Tania Lozansky General Manager, PEP ECA 36, Bldg. 1 Bolshaya Molchanovka Street, 3rd Floor, Moscow 121069 Russian Federation Tel.: (7-495) 411-7555 Fax: (7-495) 411-7556
SmartLessons is an awards program to enable IFC clients, partners, donors, and staff to share lessons learned in their day to day work. This brochure opens a door into a new kind of knowledge sharing. Instead of lengthy academic articles and formal reports, it presents first-hand and straightforward project stories with pragmatic useful analysis, written by professionals and for professionals. Through the prism of their own experience, good and bad, these authors aim to capture practical insights and lessons that could help advance development-related operations for private sector-led growth across the globe. While IFC supports private sector development both by investing and by providing advisory services that build businesses, this brochure focuses on advisory services in particular. IFC advisory work aims to support small and medium enterprises, to improve the business enabling environment, to accelerate private participation in infrastructure, to increase access to finance, and to strengthen environmental and social responsibility. Much of IFC’s advisory services work is conducted through facilities managed by IFC but funded through partnerships with donor governments and other multilateral institutions.
DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please contact the program at smartlessons@ifc.org.
SmartLesson 1 A Juicy Story—Using the Pull Factor to Build an Agricultural Supply Chain by Ebbe Johnson
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SmartLesson 2 Business and State: On-Line Tools Bridge the Gap. Belarusian SME Toolkit as a Dialog Platform for Business and State by Anastasiya Khomenkova
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SmartLesson 3 Key Benefits of Enterprise Surveys for Improving the Business Enabling Environment by Sanda Liepina, Dina Nicholas and Edward Novoseletsky
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SmartLesson 4 1 + 1 = . . . 50 Million! by Mary Lystad and Vladyslava Ryabota
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SmartLesson 5 19 Money can’t buy you love... but it can buy you our services! Experiences in Charging for Corporate Governance Advisory Services by Motria OnyschukMorozov and Patricia Maruschak SmartLesson 6 Interaction with Mid-Level Officials Has Led to the Simplification of Business Registration in Belarus by Viktoryia Menkova
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SmartLesson 7 Lessons in Promoting Energy Efficiency by Eluma P. Obibuaku
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SmartLesson 8 Mass Manufacturing on a Diet—Introducing Lean Production in Russia by Carl Watt
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A Juicy Story—Using the Pull Factor to Build an Agricultural Supply Chain Ebbe Johnson In parallel with IFC’s investment in the Sandora juice company in Ukraine, IFC implemented an advisory project to help build Sandora’s supply chain. The project’s broader objective was to improve market access and long-term sustainability for vegetable farmers working in the Mykolaiv region of Ukraine. We needed to bring local farms to a level where they could meet the requirements of Sandora and eventually of the international markets. How was this to be done?
Background Ukraine’s vegetable sector has a strong potential: good natural conditions, a large domestic market, and good possibilities for exploring the markets of neighboring countries, including the very large European Union (EU) market. The vegetable processing industry in Ukraine has historically been relatively well developed, and a number of firms are now at a level to be able to export their products to international markets. Sandora is an example of such a firm. A Ukrainian juice processor, Sandora has about a 45 percent share of the market. The company has received a $40 million loan from IFC in order to expand and modernize production facilities. Yet, while investment in local processors is growing quickly, driven by market growth, the farms in Ukraine are not as advanced. Low efficiency and lack of investment and resources at farm level hamper the development of the entire sector, in turn affecting the growth potential of the processors.
The project was structured to not only address technical improvements to farms within Sandora’s supply chain. One of the key lessons learned in IFC’s previous work is that in order to implement improvements to their production processes, farmers need not only markets but also money. Thus, the Sandora project has three components: supply chain development (advice to farmers to allow them to increase efficiency and yields), access In 2005, IFC’s Private Enterprise Partnership (IFC-PEP) to finance and to markets other than Sandora, and an launched an advisory project linking in to the Sandora outreach/advocacy component, which includes an eduinvestment. IFC has experience in building agricultural cational campaign aimed at the sector at large, as well as supply chains—we had just finished a similar project work with regional authorities. about 100 kilometers to the south, in Kherson oblast. Key staff from that team, including the project manager, Lessons Learned: A strong anchor firm makes the had transferred to the Sandora project. This not only had difference in advisory work an important impact as regards skills transfer, but it also became a vital selling point for Sandora, increasing the Improving an agriculture supply chain usually requires company’s interest in cooperating with the project. San- efficiency and quality improvements, which in turn redora’s CEO said: “I know what you did with other sup- quire access to financing and to new markets. Often, the major bottleneck turns out to be access to ready markets: ply chains, and I want you to do the same for ours.” you can build capacity of farmers for many years, but 4 SmartLessons
if market conditions do not require them to implement improvements, changes simply do not take place. A busi- ness will make improvements only if they see how this will directly lead to higher profits.
In this project, local farmers were able to tap into Sandora’s growing input demands for vegetables. Farmers saw the market possibilities and responded with improved techniques and increased efficiency and yields. The “pull factor” of the anchor firm greatly increased their willingness to introduce changes. At the same time, working with Sandora, a firm with a strong regional image, gave the project credibility when addressing local stakeholders: the farmers, input-suppliers, banks, and local government. Processing tomatoes
Agreement on the common issues facing the producer and the sector is vital. This calls for open communication Sandora staff and top management were actively inbetween the project and the anchor company, at the volved in the project’s work. They participated in project study tours, roundtables, and demonstration field days. highest level. Having farmers and staff from the processor listen to the Detailed discussions were held with Sandora’s CEO from same message at the same time led to valuable discusthe launch of the advisory project. These discussions fo- sions and development of a mutual understanding of cused on factors limiting the processor’s supply chain. At key problems and potential solutions. The direct link to the same time, the project interviewed farmers and other Sandora helped the project to understand the company’s stakeholders in order to ensure it was obtaining a full concerns and address the raw material quality issues in a focused way. view of the problems facing the local vegetable sector. Sandora suppliers line-up on the way to the plant. Other stakeholders in the supply chain need to be Processing tomatoes actively involved: financial institutions, input suppliers, As it turned out, issues of efficiency and quality were and regional authorities. This allows the project to relevant for both the processor and the vegetable sector achieve impact across the entire sector. at large. Sandora wanted more tomatoes, delivered on time, and with better quality. They also saw the need When the project came to the region, local financial infor farmers to improve efficiency, as Sandora’s raw mate- stitutions regarded agriculture as generally complicated rial costs are high from an international perspective. The (specifically vegetables!) and as high risk. Given the farmers wanted higher yields, better returns, and access to credit.
Sandora suppliers lined up on the way to the plant
SmartLessons 5
strong growth in consumer credit, extending credit to local farmers was not high on the list of priorities. Another difficulty for farmers was obtaining quality inputs, such as seed and machinery. Sandora’s CEO commented that “farmers complain about access to finance, they cannot find good seeds, they have problems finding people in harvest season; they need to mechanize!”
After two seasons, the situation has improved. The project’s pilot farms have attracted over $2 million in financing, while the volume of bank credits to vegetable farmers in Mykolaiv region was nearly $6 million in 2006, up from $2 million when the project was launched.
Tomato combine harvester at a project pilot farm. The first combine in the region.
Select a group of pilot SMEs (farms) that are responsive to advice, and allow them to learn by doing.
Seed companies, chemical companies, and machinery suppliers came to the region in close cooperation with the project. We organized demonstration fields together, we organized field days and regional study tours, and we had their specialists (often from Western Europe) taking part in our technical work. The basic idea is to support the industry to start working in the region, and this is “sustainable development.”
Based on our previous experience, we learned that it is better to begin with a small group of highly motivated farms than trying to incorporate all farms at the same time. The “pioneer” farms will form the critical mass starting to move the sector, and at the same time serve as the good examples for others to follow.
All this work could not have been done without close involvement and cooperation with the regional and local This allowed the project leverage with banks and input authorities. We learned that it is simply not possible to suppliers. “Sandora and farmers are complaining about a do any real work without having authorities on board to lack of access to finance; we can help you better under- deal with water issues, state support programs, etc. Local stand this business opportunity, and to correctly assess administrations also can provide great support to semithe risks involved.” nars and workshops.
