector. There are few investment‐ready enterprises in Senegal, which can be explained by the difficulties to access finance, and capacity building services highlighted above, as well as the large levels of informality. To provide some perspective, an impact investing fund interviewed in the course of this study explained that they’ve only been able to make seven investments in Senegal in eight years of activities. 47

Limited exit options In order for impact investors to recoup a financial return from an equity investment they need to be able to exit. That is, a clear alternative to sell their shares once the funded enterprise has achieved the desired stage of capitalization and maturity. The equity capital markets in Senegal are still incipient, with limited liquidity and only one Senegalese company listed on BRVM, the Regional Stock Exchange. Another exit option applied elsewhere is the sale of equity shares to the company itself, once the original management team has the financial resources, and sometimes the capacity, to take over. In order for both public offerings and repurchase of shares by companies to become feasible exit options, adaptations on the Senegalese regulations and markets would have to take place to suit the fast‐moving market and investors’ needs. For example, the current capitalization requirements to list on the BRVM are beyond most SMEs.

5.3.

Challenges in directing capital to impact investing

Senegal’s Investment Code and Accelerated Growth Strategy are examples of how government has used policies to direct capital to priority sectors, and impact opportunities. These policies are made less effective however due to misplaced incentives and a lack of clarity. Competing incentives Priority sectors in Senegal benefit largely from the Investment Code and the tax incentives regulated by it. Such benefits stimulate activity in these sectors but also have had negative consequences for some impact enterprises. For example, the “manufacturing activities for production or transformation” are listed as activities which benefit from the exemption of VAT on imported materials.116 Such a measure incentivizes local industry by reducing its costs when sourcing from other countries. However, a local industry in the same sector that sources its components locally does not benefit from the same tax exemption. Agriculture has been identified as the engine to poverty alleviation and economic development of Senegal.117 However, food security is also a major social issue that the government has to address. Given the rise in global prices on products that are mass consumed in Senegal, the government granted suspension of customs duty and surcharges on selected imported products such as rice and powdered milk in order to ensure their affordability for the population.118 The effect of this, while good for food security, discourages local agricultural production as local businesses producing rice, milk and its derivatives are hurt by the policy. Lack of clarity under the fiscal framework Senegal’s fiscal framework is considered difficult to navigate by impact investors and enterprises alike. The lack of predictability of fiscal costs prevents investments, since it influences the projection of cash flow and, by consequence, the expected rate of return of investments. One example is the suspension of the Value Added Tax (VAT), regulated by the Investment Code. According to the legal disposition, investors benefit from the suspension of the VAT for three years. However, it remains unclear whether companies are obliged to pay all the accumulated VAT after this period. On one hand, there is no legal disposition exempting the payment of such amount by enterprises. On the other hand, the total VAT amount after three years in most cases adds up to a prohibitive cost to the

116

Senegal Investment Code Senegal Accelerated Growth Strategy (www.sca.sn) 118 World Trade Organization (2009) 117

company, compromising its activities if due. It is hoped that the revised version of the General tax Code in 2013 will serve to address this issue. The challenges presented above focus on specific barriers to the growth of impact investing rather than broader business environment challenges which also hamper and discourage enterprises and investors alike. The challenges can be grouped under three key characteristics that affect the ability of the impact investing market to achieve scale and sustainability. These are a) its nascent nature, b) a broad lack of support for entrepreneurial activity, and c) a lack of venture capital‐style investment activity in general. These three characteristics account for a large number of the challenges referred to in this report. Government has a key role to play in seeking to overcome the challenges identified, and recommendations on how to do so are presented in the following Chapter.

Policy recommendations to shape and expand the market for impact investing

Based on the challenges identified, this Chapter presents specific recommendations on steps that government could take to shape and expand the market for impact investing. As a nascent market, the impact investing space is yet to be clearly defined or promoted. Many of the issues and gaps identified are as a result of this. Furthermore, it appears from the research conducted for this report, that the broad lack of support by government towards entrepreneurial activity hampers the growth of demand for impact investing activity. Lastly, given the lack of investment activity in general, the impact investing market (as a sub‐set of this) is missing key elements that are essential for sustainability and scale. The recommendations in this Chapter are structured to respond to the barriers identified in two broad ways:  Priority actions: Raise awareness on impact investing  Short to medium term actions: Stimulate the environment for impact investment activity Figure 6.1: Overview of challenges and recommendations

These recommendations are addressed to Government in the hope that its interventions will help strengthen the foundations for a widespread impact investing market in Senegal. As a member of a regional economic and monetary union, any activities that Senegal’s Government takes to develop the field can easily be adopted by other member states, increasing the spread of impact investing across West Africa. Under each recommendation, the institution that the authors of this report believe is best placed to champion the action is suggested.