The project trained credit officers from the main agriculture banks in the basics of the vegetable business and in evaluating the risk involved. We organized workshops for banks and insurance companies to highlight the development and bottlenecks in the sector. Leveraging another IFC investment, we invited Reiffeisen Bank Aval to become our main partner bank. 6 SmartLessons
There are around 500 farms growing vegetables in the project’s target region. Many of these farms are smallscale growers. The project decided to focus on six “entrepreneurs” as initial pilot farms, while ensuring that other components of the project addressed outreach to the entire sector. Pilot farms were judged to be able to respond to advice and to be capable of improving their way of operations. These farms were willing to share key information about the project and were open to detailed questions; thus it was possible to make a realistic estimation of their capacity to deliver. The project therefore chose its partners based on delivery capacity as well as on transparency in their dealings with the project team. An additional important criterion for selecting these farms was their willingness to share their experience with others, participate in the dissemination process, and give interviews in the local press and on TV and radio. Many farms had hesitated on the “sharing part.” The project needed to repeatedly stress that private business information would never be shared publicly, and to confirm that the intention was not to turn their farms into “open institutions” for anyone to visit at any time. When these issues were clarified, the pilot farms came on board quickly. Project plans with the pilot farms were always discussed with the principal owner/manager of the farm.
About the Author
Ebbe Johnson manages IFC PEP’s Southern Ukraine Vegetable Supply Chain Development Project. Before joining IFC in 2001, Ebbe had extensive experience with different agribusiness supply chains, mainly in Europe but also in countries of Central and Eastern Europe. He holds an MSc from the Swedish University of Agriculture Science.
Demonstration field day in Mykolaiv, Ukraine
Published in August 2007.
Conclusion The Sandora case serves as a good example of how an active anchor firm can help an advisory project to reach its goals. A number of factors contributed to the success of the advisory work. First, in this project, the presence of Sandora was a key motivating factor for quality improvements at supplier farms: farmers saw the immediate ben- efits of innovation and enhanced yields in increased sales to Sandora. Secondly, IFC structured the supply chain project not only to provide advice to farmers, but also to work with local banks in order to improve farmers’ access to finance. Lastly, IFC carefully chose a few pilot farms for the detailed work, while a significant outreach component was introduced to ensure that the project’s advice reached a wide range of farms in the region.
SmartLessons 7
Business and State: On-Line Tools Bridge the Gap. Belarusian SME Toolkit as a Dialog Platform for Business and Statein Anastasiya Khomenkova
In 2005 IFC’s PEP BEE Project launched an Internet portal to improve SME access to information on regulatory procedures for Belarusian entrepreneurs. In less than two years the portal has not only become the most popular business portal in Belarus but also proved itself an effective tool for facilitating cooperation with state officials.
IFC determined that 70 percent of Belarusian business people use the Internet, and more than 40 percent go on-line daily to search for comprehensive business information. In addition, there were virtually no Web sites geared toward the business community, and the Web pages of state agencies were infrequently updated and contained little useful information. Although the Ukrainian SME toolkit model was taken as the basis for BEL.BIZ, its content was adapted for the local Belarusian business context. BEL.BIZ included 75 sections, 2,145 articles, and over 2,100 queries covering different aspects of Belarusian business. Since its launch, the portal has attracted over 600,000 unique visitors, including business owners, top and middle managers, government officials, as well as individual entrepreneurs. Its daily audience reaches 2,500 users. The portal has won multiple awards and twice has been the winner of the national “Brand of the Year” contest.
About Belarus
The Belarusian private sector is still in its infancy with four SMEs per 1,000 residents, whereas there are from 30 to 50 small businesses per 1,000 residents in developed countries. The SME penetration level has stagnated for the last 10 years. Entrepreneurs identified the following as key disincentives for private enterprise development: 1) excessive administrative barriers (70 percent of business people surveyed), and 2) lack of business information (90 percent)1. Legislative reforms are held back by the absence of political will on the part of the Belarusian BEL.BIZ was the first independent project in Belarus government. which had managed to bring together state agencies, independent experts, and independent Internet-based media outlets for the benefit of the SME sector. In effect, About IFC’s PEP Project: IFC created a forum facilitating interaction between the business community and the authorities. Using such The Belarus Business Enabling Environment (BEE) tools as an expert opinion column, Internet conferences, Project (2004– 2009) strives to effect improvements in and topical discussions on forums with experts from difthe overall climate for SME development in Belarus by ferent ministries to answer entrepreneurs’ queries, BEL. reducing regulatory burden on SMEs, improving their BIZ not only initiated the dialog with SMEs, but in fact access to information on legislation and business sup- made it possible for the state agencies to promptly inport services, and promoting dialog between the busi- form the public about changes in regulatory policies and ness community and the authorities. the results of their activities, as well as receive and analyze feedback from the business community. To improve the entrepreneurs’ access to up-to-date information, in May 2005 the Project launched a business The key ministries—Taxation, Economics, Trade, Labor portal BEL.BIZ – Belarusian SME Toolkit. The Internet and Social Protection, and Justice —are currently actively portal format was chosen for the following reasons: involved in updating the information contained on the 1 portal. Six regional executive committees took part in Source: IFC SME Survey findings 8 SmartLessons
the “Regions on BEL.BIZ” campaign by providing information about the business climate in their regions and answering questions posed by portal users. IFC has derived several lessons from its efforts to establish cooperation with civil servants in Belarus, a country where state officials are not inclined to deal with either mass media or independent organizations. Title Double-click to type notes. Subselect "Title" to edit the title.
Communication with entrepreneurs by means of mass media is equally ineffective, as media organizations do not have much clout in Belarus. By launching its business information portal, IFC offered civil servants a much more effective set of tools to converse with the entrepreneurial community.
“The Ministry of Labor and Social Protection has placed its database of vacancies on the BEL.BIZ portal, which has made it much easier for Internet users to find jobs. The database attracts about 5,000 unique users monthly. I hope that this joint project of the BEL.BIZ portal and the Ministry of Labor and Social Protection will be instrumental in attaining one of the state economic policy objectives, namely, boosting employment in the national economy.” Nikolay Kokhonov, head of the main employment directorate of the Ministry of Labor and Social Protection
Lessons Learned
Using these tools in cooperation with BEL.BIZ, state officials significantly boosted their capabilities. For exam1. Demonstrate to civil servants that modern ple, Ministry of Taxation officials daily field as many as information technology can simplify their interaction 20 queries from entrepreneurs. The Ministry of Taxation with the business community and improve their also posts on BEL.BIZ responses to the most frequently asked questions, which are viewed by 2,000 visitors daiagencies’ performance. ly. Belarusian civil servants have very limited experience in dealing with electronic media outlets and possess scant The Ministry of Labor has placed its database of job knowledge of e-government. In addition, they cannot vacancies on BEL.BIZ. Previously it existed only in readily access the Internet, as state agencies are insuffi- hardcopy, and with over 5,000 vacancies in all cities ciently equipped with computers. Consequently, state of- and towns it was difficult to use in different parts of the ficials are unable to effectively interact with the business country. State officials from the Ministry of Labor highly community, and corridors of state agencies are crowded value the cooperation with BEL.BIZ, and they perform with queuing business people. a weekly update of the database.
BEL.BIZ provides a forum facilitating interaction between the business community and the authorities
Source of information
- recommendations - news - legal monitoring - useful advice
Legal consultations
- questions and answers - expert’s recommendations - forum
Topical discussions
Business community
- expert’s column - on-line conferences - campaigns
- forum - surveys - competitions - commentaries - real-life stories - business promotions
Tools
- rules and tariffs - documents and templates - literature - databases - catalogs - mailings - calendar of events
SmartLessons 9
Interacting with BEL.BIZ, state officials are becoming During the first three months on BEL.BIZ, the database increasingly aware of the portal’s role in increasing their was visited by 4,500 entrepreneurs and became one of efficiency by the following means: the most popular sections of the portal. Analysis and information on the frequency of database use for the • Legal commentaries reduce the load borne by first three months were presented to the Ministry of hotlines of the ministries. Justice, along with recommendations on how to further • Posting of state officials recommendations reduces simplify procedures for registering new company names. the queues at state agencies. As a result, the IFC recommendations were incorporated • Civil servants can improve their performance us- into a Decree in May 2006 that eliminated the US$15 ing feedback from entrepreneurs. fee for selecting a unique name. The Ministry of Justice • Most publications at the portal contain references also agreed to perform a weekly update of the online to the Web sites of ministries, thus increasing their database. visibility. 2. Persuade state officials step by step. Use the results attained and statistical data to convince civil servants. In its interaction with civil servants, BEL.BIZ deployed a strategy of gradual persuasion, building on the results achieved. For instance, the initial proposal made by BEL. BIZ to the Ministry of Justice in December 2005 to post a database of company names on the portal was met with a flat refusal. The access to state information was limited before. Further, there was no precedent in Belarus whereby a database of a state agency was placed on the Internet with a non-state Web site.
3. Involve opinion leaders to alter the civil servants’ perception of cooperating with an independent Web site.
From its inception, the BEL.BIZ portal has invited experts and opinion leaders whose views civil servants hold in high regard. Officials from the Taxation Ministry, heads of private enterprise, directorates of regional executive committees, deputy chairmen of regional executive committees, and independent specialists fielded users’ questions, consulted entrepreneurs, and clarified certain legal issues such as enactment of new laws and tax administration. The fact that higher ranking officials voiced In February 2006, IFC approached the Ministry of their views on the portal removed any reservations on the Justice again, using the user statistics of the portal and part of lower ranking civil servants. feedback from entrepreneurs. This time the Ministry made a bold decision, in the interest of streamlining the To boost the portal’s stature among civil Title registration process, to allow BEL.BIZ to post the dataservants, IFC published a special issue of its Analytical Bulletin “Small and base of company names (http://www.biznames.bel.biz), Medium Business in Belarus” devoted which allowed entrepreneurs to check the availability of to the role played by electronic media unique company names on-line before registering their outlets. High-ranking officials who new business. were invited to contribute to this issue praised the portal’s performance.
IFC approached the Ministry of Justice with an initiative to post the database of company names on BEL.BIZ to make it freely available to the business community.
The Ministry of Justice refused
IFC regularly provided the Ministry with feedback from BEL.BIZ users, the survey findings depicting the registration procedure and technical recommendations on how to post the database.
The Ministry of Justice agreed to post and update the database
2 months
3 months 6 months
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IFC submitted to the Ministry the statistical information about the number of entrepreneurs who assessed the database along with recommendations on how to simplify the registration procedure
The fee for company name approval was dropped
1month
“BEL.BIZ can be used as a tool to inform the business community about legal changes adopted by the state. Direct dialog between the state and economic entities should be established to prepare new business legislation.” Valeriy Tsepkalo, an aide to the President of Belarus, in an interview with a special issue of the IFC Belarus Analytical Bulletin “Small and Medium Business in Belarus” dedicated to electronic media and BEL.BIZ.
4. Build on the spirit of the BEL.BIZ community. Although state agencies will eventually start using e-government tools, it does not mean that interaction with BEL.BIZ will lose its utility. The portal promotes itself not only as a Web resource where useful materials can be posted, but also as an honest independent forum for government officials and the business community to interact.
About the Author Anastasiya Khomenkova has been an Information Assistant for the Belarusian SME Toolkit for over two years. She has invested a great deal of effort in the development, launch, and promotion of the Belarusian SME Toolkit. Anastasiya graduated from the Belarusian State University for Informatics and Radioelectronics, majoring in economics and information technologies. She is currently studying the Fundamentals of Political Sciences at the European Humanitarian University (Lithuania).
Published in May 2007
To strengthen the BEL.BIZ community, IFC has been investing a great deal of effort in showing civil servants that by cooperating with the portal they are becoming part of the elite group of top experts comprising leading banks, legal firms, independent experts, entrepreneurs, state agencies, as well as consulting and recruiting agencies. To this end, IFC holds regular events which allow the portal partners to communicate—roundtables, press conferences, conferences, and team-building activities. These events have great impact on creating a strong team spirit and lowering barriers between state officials and the business community. In conclusion, it should be noted that using on-line tools to connect state officials and business community is a complex but worthy task. In the time frame of fewer than two years, BEL.BIZ managed to establish good working relations with the key state bodies, despite the lack of a political will for further reforms. Cooperation with the Ministry of Justice resulted in the simplification of business registration procedures and the one-stop-shop concept for registration. IFC experience showed that an Internet portal can be an effective tool for facilitating dialog between the business community and the authorities and for promoting reforms.
SmartLessons 11
Key Benefits of Enterprise Surveys for Improving the Business Enabling Environment Sanda Liepina, Dina Nicholas and Edward Novoseletsky The Private Enterprise Partnership (PEP) for Eastern Europe & Central Asia has been surveying the Small and Medium Enterprise (SME) sector for 10 years. What began in 1996 as a survey of business practices among 250 entrepreneurs in Ukraine has grown into annual or biannual surveys of administrative barriers to business development in five countries. The SME surveys have proven vital for PEP in building its regional business enabling environment program. Specifically, running regular SME surveys introduces four key benefits for business enabling environment (BEE) work:
The focus was on measuring regulatory costs incurred by businesses during start-up and operations. As such, it provides in-depth assessment of specific regulatory procedures. The table below compares some of the main survey instruments used by the World Bank Group (WBG). The key strength of the IFC-PEP survey is its large sample size, which gives a representative picture of the business climate, and results in a relatively small margin of error. The key weakness is the amount of time it takes to prepare and conduct each survey and to professionally publish the findings – the typical schedule is around 10 months.
• Building visibility for IFC • Building capacity for a new local team In 2002, PEP’s approach to the surveys underwent an • Motivating governments to reform important change. Whereas before, the surveys had been • Monitoring project results and assessing the used to present recommendations to the government, impact of change to BEE PEP decided to take this work one step further. In Uzbekistan, taking advantage of the demand and awareness that had been generated through the first nationwide Context SME survey, PEP began working with the government and other key stakeholders to provide direct assistance The IFC-PEP SME survey instrument was originally de- in implementing the survey recommendations. This veloped in Ukraine on the basis of standard instruments model of promoting larger BEE initiatives, with a focus then being implemented by the Bank Group. on implementation assistance, was rolled out in other countries of the region. PEP SME surveys
FIAS ARCs1
BEEPs2
Doing Business
Sample size
1200-3000 entrepreneurs across the country
200-800 entrepreneurs, depending on region
200-600 entrepreneurs per country
Findings based on review of legislation and in-country expert assessment
Periodicity
Annual or bi-annual, benchmarking against baseline
As required by client government
1999, 2002, 2005
Annual
Flexible, includes countryspecific questions. Focus on regulatory reach, time, cost, corruption.
Flexible, focus on cost of doing business
Standard questionnaire across countries
Standard questionnaire
Topics covered
______________________ 1 Foreign Investment Advisory Services (FIAS); Administrative and Regulatory Cost Survey (ARC) 2 Business Environment and Enterprise Performance Surveys (BEEPs) 12 SmartLessons
Today, PEP’s BEE work focuses on providing governments with hands-on support in improving the legislative basis for particularly problematic procedures, and offers assistance and training to officials in implementing new procedures. To date, the regulatory improvements that resulted from PEP’s business enabling environment work are estimated to have saved entrepreneurs in four countries (Belarus, Ukraine, Uzbekistan and Tajikistan) over $70M.
Benefit 2 Building Capacity for a new Local Team
Benefit 1 Building Visibility for IFC
Lesson 2: Make it more than just a survey.
The benefits of regular surveys of the SME sector are especially evident in frontier countries, where the IFC brand is not well established, and in countries where business environment reforms are not already at the top of the government’s to-do list. The early Ukraine SME survey reports were referred to by the government as “IFC’s calling card” in the late 1990s, when investment was not yet active in the region. In Uzbekistan, the government has used the survey data to monitor the effectiveness of work of select state agencies – and called particular regional officials to account if their regions were showing up poorly in the reports. In short, the survey reports have served to establish IFC as a significant player in the field of business environment reforms in each country where they have been run.
In addition to the data, the SME survey reports present qualitative analysis of the business environment in a particular country. This is done by including legal and procedural reviews, results of focus groups with entrepreneurs and officials, and illustrative examples from the experiences of real-life entrepreneurs. The policy recommendations are split into short- and long-term, allowing for a focused message and rendering implementation more practical. The proposal is backed by examples from other countries that have implemented solutions proposed by IFC (e.g., ‘where this works’). This way of developing the survey reports has been extremely well received by governments and other stakeholders, who now look to IFC’s reports for recommended courses of action.
In addition to giving overall visibility for IFC project goals and activities, the surveys give local teams credibility with government players. Researching an SME survey is an excellent way to better understand the business environment and problems faced by entrepreneurs. The knowledge gained through analysis of the survey data, This figure is thanks to PEP’s work on BEE in these and through researching international best practices necessary to compile the SME survey, serves teams well in countries from 2002. establishing themselves as experts in the field.
Lesson 1: Wide dissemination of survey results required. The SME surveys help to enhance IFC’s action. Presentation of the SME survey results to a wide audience via channels such as the media, associations of entrepreneurs, donor organizations, and direct mailing to government officials helps to raise awareness, stimulate debate, and widen the client base for the reforms. The pressure for reforms, thus built up, can then be leveraged to lobby for change. Having a local team on the ground enables PEP to keep this pressure up year-round, disseminating information on an as-needed basis at critical stages in the political cycle, and being available for commentary throughout the year.