6.1.

Raise awareness on impact investing

The implication of the nascence of the impact investing industry in Senegal is that government, investors and entrepreneurs alike are unaware of the possibility of sustainably using private capital to create social good. As a result, very little activity takes place in the impact investing space, and there is some skepticism and dissent around how impact investing (and the needs of the different actors) is different from general private sector finance. To promote the growth of impact investing, the government must position itself as a champion of the concept. Communication and a clear directive around the concept is the first critical step to bringing more players on board. Recommendation (i): Adopt a Senegal‐relevant definition of impact investing The positioning of the government starts with the definition of what impact investing is and what it is not. Defining impact investing and publicly putting it on the government’s agenda is an effective way of showing commitment to both impact investors and impact enterprises. The definition is the first critical step in developing a legal framework for impact investing, and ensuring the transparency of the sector. Blurred lines around what is, or is not an impact investment will very quickly result in the concept being diluted or “green‐washed” and any incentives in place will be open to abuse. Moreover, a clear definition of impact investing, along with knowledge of who the actors are in such an environment, allows the Government to design more targeted policies. In this sense, the industry and its activities can be more easily catalyzed by Government actions. The possibility of directing impact investing capital to the nation’s social needs constitutes a powerful tool. For example, the Government would be able to readily direct impact investment to specific sectors and types of enterprise, and to stimulate impactful activities in certain regions of the country. Although no country has yet defined impact investing into policy, the US and UK have taken several steps to implement legislation designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximizing profits (see Box 6.1). Box 6.1: Certifying impact enterprises in the USA and UK119

To qualify as a Benefit Corporation in the US, a firm must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Another option in America is the low‐profit limited‐ liability (LC3) company, which can raise money for socially beneficial purposes while making little or no profit. The idea of a legal framework for firms that put profits second is not confined to America. Britain, for example, has since 2005 allowed people to form community interest companies (CICs). Investors are then provided with tax relief incentives to invest in CICs through Community Development Finance Institutions.

In the case of Senegal, rather than implementing a costly and bureaucratic new legal structure, Government could consider providing certification for impact enterprises that meet certain criteria. Certification would provide a higher profile for impact enterprises and give them a growing network and voice. Based on this certification the enterprises could then be eligible for additional support and concessions further down the line (see recommendation (vi) below). Learning from other 119

www.bcorporation.net; www.cicregulator.gov.uk 51

examples globally, Figure 6.2 presents an overview of the certification criteria that the Government could consider. Within these criteria, Government would need to take more specific decisions on how to define low‐income groups for example. Typically, the base of the pyramid is defined as those living on less than US$ 2 a day.120 Figure 6.2: Proposed criteria for certifying impact enterprises

* 1)Develop, or adapt existing, supply and distribution chains so as to increase the participation of local producers and suppliers; 2) Produce and/or supply much needed goods and services to low‐income groups in financially sustainable and scalable ways; 3) Develop business models that lead to the preservation of the environment and/or sustainable management of natural resources; 4) Support the sustainable provision of high quality jobs, training and development opportunities to youth and/or marginalized groups.

The purpose of this proposed certification is not to encumber young enterprises with additional bureaucracy and reporting requirements but, on the other hand, in order for an enterprise to assess whether or not it is actually having an impact it is important that it measures and reports on its activities. These criteria have purposefully been kept as simple as possible to reflect the nascence of the market and the limited number of impact enterprises currently in operation. The criteria also recognize that impact enterprises are not sector specific, and therefore do not seek to identify impact enterprises based on the sector they operate in. Also given that Senegal is seeking to increase investment overall, asset locks, remuneration limitations and income reinvestment have been excluded as there is a risk that such stringent requirements will serve as a disincentive to fledgling entrepreneurs. Another option for the Government to consider is to purchase and adopt user rights for existing impact investing tools already in use globally, such as the Global Impact Investment Rating System (GIIRS).121 Using GIIRS, any enterprise can submit itself to be assessed and based on the result given a certain impact rating. The Government of Senegal could adopt a threshold rating certifying any

120 121

World Bank (www.worldbank.org) It is worth noting that this rating system is currently available in French 52

enterprise that meets the score as an impact enterprise. By adopting and aligning with existing systems, Senegal would open itself up to the global impact investing market and not be required to invest time and resources in developing new systems. Box 6.2: Global Impact Investment Rating System (GIIRS)