Within a year or two, the local team implementing the survey becomes by far the best-placed experts to modify questionnaires for the environment in a particular country, as they are dealing with key issues on the ground through daily interaction with government officials and entrepreneurs. In Uzbekistan, for example, the survey focused on the fact that entrepreneurs were required to submit an average of 174 reports to the government each year. In Ukraine, the surveys analyzed the process of obtaining permits, finding that more than 1,000 different types of permits were being issued by agencies and municipalities across the country. In Tajikistan, the survey results showed that 98% of entrepreneurs were paying unofficially during the inspection process. These data then served to focus and inform IFC’s hands-on work with the government, and finally to enact improvements to the business environment.
SmartLessons 13
Lesson 3: SME Surveys are cost-effective and countryspecific. Conducting enterprise surveys doesn’t have to be expensive. For example, according to the Independent Evaluations Group, PEP SME surveys are up to 10 times more cost-efficient than BEEPs: PEP surveys cost between $10 and $30 per respondent, compared to $100 per respondent for BEEPs (both surveys use face-to-face interviews). Costs can be kept down through common sense: questionnaire development is managed by the local team working on the ground, with overall quality control coming from the facility at a central level. Local contractors conduct the fieldwork, which is monitored by IFC staff based in-country. By building local capacity and not using expensive consultants in standard situations (e.g., 95% of cases such as questionnaire modification or replication to another country), costs remain reasonable.
Benefit 3 Motivating governments to reform: Giving a voice to the private sector
Lesson 4: Position the message neutrally. The countries we work in are members of the World Bank Group. In this respect, they have equal opportunity to access support for business environment reforms from IFC. Countries that are not yet in line for reforms can produce results, if a strategic, pragmatic approach to building relations with government officials is employed. Thus, political neutrality of the survey results is absolutely key. IFC is particularly well-positioned in this respect. Although we are members of the WBG, we do not require government clearance for our publications. This allows us to publish balanced and objective results. Lesson 5: Large, representative samples help to assure credibility. Given that the surveys reflect the views of the private sector, it is important for the sake of credibility that they are seen to represent the view of the majority of entrepreneurs and not of specific groups. PEP survey samples are specifically constructed to collect representative data on SME activity in a country. This means that the sample is large (from 1200 to 3000 firms) and representative in terms of firm size, sector of activity, and location. Large samples ensure that survey results are viewed as objective, and make it nearly impossible for governments or particular agencies or municipalities to dispute the findings.
While some countries are already looking to improve the investment climate or enhance SME sector development, most governments need to be persuaded that improvements to the business environment are required and can be beneficial. Providing stakeholders with information on the state of the business environment, and clearly prioritizing the most problematic issues, is the beginning of the road to reforms. This is especially important for surveys conducted at the beginning of a project, in order to build credibility for follow-on policy work. SME surveys which rely on a representative sample of entrepreneurs are extremely difficult for governments to deny or ignore. The messages of the survey can be brought to the attention of decision-makers top-down or bottom-up, through a champion of reforms or through media or civil society groups. This depends on each country’s situation. The substance of the message however, is the same: Enterprise surveys directly reflect the views of the business community. In countries where public-private dialogue is rare, presenting the government with the point of view of its own private sector and distributing this information widely, has an extremely stimulating effect.
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Benefit 4 Monitoring Project Results and Assessing the Impact of Change to BEE The SME survey can also be used as a monitoring tool to help assess the effectiveness of IFC’s business enabling environment work. Key to this is the fact that the surveys track regulatory time and cost as experienced by entrepreneurs who actually go through the procedures in a given year. Given the representative sample, the surveys are also able to track the share of entrepreneurs subject to any particular regulatory procedure both nationwide and subdivided by region and sector of activity. This allows for the following scenario. An initial survey, carried out at the point of entry into a country, creates a baseline. As a policy project moves forward, changes to the issues that IFC is addressing (given that these are stated up front) are tracked against this baseline. Additional issues that come to the surface as the project progresses can similarly be tracked – the PEP survey questionnaire is flexible enough to absorb new questions as need arises, and to remove issues that are clearly not applicable or useful for measurement in a particular country. Importantly, surveying enterprises directly allows us to track not only new laws on the books, but how and whether the improvements embedded in these new laws are actually reaching entrepreneurs on the ground across the entire country. The surveys bring to light changes in time, cost, and reach of each regulatory procedure they cover. Surveys also directly track firm investment patterns within a country. These are typical outcome and impact indicators for BEE projects at IFC. In this way, the surveys monitor the results of IFC’s BEE work, allowing projects to make needed adjustments in actions and bring new issues to the attention of the government as soon as they arise.
About the Authors As Senior Operations Manager, Sanda Liepina oversees PEP’s regional BEE portfolio. Sanda has extensive experience in managing regulatory reform initiatives from both the side of government (on successful Business Environment Improvement reform program in Latvia from 1998 to 2002) and the side of advisory services providers (IFC, FIAS, EC, USAID, etc.) in various CEE and CIS countries. She holds an MPA from Maxwell School of Citizenship and Public Affairs. Dina Nicholas has worked with PEP’s BEE portfolio since joining IFC in 2003, focusing on launch and development of projects in Ukraine and Georgia. She has recently taken up the position of Knowledge Management Officer for PEP. Dina studied at Boston University in the US and the Sorbonne in Paris. Edward Novoseletsky coordinates the work of PEP BEE projects, with a focus on supporting project teams in developing SME surveys and transmitting policy recommendations to governments. Additionally, Edward oversees Monitoring and Evaluation activities of PEP’s BEE projects. He possesses MA degree in Economics from the Kyiv-Mohyla Academy in Ukraine.
Published in January 2007.
SmartLessons 15
1 + 1 = . . . 50 Million! Mary Lystad and Vladyslava Ryabota It takes two arms to carry something securely for a long time without dropping it. This is a story of how two arms of IFC – investment and advisory services − successfully cooperated and helped each other to develop, nurture, and carry a client relationship that eventually led to an $8 million investment deal and another $42 million in the pipeline. Since its independence in 1991, Ukraine has moved from a closed, planned economy to one of the fastest growing, dynamic economies in Europe. Local businessmen have displayed entrepreneurial spirit and have comprised the backbone of the country’s expanding economy. While larger investment deals are often favored within IFC, it’s often the smaller, local entrepreneurs who truly value and benefit the most from cooperation with IFC. When our assistance to them is a well-coordinated joint effort between investment and advisory services, they benefit even more. The Ukrainian Company (referred to as “the Company”) in retailing that IFC worked with is a case in point. The Company was established in early 1990s by four Ukrainian entrepreneurs with the opening of one small store in Kyiv selling basic goods such as shampoo and soap. The business grew, and in the late 1990s one of its companies became the exclusive distributor of Procter & Gamble’s goods for Kyiv and Central Ukraine. Today, this Company has evolved into a leader in the Ukrainian wholesale and retail market of fast-moving consumer goods, employing more than 4,600 people.
ment skills and its ability to grow a successful business from scratch, during the appraisal IFC identified some areas in need of improvement: the Company had no audited financials; the legal corporate structure was complicated, with over 50 subsidiaries; and while the Company had taken an initial step by forming a closed joint stock company, its corporate governance (CG) was in its infancy. Coinciding with the appraisal process, the Ukraine Corporate Development Project (UCDP), an advisory services project focused on improving corporate governance in the private sector, began actively rolling out its “pilot company program” – offering corporate governance assessments, followed by CG improvement plans and training and support in implementing recommended changes. The investment team thought that the Company could benefit from this type of assistance.
The UCDP advisory staff was brought in early on to work closely with and complement the investment team – participating in numerous client meetings, conference calls, and internal investment team discussions. The advisory services team was asked to conduct a preliminary The Company was first contacted by IFC back in 2002 assessment of the Company’s corporate governance and on the recommendation of Procter & Gamble, which re- inform the investment team of its findings. It also conferred to the Company as a reliable and trusted partner. tributed by identifying potential risks for the investment In the years that followed, The Company became not project and offered mitigating solutions. Many of these only a long-term investment partner of IFC but also a findings were incorporated into the decision book of the success story for its advisory services arm. investment project. The investment team supported the advisory services team’s findings by reinforcing the message to the Company that the need for CG improvements overall was much higher than what would be required as a precondition for a loan, but that in the end it would help bring The While the Company had demonstrated strong manage- Company closer to international best practices. It was Lesson 1. Take a comprehensive approach to client management. Form a joint investment−advisory services team at the early stages. Let advisory staff participate in initial meetings and take part in the appraisal process.