GIIRS, a project of the independent non‐profit B Lab, is a comprehensive and transparent system for assessing the social and environmental impact of companies and funds with a ratings and analytics approach analogous to Morningstar credit risk ratings. The GIIRS Impact Assessment includes a comprehensive set of required fields that span a range of aspects of an organization’s work and that are specific to the organization’s size, sector, and region. The GIIRS approach assigns weights to different performance indicators in order to allow for comparisons. Key features of GIIRS include the fact that it is integrated with impact reporting and investment standards (IRIS), an industry‐recognized taxonomy and reporting standard co‐developed by B Lab; its ratings methodology is developed and governed by an independent standards board; and the ratings are subject to the GIIRS verification process, executed with the support of a third‐party documentation review. (Source: www.giirs.org)

Recommendation (ii): Communicate impact investing concept The lack of awareness on impact investing and what it entails is widespread across actors. It is the government’s role to shed light on the benefits of impact investing, as well as to demonstrate results. Engage a wider range of stakeholders. A communication plan around the Senegalese definition of impact investing is the starting point to a debate on the industry. An open debate between public organs, private sector representatives and investors leads to engagement of all the different parties and not just the few enterprises and investors currently active in the sector. To accelerate the growth of activities, the government may activate new communication channels or leverage existing ones. For example, universities may be engaged to increase the awareness of the topic among professors and students. Knowledgeable professors can inspire students to become young entrepreneurs interested in addressing social issues facing the country. Once universities are involved in the debate around impact investing, they have the potential to become new centers of innovation for impact investing. Further, the diaspora is another key group of actors that the Government should engage with. Remittances of Senegalese residing abroad were substantially higher than FDI inflows from 2000 to 2009, but studies have shown that most remittances are used for consumption purposes rather than investment; only 5 percent of remittances to Senegal are invested in productive activity.122 This compares, for example, with 18 percent in Mali and 14 percent in Morocco.123 Government has a role to play in increasing awareness among the diaspora on impact investment and incentivizing their activities in this area. There are already governmental programs and organs in direct contact with enterprises, such as APIX, FONDEF and ADEPME. They constitute communication channels between the government and the private sector and can be leveraged to increase the awareness of impact investing. Such organs already play an important role in supporting enterprises. Impact investing can be included as part of their agenda when communicating with the private sector. It would be highly beneficial to

122 123

Senegal 2011 ‘ National Competitiveness Report’ Ibid 53

enterprises to better understand the instruments used by impact investors – equity, debt and quasi‐ equity instruments, the benefits associated with each one of them, and to start considering impact investing as an alternative source of financing. Using metrics and measurement to demonstrate results. In order for impact investing to be recognised as a major tool for addressing development challenges, Government needs to ensure that impact investors and entrepreneurs concretely demonstrate their social or environmental impact. They will have to move away from individual case studies and anecdotes on social impact and instead report on impact investment deals that have been completed and successfully exited in the region and the social and environmental benefits created. To do this, actors need to adopt consistent and comprehensive measurement systems that allow investments to be easily compared on both financial and social returns. There are tools such as GIIRS and IRIS mentioned above, that enterprises, investors and fund managers can use to report, benchmark, and measure the social and environmental impact of investments. Government can encourage actors to adopt these (or similar tailored) tools, and use the results to monitor, evaluate and communicate the progress of the impact investing industry. It is suggested that recommendations (i) and (ii) above be discussed and debated by the Presidential Investment Council Working Group on “How to Increase the Social Impact of Private Investment” before concrete proposals are put forward for broader Government approval and adoption. Once adopted, the Ministry of Economy and Finance will be responsible for communicating the concept of impact investment through relevant state structures such as APIX and ADEPME, as well as private structures such as universities and business incubators.

6.2.

Stimulate the environment for impact investment activity

There are a number of steps to incentivize the demand for impact investing and to increase its deal flow. Firstly, there must be an increase in the number of ideas aiming to address social issues. These ideas must be nurtured, their social impact must be defined and refined, and they must be developed into business plans. Secondly, enterprises must become investment‐ready, as explained in Chapter Five above. And finally, there must be an appropriate environment for business, with an adequate legal framework and efficient incentives. This section lays out recommendations for government actions to support different stages of business development in order to increase the deal flow of impact investing. Recommendation (iii): Support business incubators Incubators transform ideas into investable businesses. They find talents and give them the needed resources to become successful entrepreneurs. Incubators focused on nurturing ideas that may become impact enterprises can play a significant role in shaping the entrepreneurial landscape in Senegal towards a more impactful model. Senegal currently only has a handful of business incubators (see Annex B for an indicative list). These incubators face resource constraints and are often reliant on grants from donors or foundations. Technical support and managerial training are some of the key benefits to entrepreneurs, when participating in incubator initiatives. Entrepreneurs receive training on business plan development, corporate governance, accounting and finance and also on how to present their business to 54

investors. The incubator serves as a knowledge center and the support of lawyers, accountants and other professionals may also be provided. Additionally, entrepreneurs get access to a network of mentors, investors and potential clients. Mentors are experienced businessmen and women who can provide advisory support to entrepreneurs, inspire them and be the first link to a network to be developed. Investors may see the incubator as a source of deals, since it creates a pipeline of investment‐ready enterprises. The improved business model and the link to incubators facilitate the access of entrepreneurs to funding. Incubators can also open markets to the new enterprises. Connections with distribution channels and potential clients help the launching of the start‐up. Many of the challenges outlined in Chapter Five can be tackled by a well‐designed program of support to private incubators by the government. Expected results of this initiative include the promotion of the concept of impact enterprises, support to young entrepreneurs, increased competition in different sectors and incentives to start businesses in the formal sector. Below are specific actions the government can take to pursue these results. Foster private incubators. Government may stimulate the emergence of such initiatives by creating a national program to support private incubators. This support could be through annual grants such as is the case in Brazil (see Box 6.3). Government can hold the institutions accountable with milestones connected to indicators such as the number of impact enterprises successfully graduating from the incubator. Incubators set up by the private sector potentially present more flexibility, expertise and efficiency when compared to a public‐run initiative. The Government can leave the management of such incubators in the hands of the private sector, provide grants to strengthen the services provided and closely monitor results and outputs. Box 6.3: Brazil Incubator Support Program

124

PRONINC is an initiative from the Brazilian federal government to finance and support the activities of incubators with the potential to generate social impact. The incubators eligible to participate in this national program are managed by universities and municipalities. Since 2003, PRONINC has invited incubators to submit proposals for grants up to US$ 75,000.

The importance of monitoring results is also being addressed in South Africa. JP Morgan, with support from Dalberg, is spearheading a program to catalyze effective business development service provision through investing in quality service providers to help them increase their reach to SMEs. A core focus of this will be the development of a strong monitoring and evaluation framework, with clearly defined impact metrics to measure success. The program also aims to build a public platform to share similar findings and provide a comparison between different Business Development Support providers in the country to help financiers and enterprises invest wisely in the sector. The Government of Senegal could consider implementing a similar initiative under an incubator support program. Provide early stage seed funding. The ideas developed in such incubators need seed funding to become a business. As highlighted in Chapter Five there is a finance gap which is critical for growing 124

www.finep.gov.br and www.mte.gov.br 55

enterprises to a stage where they can take on impact investment. Angel investors typically seek to fill this gap. Angel investors have a different risk/return profile when compared to traditional financers and are willing to make long‐term smaller investments supporting enterprises through different stages of their development. They provide companies not only with financing, but also with technical assistance and business development advisory services. In order to support the achievement of such incubators, the government, through an institution such as BNDE could seek to provide small‐scale concessional finance to incubatees. Government could also seek to facilitate the development of angel investor activity through tax incentives. This is something that is currently under development in Ghana (see Box 6.4). Box 6.4: Ghana Angel Investor Network125

The Ghana Angel Investor Network (GAIN) was established by the Ghana Venture Capital Trust Fund. GAIN is a network of angel investors looking to invest in early‐stage businesses with significant growth prospects and the potential to generate superior returns. GAIN is a body corporate limited by guarantee and established under the laws of Ghana. As a Network, GAIN is not‐intended for profit. However, members and beneficiaries seek to derive significant returns on their investments. The GAIN Secretariat is responsible for coordinating the affairs of angels and acts as a liaison between entrepreneurs and angels. Apart from the long‐term investments, beneficiary entrepreneurs also benefit from the expertise and experience of a group of highly qualified investors who would mentor their respective entrepreneurs and have access to a network of executives with a wide array of functional expertise. Further, by dealing with a network of investors rather than individual investors, entrepreneurs can save considerable and effort in the process of getting the investment capital they need. The angel investors themselves who sign up to become members of GAIN benefit from access to pre‐screened deals across different industry sectors, as well the expertise of other members of the group, and networking opportunities with other successful business leaders. Importantly, the investment made by an angel investor can be offset against corporate and individual tax liabilities and there are exemptions given on capital gains and income generated by the capital invested.

Decentralize activities. There is a pressing need for entrepreneurial activity aiming to solve social issues across all of Senegal’s regions. In order to stimulate impactful economic activity, a national incubator support program should be designed to equally incentivize incubators located in different regions outside of Dakar. Additionally, the social issues faced and the barriers to the development of impact enterprises are distinct to each region. A targeted approach to solve such issues tends to be more fruitful than a general one. Also, the coaching and mentoring aspects of the incubation process will be more effective if specialized in addressing specific constraints of the business environment of a particular region.