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left up to the Company’s owners to decide whether or owners became leaders and promoters of good corporate not (and when) to apply for the UCDP pilot program. governance. Lesson 2. Advisory services and investment don’t always happen simultaneously. The advisory services team should be patient – you want the company to choose a time that’s right for them and ensure they are fully committed. Using investment as a motive (or “stick”) for improving things like corporate governance can lead to a “window dressing” exercise which, in the end, can increase the risk for the investment, not mitigate it. Although the Company’s shareholders were interested to learn about CG best practices, they were at first somewhat skeptical about whether CG could really add value. At the time, the Company was run like a small family business, with decisions made informally and issues usually discussed until everyone agreed. The advisory services team expressed concern that the Company had inefficient decision-making procedures, and that due to a lack of formalized corporate governance structures, there was an increased risk of conflicts among the owners. This was communicated to the Company’s shareholders, but they believed that formalizing procedures and a clear division of powers could unsettle their friendly relationships. As a result, the investment process continued while the advisory services team took a back seat. The investment team included some key requirements on corporate governance as a condition to financing the deal, but didn’t push on the rest. When IFC decided to invest, the advisory services team was somewhat disappointed, worrying that their leverage to encourage broader CG changes at the Company was lost. However, having a strong working relationship with IFC and having sown the seeds of corporate governance at the outset had its effect on the Company. Having gone through a rigorous due diligence process and evaluation of a range of strategic and management issues, the owners soon realized the weaknesses of their systems and the value that improved corporate governance could bring. After an eight-month break, the Company’s management re-engaged with IFC’s UCDP team to become a corporate governance pilot company. The advisory services team designed a CG improvement program with over 30 different activities, including various workshops, special training for the Company secretary, a revision of the Board of Directors’ role, succession planning, and formalization of company procedures. From a CG-reluctant group of friends, the Company
Lesson 3. Investment and advisory staff need to work together as one IFC team. To make this happen, there must be frequent sharing of information between the investment and advisory arms. Both teams should know about the client’s achievements and problems. Throughout the process, the investment team and the advisory services team regularly informed one another of developments. The investment team often invited the advisory services staff to client meetings and internal discussions, and the advisory services team kept the investment staff up to date on any interactions with the Company. Once the CG pilot program was underway, the advisory services staff summarized the Company’s achievements and also conveyed problematic areas in need of improvement, which were incorporated into a future action plan. At the same time, investment staff shared information on the Company’s performance and future ambitions. There were no formal procedures: each team member shared ideas and what he/she knew. Usually this happened either via e-mail or a simple chat between advisory services and investment staff. This sharing of information helped the advisory services staff increase the quality of workshops by making them more relevant not only to the Company’s current situation but also taking into account its medium- and longterm plans. This also enabled the investment team to keep abreast of what was happening in the Company outside of the investment deal. Working together with the Company’s management and shareholders, IFC investment and advisory services staff were all part of a team which developed an attractive range of services to add value to the Company’s business. Lesson 4. Be a trusted partner of the client. Keep in touch with the client on a regular basis, including after the deal is signed and advisory services completed, and broaden the relationship to involve the client in other activities. Over the life of the relationship, IFC’s investment and advisory services teams have built up a significant amount of trust with the Company. The initial project, which was small by IFC standards, was the first step in building a strong relationship. It was used by both parties to get SmartLessons 17
to know one another and has led to both sides’ wanting Company’s operations. In spite of the UCDP’s official to deepen and expand the relationship. closure, the Company keeps in contact with IFC’s advisory services consultants: seeking advice, sharing information, or simply discussing general CG trends in the country. This is what good client relationship management is all about.
About the Authors CEO of the Company speaking at our Second IPO Forum
It’s important to keep in close touch with the client, even on an informal basis, and worthwhile to include the client in events that can benefit both parties – as a guest speaker at conferences, and as a participant in training events organized by IFC. For example, the CEO of the Company, was invited to speak about his Company’s experiences at an Initial Public Offering (IPO) Forum at which dozens of local companies were present. His presentation was mentioned among one of the most interesting and informative. It put the Company in the spotlight, and for IFC it provided a strong demonstration effect of how improving corporate governance and working with IFC on the financing side can lead to success. At the introduction of IFC, the CEO of the Company also recently made a presentation at a well- attended Ukrainian CFO conference at which he spoke highly about his relationship and experience in working with IFC. The Company’s CEO: “We never divided this process into two parts, as you say (advisory services and investment). To us it was one project with one investor.”
Here our SmartLesson ends, but the relationship continues …. In FY05, IFC provided a total loan of US$8 million to the Company for the expansion and modernization of its distribution, warehouse, and logistics business. IFC is currently working on a second financing for the Company of up to US$42 million, including a syndication and possible equity investment, to further expand the 18 SmartLessons
Mary Lystad, Principal Investment Officer, GMS. Mary is the Client Relationship Officer to the company on the investment side. She has been involved with the company since the beginning of the relationship, participating on the project team for the first loan to the company. Mary currently is actively involved in developing and structuring the second investment and exploring other ways in which IFC can add value to the company. Vladyslava Ryabota, Legal Advisor/Associate Operations Officer, CEUEP. Vladyslava was responsible for implementation of the pilot program with The Company while working as a legal advisor for the UCDP. Although she has expanded her role at IFC beyond Ukraine, she remains in close touch with The Company to this day.
Published in October 2007.
Money can’t buy you love... but it can buy you our services! Experiences in Charging for Corporate Governance Advisory Services Motria Onyschuk-Morozov and Patricia Maruschak The new policy on pricing advisory services that came out in early 2007 has created some controversy. However, a few of IFC’s corporate governance projects in Ukraine and Russia have actually been charging clients for services since 2004... IFC and one of its key donors launched the Ukraine and Russia Banking Sector Corporate Governance Projects (UBCGP and RBCGP) in 2004 and 2005.1 Given that the banking sectors of these countries were relatively profitable and had a culture that was more open to paying for consulting services, it was decided to test pricing for advisory services. The “public good” aspects of the project, such as working on the legislative framework, were free of charge, but all banks receiving additional assistance that benefited them directly were charged a fee for services such as: • The “pilot bank program”—in which participating banks received a comprehensive assessment of their corporate governance, together with a series of consultations and workshops over several months to help them improve some of their corporate governance practices; • Written consultations, including reviews of charters and bylaws; and • Certain high-level seminars.
The following are lessons we have learned so far. Lesson 1: Fees should be market-driven and not costdriven. Setting a range of prices offers much needed flexibility. Since corporate governance is still a new issue in the former Soviet Union, there were very few consulting firms, let alone international or local organizations, providing the same services as those planned by IFC’s projects. Therefore, attracting clients to corporate governance products was a higher priority than recovering project costs. In determining the prices to charge for project services, the UBCGP and RBCGP considered fees being charged for comparable services, such as audits and legal due diligence reviews, at reputable consulting and law firms working in Russia and Ukraine, and then set project fees close to these rates. However, given that corporate governance was a newer topic, a small reduction was made. For training events and seminars, the projects researched fees for similar events aimed at private companies delivered by both international and local organizations.
Russia Banking Corporate Governance Project
Ukraine Banking Corporate Governance Project
Pilot Program Workshops Corporate Document Reviews (charter & bylaws) Public Seminars
$15,000 – 20,000 $2,000 – 4,000 $2,000 – 15,000
$30,000 – 40,000 $2,000 – 4,000 $5,000 – 7,000
via IFC = Free via local partner = $100–$1,000 per person $250,000 $2.1 million
via IFC = Free via local partner = $100–$1,000 per person $230,000 $1.5 million
Total Fees Collected Project Budget
These projects work on policy reform, public awareness and educational programs but spend a substantial amount of time providing corporate governance advice to private sector companies— work that many would classify as a “private good.”
1
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Project event prices were above those charged by local NGOs and slightly below those of other international organizations.
Lesson 3: The process of charging and collecting fees in an institution like IFC is not always easy and requires additional administrative resources.
The rationale was to set fees that were high enough to be taken seriously for the given market, but low enough to be affordable to most clients. A range of fees allowed flexibility in setting lower fees for smaller, regional banks that had a less complex structure (and were often less profitable) and higher fees for large banks with nationwide branch networks. In practice, most of the clients readily accepted the fees proposed and very few negotiated them down. Discussions focused more on deliverables and timelines. There was only one bank with which one of the projects was not able to agree on fees and, as a result, was not accepted into the pilot program.
You can name your price, but can you get the money? Charging for services not only required a different type of advisory services contract, but also necessitated a whole range of administrative support to generate invoices, collect fees, and account for revenues. Law firms and consulting companies have entire departments devoted to billing, but the projects’ administrative and financial staff had to add billing responsibilities to their other project duties. New reports, forms, and procedures needed to be created, as well as a system for receiving funds through appropriate channels. The accounting staff was crucial in this regard and became a vital part of the project team.