125

www.gain.com.gh; www.mybusinessweekafrica.com/topheadlines_detail.php?ID=902 “Venture Capital’s New Frontier’ September 2011 56

Kick start the sector by exposing entrepreneurs to successful business models. In addition to providing support through incubators, the Government of Senegal could take a more proactive role and seek to expose entrepreneurs to successful ideas from around the world. Impact enterprises (such as those listed in Table 3.1) are active in many developing countries. Rather than APIX or incubators waiting passively for entrepreneurs to come up with a viable idea, they can ensure that entrepreneurs are aware of existing impact business models, and provide support (technical assistance and seed funding) to piloting such initiatives. Through bringing examples of successful impact enterprises into the public sphere along with a support framework, entrepreneurs will be able to learn about, and adapt existing success stories to the Senegalese context. An approach to the above is currently being piloted in Pakistan which Senegal could look to for inspiration. A database of global impact enterprise ‘blockbusters’ (in terms of scalability, sustainability and impact) in priority sectors was created and analysis undertaken on the key success factors needed to replicate the different business models. Based on this database local experts selected the most relevant and feasible business models for the local context. Then, local champions (corporates and others) were identified to adapt the model to the local context, develop a business plan and pilot the initiative with support from development partners. It is suggested that recommendation (iii) ‘Support business incubators’ be driven by the Ministry of Commerce, Industry and Handicrafts, in collaboration with ADEPME and higher learning institutions. Local authorities will also need to be involved to facilitate the development of incubator initiatives across Senegal’s regions. Recommendation (iv): Support Business Plan Competitions Business plan competitions are a way to engage communities and entrepreneurs to search for solutions to social issues. Local governments can highlight a particular social issue affecting a community or region and request entrants to come up with sustainable business solutions to the problem. The winner of the competition would not only get the opportunity to develop their business through an incubator program but also receive publicity and a cash prize. Benefits of the competition approach include:  Provides entrepreneurs with the opportunity to receive feedback and refine their ideas before starting up  Fosters innovation and R&D  Demonstrates Government commitment to addressing the most urgent issues (picked as themes for the competition) leveraging public and private resources  Develops a pipeline of start‐ups  Incentivizes companies to formalize  Gives credibility to winning entrants. Such competitions which could be held annually at the national and local level would promote impact entrepreneurship, showcase successful ideas to inspire others, foster competition and facilitate access to capital. This initiative could be led by incubators in partnership with local government, and sponsored by impact investors themselves. An example of how Government can

collaborate with private expertise to run a business plan competition can be found in South Africa (see Box 6.5). Box 6.5: Technoserve annual business plan competition in South Africa

Technoserve holds an annual business plan competition in South Africa as part of the “Believe Begin Become” program. The program is supported by the South African Department of Trade and Industry’s Small Enterprise Development Agency. The competition prepares the entrepreneurs to turn their ideas into viable business plans, and the after‐care program provides mentorship, networking opportunities and ongoing support.126

It is suggested that recommendation (iv) ‘Support business plan competitions’ be driven by the Ministry of Commerce, Industry and Handicrafts in collaboration with ADEPME. The Senegalese Agency for Industrial Property and Technological Innovation, which is charged with ensuring the protection of intellectual property to promote innovation should also be associated with this initiative. To ensure that the competitions are not solely focused on urban centers, the involvement of all local authorities is also needed. Recommendation (v): Leverage existing government programs The development of entrepreneurship is already being addressed by government initiatives such as ADEPME, FONDEF, and ASEPEX. 127 Currently the directive of such initiatives is to generate economic growth. But, they can be leveraged to increase impact investing deal flow by including social impact in their agendas (such as is the case with FNPJ that focuses on youth), along with economic growth. Orienting entrepreneurs on how to generate more impact will lead to an increase in the pool of enterprises which impact investors can support. Existing government programs are in a privileged position to identify the constraints to the emergence of impact enterprises at any given time. This study recognizes the benefits of creating new government initiatives focused on impact investing. However, leveraging existing programs by guiding them towards social impact can also be effective and produce faster results. Recommendation (v) ‘Leverage existing government programs’ should be elaborated on through discussion and debate within the Presidential Investment Council working group on ‘How to Increase the Social Impact of Private Investment’ before concrete suggestions on steps forward are proposed to the relevant Government departments. Recommendation (vi): Develop an incentive structure for impact enterprises As highlighted in this report, enterprises whose business models try to address a social issue often face additional challenges when compared to traditional enterprises. Taking into account these particular constraints and the potential for social benefit that impact enterprises hold, it would be beneficial if these enterprises received incentives or concessions to lower their taxation burden or provide them with subsidized support. Once the government has defined the concept of an impact enterprise and impact investor in the case of Senegal, it can use these criteria to determine which enterprises can benefit from targeted support. This support could include tax exonerations, or access to training grants or subsidized technical assistance services. In China for example,

126 127

www.technoserve.org Senegal’s Export Promotion Agency 58

Government successfully provided incentives to enterprises operating in the renewable energy sector to stimulate the industry (see Box 6.6) Box 6.6: Promotion of the renewable energy sector in China