Lesson 2: The sales pitch to clients when offering Charging fees was particularly troublesome for a similar services for a fee needs to be more sophisticated than corporate governance project in Central Asia. All payments had to be made to IFC’s offices in Kyiv or Moscow when they are free. because IFC does not have official status, and thus no Public seminars were the key source of clients for the separate bank account, in Kazakhstan. projects. Clients became pilot banks through a process of self-selection. Once a client expressed interest in the pilot Collecting fees for low-cost activities (below $500), such program, project staff discussed the bank’s commitment, as seminars attended by many different participants, was financial position, and reputation, which included dis- not worth the administrative burden to the projects. cussions with IFC’s financial markets investment team. If Therefore, the projects partnered with local NGOs for the bank was identified as a good candidate, project staff such activities and allowed them to retain the fees in exprepared a detailed presentation on the pilot program change for handling the event logistics, registering parand met with the bank’s management to discuss it. This ticipants, and collecting fees. This had the added benefit allowed the projects to provide a thorough explanation of building local capacity and encouraging these partners of their services and the project’s pricing policy. It also to conduct similar events on their own in the future. helped to set clear expectations for both parties from the outset. A formal contract then solidified this understanding. Both projects found that when clients were well informed about the project and its pricing policies they were generally open to paying for services and there were very few problems in negotiating and collecting fees. Types of companies coming for services:
Seminars/workshops attended by higher proportion of: Agreement between client and IFC:
Providing Free Services Smaller companies Not always profitable Need to explain value of CG Often took things more slowly Did not always have adequate resources Company department heads Mid-level managers MoU with a general description of services to be provided
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Charging a Fee Larger companies More profitable Understand value of CG Implemented changes faster Invested more resources in the process CEOs, Directors Top-level managers MoUs with more detailed outputs and deadlines set for each stage of the process
Lesson 4: The project client pipeline is different when you start charging fees. In general, IFC found that more sophisticated companies and banks—primarily medium to large, profitable banks—that understood the value of corporate governance were willing to pay for project workshops and participation in the pilot program. Smaller banks attended seminars but showed limited interest in the pilot program—possibly because of the fees, or perhaps because they felt they didn’t need these services. In comparison to the other corporate governance projects that provided free services, the banking projects found that not only did the type of client companies change, but the type of client representative who participated in the seminars, workshops, and consultations changed as well. Instead of company department heads and midlevel managers, participants included CEOs, directors, and top-level managers. Lesson 5: Client behavior and commitment increase when services come with a price tag. Changes in the client pipeline were accompanied by changes in client behavior. Paying clients took the advice very seriously, implemented changes faster, and often showed rapid success. These successes created a powerful demonstration effect in the market. Clients became more conscious of quality and interested in establishing detailed descriptions of services and firm deadlines for specific project deliverables, such as document reviews and reports on their corporate governance practices. Some clients also requested a clause in their contract ensuring that they could exit the contract mid-way if they were dissatisfied with project services. Overall, charging fees raised the level of client commitment to the agreed services. Many of the clients also allocated more resources to implementing better corporate governance, such as hiring corporate secretaries and electing (and remunerating) independent directors. This should not be taken to mean that clients receiving services free of charge in other projects were less committed; a vast majority was dedicated to making corporate governance improvements. However, in many cases the paying clients implemented changes more quickly and more broadly. They also took the process more seriously. It’s possible that this was because banks are generally more sophisticated and more determined about programs they
undertake. The increased interest by international investors in the financial sector at the time was also a likely factor, but maybe paying does influence behavior. Because of these changes in the pipeline, IFC should be careful that the desire to include a pricing component doesn’t obscure the greater project goal and prevent clients that can’t afford the services from benefiting from the project. Looking back at projects that offered free services, there were a number of successes with clients that would not have paid for services at the outset; as a result, these projects might not have had the broad reach and impact they did. A project that charges fees in a market that is not quite ready, risks getting few clients and taking a long time to develop a pipeline. Even in more developed markets there may be clients that understand the value and show a high level of commitment, but need to be subsidized in paying for these services. This is where a flexible approach and price range is key. Lesson 6: To charge or not to charge? That is the question . . . that needs to be answered at the start of the project. Whether to charge for corporate governance advice in a project largely depends on the level of awareness of corporate governance in the country, and the state of development of the market. If companies don’t even understand what corporate governance is, let alone what benefits it will bring, charging for project services at the outset will be risky. Companies will be unwilling to pay for something they don’t comprehend. They need to be educated about corporate governance first, and see a few companies benefit from making such changes, before the concept will gain acceptance. Corporate governance is a cultural change that takes time. Preconditions for charging • • • •
Awareness of the topic Seeing value in such services Use of consultants Affordability of fees
Furthermore, in weaker economies with less developed markets and struggling companies, affordability of such services will likely be an issue. If the market is somewhat more advanced and the project is focused on increasing capacity and building demand, charging may be just the SmartLessons 21
right strategy. When companies understand that getting advice on and making improvements to corporate governance could lead to investment, they are often more willing to pay for such services. It is also helpful to determine whether there already is a culture of using consultants and whether similar services are offered on the market. In the CIS region, IFC felt that Russia, Ukraine, and Kazakhstan were markets where charging could work. In other countries, such as Georgia and Azerbaijan, financial institutions might be willing to pay for these services, but the corporate sector is probably not ready yet. In Tajikistan and the Kyrgyz Republic, where IFC is still raising awareness of a very new topic, it is still too early to think about fees. In such countries, public education is an important component of advisory work, through public seminars, publishing articles and handbooks, disseminating information about international best practices and their benefits, and working with journalists to educate them about corporate governance so that they can report on the topic knowledgeably. It is important that the pricing decision be made at the start of the project. If the project starts charging midway, without a clear and distinct separate phase of project work, there is a risk of confusing and losing clients.
The Payoff Ultimately, the experiment in charging for corporate governance advisory services was a success. The RBCGP collected $250,000 in fees and the UBCGP $230,000. In both cases, all fees that were contracted were collected within a reasonably short period of time. Furthermore, the improvements made by clients, coupled with increased interest in these financial sectors by international investors, yielded strong results. Many of the pilot banks were able to use the fact that they made corporate governance improvements to attract significant investments. Together, the two banking projects enabled over $2 billion of investment (where clients identified corporate governance improvements as influencing their ability to obtain financing). More importantly, we believe that these successes had a strong demonstration effect on the market. In recent surveys on corporate governance practices in Russia and Ukraine, IFC learned that one of the key motivators for 22  SmartLessons
companies and banks to improve their corporate governance was seeing the example of their peers. Therefore, we hope that more banks and companies will follow suit and improve their own corporate governance. In 2007, the Russia and Ukraine banking corporate governance project teams received IFC’s Corporate Award for their work. About the Authors Motria Onyschuk-Morozov is a Senior Operations Manager overseeing IFC’s corporate governance advisory projects in CEU and Central Asia. Motria has Master in Business Administration from University of Toronto (CA). Patricia Maruschak is an Associate Operations Officer working on corporate governance advisory projects in the region and other advisory services in Ukraine.
Published in December 2007.
Interaction with Mid-Level Officials has led to Simplification of Business Regisration in Belarus Viktoryia Menkova The main objective of the Business Enabling Environment (BEE) project in Belarus is to reduce the regulatory burden on SMEs in three specific areas: business registration of start-ups, permits, and inspections. The project operates in a fairly challenging environment, where top-level decision makers are not inclined to adopt policies to stimulate SME development, and where there is no comprehensive policy for business environment improvement. Consequently, to facilitate muchneeded reforms, IFC decided on a policy of interaction with mid-level functionaries, and these officials proved to be in the ideal position to both initiate and implement policy change.
Background: Registration of start-ups in Belarus Since 2004, IFC has conducted surveys of the Belorussian SME sector; according to the results, business registration was one of the most problematic administrative procedures in the country. Survey data showed that the registration process required submission of more than 80 documents (13 separate sets) to 10 different state agencies. On average, entrepreneurs spent two months and $7361 to register a company. A considerable portion of these expenses (up to 80%) was attributed to notary fees, which are based on tariffs set by the government. An additional interesting twist was a substantial fine levied on entrepreneurs who do not complete registration procedures within a specified time period -- a “non-compliance” penalty2 -- a unique system of fining entrepreneurs for government backlog.
chose to promote policy change “bottom-up” within government agencies, and began interacting with mid-level bureaucrats who were directly involved in lawmaking. Outcome and impact to date
Interaction with mid-level officials: Deliberate strategy IFC held regular meetings with mid-level officials difor policy change rectly involved in registering businesses. Specifically, support was given to officials from the Ministry of Justice In a country with limited civil society, and where the in explaining the rationale for streamlining the process, media are largely under government control, it was clear introducing them to best practice, and finally providing from the beginning that change would be initiated only expertise and consultations in drafting a Presidential Dethrough government action. The IFC project therefore cree for simplification of registration. The project pro1 According to SME surveys conducted in Georgia, Uzbekistan, vided consultations with a total of 60 officials who dealt and Ukraine, the costs of business registration in 2004 in those with business registration in Belarus. countries were $56, $62, and $178, respectively. A start-up entrepreneur might have to bear fines up to $2000 for failing to meet the deadline to register with the state agencies assumed within the registration procedure, namely, Tax Authorities – up to $830, Social Security Fund – up to $35, Statistical Authorities – up to $1185.