In 2008, the Chinese government announced a US$ 46 billion package to stimulate the renewable energy industry.128 It included reduced corporate income taxes, significant reductions in value added taxes, other tax incentives, feed‐in tariffs, R&D incentives, and subsidies for energy conservation technologies improvement. Such incentives attracted large sums of investment to the green energy sector in China, reaching US$ 49 billion in 2010. In the same year, more than a third of all global investments in renewable energy were made in China. The country is now the leader manufacturer of photovoltaic panels.129

It is suggested that recommendation (vi) ‘Develop an incentive structure for impact enterprises’ be driven by the Ministry of Economy and Finance alongside determining which enterprises should qualify. The Direction of Taxes can then analyze the cost/benefit of specific fiscal incentives or exonerations. Recommendation (vii): Establish an impact investment trust fund Chapter Five explained how the lack of investment vehicles in Senegal limits the volume of capital that can be harnessed globally and domestically, and directed towards enterprises, and some of the reasons as to why this is the case. In order to encourage the creation of impact investment vehicles, the government has a role to play in not only building the venture capital industry in Senegal, but shaping this industry to be focused towards social impact. Learning from the experience of Ghana with its Venture Capital Trust Fund (see Box 6.7) or the Inclusive Innovation Fund in India (see Box 6.8), Senegal could take the concept a step further and establish an impact investment trust fund. This fund would serve as a fund of funds to support the growth of domestic impact investment funds using the tools of venture capital to support impact enterprises. This fund would not only increase the amount of capital available but also serve to encourage private domestic institutional (e.g. pension funds and insurance companies) and individual investors to co‐invest alongside it. Box 6.7: Ghana Venture Capital Trust Fund130

The VCTF was established by the Government of Ghana to provide financial resources to SMEs through venture capital financing companies. Its vision is “to create a vibrant and well‐structured venture capital industry boasting of investments in various sectors, leading to poverty reduction through job and wealth creation with a collateral growth in government revenues”. The VCTF started with a seed funding of approximately US$ 15 million (GH¢22.4million) from the Government of Ghana. In partnership with local and foreign investors, the VCTF has created a pool of about US$ 55 million (GH¢83 million) for SME investments. In doing so, the Trust Fund has established five venture capital funds and invested the equivalent of US$ 17 million. As of the beginning of 2011, more than 1,000 direct jobs have been created by 39 portfolio companies. Additionally, government tax revenue resulting from the 39 portfolio companies has increased by an average rate of 264.5 percent per annum after venture financing capital, and some portfolio companies have recorded turnover growth in excess of 100 percent.

128

KPMG (2012), “Taxes and incentives for renewable energy” KPMG (2012), “Taxes and incentives for renewable energy” 130 www.venturecapitalghana.com.gh 129

The VCTF hopes to increase the total pool of funds available to exceed US$100 million to support SME investments. To further develop SMEs into large businesses and also invite the public to share in profitable SMEs, fund managers will be encouraged to list on the Ghana Stock Exchange. The VCTF will also intensify its public awareness campaign to educate SMEs on the benefits of equity investments and attract more funds from local financial institutions.

131

Box 6.8: India Inclusive Innovation Fund

The Government of India has committed US$ 100 million as seed money for setting up a billion dollar Inclusive Innovation Fund. The fund seeks to catalyze the creation of an ecosystem of enterprise, entrepreneurship, and venture capital. It will focus on providing risk capital funding to enterprises that create and deliver technologies and solutions aimed at enhancing the quality of life of the bottom of the pyramid. Recognizing the specific needs of such enterprises, the Fund also envisions incubation services to help entrepreneurs build capacities related to base of the pyramid businesses.

The fund itself would need to be managed by a private fund manager, with Government as the minority investor. This would ensure that best practices of venture capital financing are followed, and also that technical expertise in fund management could be passed on to the sub‐funds. Government can also help manage risk and leverage financing by providing a “first‐loss tranche facility” to investors. The use of a first‐loss tranche in funds means that a pre‐agreed percentage of investment losses are absorbed by the Government. Private sector investors (not investing in the first loss tranche) therefore share in profits whilst enjoying a buffer in the event that the fund loses money. It is suggested that recommendation (vii) ‘Develop an impact investment trust fund’ be driven by the Ministry of Economy and Finance in close collaboration with the BNDE and/or other government SME funds.132 There is potential to house the trust fund within the existing structure of the BNDE; i.e. a separately managed financing line for domestic venture capital / impact investment funds in line with the recommendations above. Recommendation (viii): Encourage adoption of regional SME stock exchange One of the key challenges identified for investors is a lack of exit options in the market. As mentioned in Chapter 5, the equity capital markets in Senegal are still incipient, with limited liquidity and only one Senegalese company listed on the regional stock exchange. A way to address this challenge is to establish an SME stock exchange, and this is something that is currently being considered at the WAEMU level.133 WAEMU’s stock market (BRVM) recently presented its project for opening the financial market to SMEs within the union. Current BRVM entry requirements do not allow SMEs to leverage funds mainly because the capitalization required is too high for this type of company. The new market would be opened to companies as soon as they are constituted under an SA (public limited liability company) but without any other requirement related to the capital or the net margin. Depending on the project, these companies could sell shares with a value of FCFA 50 billion to no more than 100 subscribers without any requirement related to a minimum percentage of the capital.134 SMEs will also not have to follow the public appeal process or obtain a visa from the