2
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These efforts resulted in the introduction of One-Stop Shop3 (OSS) business registration, reduction of costs and time for registration,4 and abolition of fines for untimely compliance with post-registration procedures. Consequently, overall cost of registration per company dropped by 58%. This is expected to result in direct total annual cost savings of $630,000 for newly registering SMEs in Belarus. In addition, the time required for registration has been cut by 11 days, which it is estimated will lead to additional profits of $2.9 million due to reduced start-up time for new businesses. Lessons Learned Lesson 1. Utilize the potential of mid-level officials to initiate reforms; however, be aware that it may take longer to achieve results. In Belarus, IFC has succeeded in destroying the myth that it is impossible to initiate policy change when reforms are not already on the agenda of top-level officials. As registration was not a priority for the government, the BEE project team worked with mid-level officials of the Ministry of Justice, the agency responsible for registration, who then were able to persuade top-level decision makers to change their perceptions on reform. To draw stakeholders’ attention to the problem and promote policy change, the project exploited a variety of channels:
• Analytical bulletins: published quarterly and distributed among state agencies (including the Ministry of Justice). Each publication was dedicated to certain aspects of starting/doing business in Belarus and provided comprehensive analysis of possible ways for improvements. • Press clubs: conducted regularly in all the regions of Belarus. Such events usually had wide coverage both by local and national media whose primary target audience was mid-level officials. • Face-to-face meetings: held with mid-level civil servants on a day-to-day basis. Such meetings allowed for better understanding between IFC and its counterparts as it became possible to receive first-hand feedback on the project’s initiatives and to adjust tactics for interaction with bureaucrats. Cooperation with the Ministry of Justice led to gradual rather than immediate reforms. It took two years for the project to finally observe changes leading to a decrease in the time and money required for registration. The delays were due to the necessity of mid-level civil servants to get approval “from the top” for any initiative. Thus, the Ministry of Justice, which officially dealt with all the preparations of amendments to registration legislation, had to revise and resubmit proposals to the Council of Ministers and the Administration of the President several times.
REGISTRATION SIMPLIFICATION: Signed into law:
The Council of Ministers; Administration of the President
April 2006: Decree on State Registration
The Ministry of Justice; Prime Minister’s Office
2004
IFC
September 2006: Decree on State Tariffs
Several revisions and resubmissions of proposals
SME survey Recommendations Information campaign
2005
Presidential Decree #6 “On State Registration,” signed April 10, 2006 4 Presidential Decree #574 “On State Tariffs,” signed September 14, 2006 3
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SME survey Study trip to Sweden International conferences
2006
Consultations/expertise Assistance in drafting a decree
this opportunity to emphasize again the need for reforms and to stress the importance of streamlining registration, in particular. Countries that shared a common Soviet past with Belarus (e.g., Georgia and Poland) were held The project did not limit its activities to cooperation with up as an example to illustrate that simplification of adthe Ministry of Justice. The Ministry, while interested in ministrative procedures would significantly improve the streamlining the registration process, was not inclined to country’s overall ranking. initiate a reduction in costs, as it was the main beneficiary of high tariffs. In order to introduce amendments aimed Lesson 4. Present international expertise only in a at reducing registration costs, the project approached a manner that is persuasive and contextual to the local working group within the Office of the Prime Minister. audience. The working group, in charge of preparation of analytical materials for the Prime Minister, was an excellent partner In Belarus, IFC based its recommendations for policy for raising awareness and gaining support for IFC’s cost- change on registration reform efforts undertaken in Swereduction initiatives. The project conducted a presenta- den, Uzbekistan, and Ukraine, as each of these countries tion to the group and emphasized excessive notary fees as had taken a particular path to simplification of business the main cause of high registration costs. Drawing upon registration. The choice of countries presented was largely the analysis, the working group prepared a report for the driven by the need to provide a variety of reform experiPrime Minister’s Office that resulted in the adoption of ence in countries palatable to the government’s mindset. the Decree on State Tariffs, which has significantly re- While Uzbekistan has certain similarities with Belarus duced the size of notary fees. in terms of political environment, Ukraine is a direct neighbor and shares a common legal heritage. Sweden is Lesson 3. Become the main source of expertise for your a developed economy whose experience is adaptable to partners and be ready to provide advice at any time. Belarusian political conditions, given the focus on social Make good use of data available within the World Bank stability. Group. Three key factors ensured the success of IFC’s presentaThe project provided regular and timely expertise to offi- tions of international expertise in reforms: cials to ensure a clear and comprehensive understanding • Neutrality: IFC presented several versions of of the need to reform. In addition to data from IFC’s streamlined business registration procedures in a SME survey, and analysis of registration procedures, the number of countries that are varied in terms of Ministry of Justice was interested in materials covering political, social, and economic development. international experience in reforming registration. In• Relevance: The reform options presented were formation available from other IFC facilities that were relevant for and readily applicable to the current working on similar issues around the world and had alsituation in Belarus, not to the ideal world. ready achieved positive results was of great value. • Simplicity: Registration simplification was presented in an easily understandable, non-theoretAlong with the data and analysis generated by IFC localical manner. ly, the project intensively utilized research findings and policy studies conducted by other divisions of the World To show officials how IFC’s recommendations work in Bank Group. Specifically, Belarusian officials appeared to practice, the project organized a study trip to Sweden for be highly interested in Doing Business and other reports representatives from state agencies directly involved in which showed Belarus in the context of other countries. the registration process. IFC also conducted two internaFor example, the leader of the working group within the tional conferences on registration simplification. In the Prime Minister’s Office approached IFC with a request course of the Swedish study tour, mid-level civil servants to explain the logic behind the indexes of the Doing were clearly made aware of the differences between the Business report and to outline the reasons why Belarus cumbersome registration procedures in Belarus and the was so poorly rated in terms of business environment same procedures in Sweden.5 The conferences likewise and investment climate. The BEE project team utilized Lesson 2. Diversify your contacts with state bodies to promote policy change. Do not stick to one state agency even though it seems to be in charge.
5
To show how easy it is to register a business in Sweden, a repre-
SmartLessons 25
presented simplification of registration in Uzbekistan and Ukraine directly from the Uzbek and Ukrainian officials who had been involved in reforms. Their Belarusian counterparts were particularly impressed by these postSoviet officials, much like themselves, speaking of the need to streamline registration procedures and explaining how this had been done in their own countries. In conclusion, interaction with state officials is a work in progress, which gradually changes their viewpoints and perceptions of reform as well as impacts their future actions. Interaction, cooperation, and coordination with mid-level officials can be used as an alternative tool for affecting business climate improvements in cases where reforms are not a priority for key decision makers. Even though this strategy might take longer to show results, the experience of IFC’s Belarus BEE project has proved the effectiveness of the approach.
About the Author Viktoryia Menkova, Research Assistant, joined IFC in January 2005 and has three years of experience in private sector development and research. She holds MA in Economics from EERC at National University KyivMohyla Academy (Ukraine).
Published in January 2007.
sentative of Swedish Company Register completed the process of registration in front of Belarusian delegation within half an hour using on-line option.
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Lessons in Promoting Energy Efficiency Eluma P. Obibuaku Over the past ten years, IFC’s Environment and Social Development Department has initiated a number of energy efficiency programs in emerging markets designed to promote local financing of energy efficiency projects and to reduce greenhouse gas emissions and consumption of energy. These projects accomplish their objectives by stimulating demand for energy efficient products and services in markets that show a potential for energy efficiency uptake. This paper discusses IFC’s experience with three distinct but related energy efficiency initiatives, the last of which is currently under implementation. Who is this document intended for? IFC staff developing projects in various business lines and regions - especially those working on energy efficiency projects. The lessons are presented with minimum technical jargon to make the message accessible to as wide an audience of project/ program developers as possible.