131

www.innovationcouncil.gov.in A list of funds is presented in Annex B 133 Making markets work for the poor (www.mfw4a.org) 134 Ibid 132

regulation and supervision authority.135 The Government of Senegal should do what is in its power to ensure that this initiative is adopted. It is suggested that recommendation (viii) ‘Encourage adoption of regional SME stock exchange’ be driven by the Ministry of Economy and Finance and the Central Bank for West African States (BCEAO) which regulates the financial sector. Recommendation (ix): Undertake case‐by‐case analyses on fiscal framework and sector specific challenges In addition to the broader recommendations made above, there is also a need for more detailed analysis to be undertaken at a sectoral level to identify the implications of specific policy and fiscal regulations that are hampering the activities of investors and entrepreneurs. It is beyond the scope of this study to look into detail in these areas but the examples identified provide a useful starting point. Under recommendation (ix) ‘Undertake case‐by‐case analyses on fiscal framework and sector specific challenges’ additional studies would need to be undertaken which APIX could seek to contract out to research institutions or consultancy firms. Over and above the specific recommendations made above to develop the impact investing industry, Government can also use its policy tool kit to encourage existing traditional enterprises to generate more of a social impact. One of the key tools at its disposal to do this is procurement policy. For example, Government, at both the national and local level, can be more targeted in selecting its service providers, and demonstrate a preference for enterprises that demonstrate social impact (e.g. through an employment focus on unskilled youth or marginalised populations). By encouraging impact across all enterprises, Government will be better placed to advocate for impact investing without excluding traditional businesses which are also critical for Senegal’s growth and development. This is important in order to build support for the impact investing industry and ensure that key decision makers in the public and private sectors buy into the concept and the overarching goal of social impact.

6.3.

Conclusion

This report has sought to raise awareness on on‐going impact investing activities in Senegal, the challenges faced and demonstrate the importance of the role of government in increasing the supply, demand for, or direction of impact investing capital. Recognizing the nascence of the impact investing industry in Senegal, the government is best placed to provide a supportive legal and regulatory environment to nurture and grow the industry. The focus of this report is not on the general enabling role of government in markets, such as the provision of basic infrastructure and improving the general business environment, but rather on specific efforts to catalyze investment opportunities that yield deliberate and substantial social benefit. In this regard, the recommendations made in this report make good use of the six criteria introduced in Chapter One to design and analyze policy: 135

Ibid 61



First and foremost, each recommendation is specifically targeted at the impact investing industry, rather than seeking to address economic growth in general  Secondly, establishing a clear and accepted definition of impact investing will serve to increase transparency in the sector, and form the basis of all additional supporting policies  Third, a policy is likely to be more effective if it builds on and leverages existing policies and markets. In this regard, it is wise for government to use its existing programs and institutions to champion the impact investing agenda rather than creating new overlapping structures  Fourth, up‐front and on‐going engagement with impact investors is important for clarifying needs and building support. This report and the accompanying workshop serves as a starting point for that engagement which government can continue to build upon  Fifth, government needs to demonstrate its commitment to the industry in terms of duration and resources, and the establishment of an impact investing trust fund and targeted support to incubators and impact enterprises seeks to do just that  Lastly, the success of policies is contingent on their implementation. In this regard, each specific initiative should be championed by a particular government department that is held accountable for its success. This report provides a basis for further exploration and the next critical step for Government is to identify when and what of the above recommendations are justified.

Annex A: Stakeholders interviewed in the course of this study Type

Organisation

Name

Investor

AFIG

Patrice Backer

Investor

BICIS

Mouhamadou Ndiaye

Investor

CNCAS

Arfang Daffé & Fatma Dièye

Investor

Etimos

Daniela Lafortezza & Guy‐Lionel Cakpo

Investor

Investisseur & Partenaire

Jérémy Hadjenburg & Patrice Gomis

Investor

LGTVP

Marindame Kombate

Investor

Root Capital

Diaka Sall

Investor

Sen Finances

Denise Ndour

Enterprise

AGRICOLA

Francis Nuwame

Enterprise

AMERGER

Fatou Niang Ndiaye

Enterprise

AYWA

Saidou Ba

Enterprise

Delta Irrigation

Bruno Demulder

INENSUS

Jakob Schmidt‐Reindahl

Enterprise

Laiterie du Berger

Bagoré Bathily

Enterprise

Nest for All

Khadidiatou Nakoulima

Enterprise

Prima Planta

Souleymane Doucoure

Enterprise

Proplast Industrie

Macoumba Diagne

Enterprise

Safe Nutrition

Bernard Giroud

Enterprise

SECOSEN

Kevin Torck

Enterprise

SODEFITEX

Ahmed Bachir Diop

Enterprise

SPEC

Mamadou Saliou Sow

Other

GAIN

Philippe Guinot

Other

Synapse

Ciré Kane

Government

ADEPME

Mabousso Thiam DG

Government

APIX

Mamadou Lamine Ba

Government

CPI

Mamadou Lamine Ba

Government

Bureau de Mise à Niveau

Amadou Ndiaye & Magaye Ndiaye & Mohammadou Dia

Government

DASP

Saliou Seck & Ibrahima Fall

Government

DGID

Babou Ngom El Hadji Diop & Ismaëla Diallo

Government

Direction de l’Agriculture

Mamadou Diallo

Government

Direction de l’Appui au Secteur Privé

Saliou Seck & Ibrahima Fall & Moussa Seck

Enterprise

Type

Organisation

Name

Government

Direction de la Monnaie et du Crédit

Oulimata Diop & Oumar Diallo

Government

Direction de la Pêche

Camille Manel

Government

Direction Générale des Impôts et des Domaines

Boubou Ngom & El Hadji Diop

Government

FDEA (Femme Développement Entreprise en Afrique)

Soukeyna Ndiaye Ba

Government

FPE

Alioune Aïdara Sall

Government

Ministère de la Pêche et des Affaires maritimes

Babacar Banda Diop

Government

SCA

Aminata Dia

Annex B: Supporting information Table 1: Incubators in Senegal

Name

Location

Innodev Incubator (www.innodev.sn)

Dakar

CTIC Dakar (www.cticdakar.com)

Dakar

Founders Target Market 5 Senegalese universities and other institutes, such as l’Institut Sénégalais de la Recherche Agricole (ISRA), l’Institut de Technologie University professors, Alimentaire (ITA), l’Institut de Recherche pour researchers and students le Développement (IRD) and the French Embassy.

Sectors Agribusiness, aquaculture, biotechnologies, renewable energy, Environment, social sciences, health, and ICT

A broad range of Private Sector, Government, ICT entrepreneurs International Organizations and Universities

IT and Mobile Services

Synapse Center Dakar (www.synapsecenter.org)

Private sector, with support from International Youth Foundation (IYF) and USAID

Entrepreneurs

Various (focus on social impact)

Senegal Cleaner Production Program (www.unido.org)

Government with financial and technical support from UNIDO

Manufacturers

All (focus on support to manufacturers in clean technology, good environmental practices, pollution control and recycling)

Dakar

Source: University Cheikh Anta Diop of Dakar, Innodev, CTIC‐Dakar, Synapse, UNIDO

Table 2: Government funds supporting entrepreneurship in Senegal

Fund name National fund for the promotion of female entrepreneurship 136

Budget in million CFA

National youth promotion fund137 Technical education and professional training fund138

Donors

Beneficiaries

Financing mechanism Loans provided to rural and urban women entrepreneurs at rates of 5 – 7 percent

1 000 Government

Women

6 379 Government

Guarantee Fund: maximum FCFA 5 000 000 (50 percent of total credit) Financial Fund: Maximum of investment FCFA 5 000 000 (50 percent Youth (18 – 35) run working capital, 50 percent investment) cooperatives or enterprises Loan fund: maximum FCFA 5 000 000 – maximum loan 20 percent of project cost

620 Government

Enterprise upgrade program139

28 000 AFD ‐ Government

FAGACE140

100 000

All enterprises that meet criteria All enterprises that meet criteria

12 member states All enterprises including Senegal

75 percent of financing costs of training Enterprises pay themselves for strategic consulting services. The upgrade program then reimburses part of the consultancy payment up to a maximum threshold of 20,000 Euro. Provides guarantees (minimum FCFA 50 million, rate 5 percent, maximum 80 percent of credit amount)

136

Fonds National de Promotion de l'Entreprenariat Féminin Fonds National de Promotion de la Jeunesses 138 Fond de Développement de l'Enseignement Technique et de la Formation Professionnelle 139 Programme de mise à niveau 140 Le Fonds Africain de Garantie et de Coopération Économique 137