Background The following paragraphs summarize the structure, results, and lessons learned from the Hungary Energy Efficiency Co-financing Program (HEECP), the Hungary Energy Efficiency Co-financing Program 2 (HEECP2), and the Commercializing Energy Efficiency Finance (CEEF) Program. HEECP2 and CEEF were combined into a regional program which focuses on six countries, namely, Hungary, Czech Republic, Slovakia, Lithuania, Latvia, and Estonia. Figure 1
The goal of each of these programs is to promote and enhance commercial financing of energy efficiency (EE) projects by local banks and leasing companies, thereby reducing greenhouse gas emissions. The project objectives are pursued through the provision of (1) financial products to local financial institutions that make loans for EE projects and (2) advisory services for capacity building to financial institutions, energy services companies, and project hosts. Figure 1 below shows IFC/ Global Environment Facility (GEF)1 interaction with FIs (guarantees and advisory services) as well as energy services companies (ESCOs) and end-users. Note: Advisory Services is referred to as Technical Assistance, as formerly called, in Fig 1.
IFC Program Structure
End User
IFC/GEF
Local Financial Institution ESCO
End User
IFC Services IFC provides Technical Assistance to the Local Financial Institution, End User or ESCO
IFC provides the Local Financial Institution a Guarantee Facility Agreement
_________________
GEF is the largest funder of renewable energy in the developing world, supporting solar, wind, and other clean forms of energy.
1
SmartLessons 27
they will generate more than 2 million tons of CO2 reductions2. In spite of the successes recorded above, IFC’s EE experience has not been without implementation challenges. First, the projects have not been successful in every country of intervention—two of the five target countries for CEEF (six target countries, if we include The advisory services provided through each project were Hungary) have yet to generate traction because of the designed to strengthen or build the capacity of financial characteristics of these markets. Second, each of the proinstitutions, energy end-users, and energy services com- grams had difficulties tracking the level of EE transacpanies. They assisted financial institutions in developing tions completed without IFC guarantees and the associspecialized financial products, helped end-users and EE ated energy savings. Third, though the ESCOs and FIs companies build “bankable” EE projects, and developed interviewed indicated that the advisory services provided institutional capacity in the Hungarian EE and financial under HEECP1, HEECP2, and CEEF have been very services industry. They also provided support to end-users valuable, an assessment of the effectiveness and efficiency interested in conducting energy audits to help determine of the technical assistance is impossible because there is if EE would be a viable option. With regard to content, not sufficient information available on the actual results the advisory services often involve skilled personnel (ei- of many of the advisory services activities. ther IFC staff or outside consultants) who provide support for market research, due diligence, investment ap- Lessons Learned praisal, and training services. Due to the evolution of IFC’s EE Services of the IFC Implementation Team Recipients of Services experience and the fact that the Develop strategy for EE. Financial institutions. above three programs were impleAssist in preparing/creating “bankable” projects. Developers/FIs. mented in sequence, the lessons that were generated in HEECP1 Conduct market assessment and awareness raising. Individual EE investments were built into HEECP2 and Capacity building/training/external consultant ESCO/FIs CEEF. Most of these lessons apply engagement. to almost any program within the Monitoring legal, regulatory, and institutional World Bank Group. The followenvironment to identify barriers to investment. ing paragraphs will focus on the lessons from the advisory services components of these projects. Although the focus of this paper is on advisory services, the results discussed below encompass both advisory services and investments (financing). The advisory services component is a necessary but nevertheless insufficient condition for success.
Results
Necessary conditions for success:
Collectively, HEECP, HEECP2, and CEEF have directly influenced the operations of 14 financial institutions, two of which are nominees for the 2007 Financial Times Emerging Markets Sustainable Bank of the Year award. The programs have also resulted in the creation of several hundred energy efficiency projects and significant energy savings. The CEEF Program has generated energy savings of 1080 tera joules annually or dollar savings of $30 million/yr assuming $0.1/kWh in average electricity prices. The CEEF initiative has led to direct CO2 reductions of 52,800 tons per year. These guarantee projects are estimated to have led to the implementation of an additional 144 projects valued at $79.6 million with CO2 reductions of 159,649 tons per year. Over the estimated 10-year life of these efficiency improvements, 28 SmartLessons
There are certain conditions without which a favorable outcome for market-based EE initiatives is unlikely. First, the energy pricing should not be subsidy intensive, or where subsidies exist, they should be very selective. Energy subsidies tend to dull the incentive to use energy efficiently or conserve it. Second, project developers need to be active in these markets. They are the vehicle for identifying opportunities to improve efficiency in factories or homes, can be used to retrofit existing inefficient systems, and have access to equipment suppliers. Third, loan financing stimulates energy efficiency investments because, though EE improvements generally have short payback periods, consumers may not be able to afford the up-front costs of these systems. For this reason, high interest rates and unsophisticated financial in-
termediation will tend to hurt the growth of EE. Finally, economic sectors that are extremely energy intensive also tend to provide opportunities for energy efficiency improvements. Tracking advisory services results: Although an integral component of each program, the success of advisory services was not rigorously tracked. The monitoring efforts were devoted to the overall goals of the project and the degree to which environmental benefits are achieved. To directly assess the impact of advisory services, appropriate tracking systems that capture the importance of these activities to the clients on the one hand and the outcome of the project on the other must be established. Where rigorous tracking is not implemented, the value of advisory services, which may be apparent to direct project participants, cannot be communicated to relevant stakeholders. Furthermore, since the advisory services efforts cannot be independently assessed, potential improvements in project design may be lost. Building flexibility into advisory activities: For advisory services that are expected to be administered over several years, it is valuable to build flexibility into the project structure. This will allow for changes to the content of the program as market conditions change. In certain markets, IFC’s EE program was adjusted to take advantage of opportunities to market to Block House renovation initiatives, an unanticipated opportunity. In others, the program closed operations because deal flow was limited due, in part, to unfavorable market conditions.
suppliers, and financial institutions to structure and deliver on individual investments. After these practical interactions, the financial institutions, project developers and others would gain the confidence to independently pursue similar business initiatives, thereby embedding the learning from the advisory services into routine business practices. Clients may value a menu of advisory services: As advisory service providers, we are often tempted to offer potential clients one or two advisory services that we believe are best suited to their needs. However, the client is very knowledgeable about his business, its current capabilities and growth trajectory, and might therefore opt for a completely different kind of services than the ones we suggest if he understood the various services we are able to offer. It is therefore useful to offer clients a menu of advisory services and explain the benefits and costs of each of them. The clients may then select the service or mix of services that best meets their needs based on a good understanding of the merits of our advisory services. Implicit in the above is that if we offer only one or two advisory services, there is the likelihood that the client may decline our service offer once they know that it is not suited to his needs. Financing alone is not enough:
Where IFC has worked with financial institutions to expand the availability of loans to support EE investments, we have found that pari-passu guarantees (loan guarantees with equal risk sharing) alone do not provide adequate incentive to make financial institutions offer EE loans. Strong advisory services and a close working relationship with the financial institution are often required. The loan guarantee product is not seen as very valuable There are limits to what training alone can accomplish: unless it is complemented by advisory services, which often enables/helps the bank assess the risks associated Advisory services should go beyond training the client/ with the underlying loan product and other aspects of financial institution to perform new tasks or introduce individual EE transactions. new services. Businesses need to be assisted in changing their behavior and deploying the new knowledge. Advisory services and clients’ existing strategy: A degree of hand-holding is often warranted to broker partnerships between financial institutions, project de- Advisory services can be especially valuable if they supvelopers, and equipment suppliers. It should also include port a financial institution’s business or strategic direcstructuring actual transactions involving these parties. tion. Before a specific or menu of advisory service is ofFor example, our advisory services team (a) sensitizes fered to any entity, it is best to understand the strategy financial institutions about EE opportunities through of the entity as well as the market challenges it faces. market studies, (b) teaches them how to assess EE credit The assistance should be designed around the direction risks, and (c) works with project developers, equipment SmartLessons 29
a business has set for itself rather than offering advisory services that divert a client’s attention away from its established priorities. A financial institution that is marketing a range of mature loan and other financing products and is interested in expanding into other areas may be a good candidate for EE-oriented advisory service, since this will represent a new and unexplored opportunity — provided that the necessary conditions for success of an EE program exist. If a bank is only offered a limited guarantee facility, and operating that facility has high transaction costs, then it will not focus on this business opportunity.
Figure 2
About the Author Eluma P. Obibuaku is Monitoring and Evaluation Specialist with the Environment and Social Development Department. Over the past two years, the author has been responsible for the development of monitoring tools and practices for a wide range of sustainable energy initiatives. This document has been written with extensive input from the Sustainable Energy team, namely Ian Crosby and Russell Sturm. Published in June 2007.
CEEF Guarantees 1997- 2007
Cummulative
(as of 26 January 2007)
Per Year
40,000,000
30,000,000
25,000,000
128,702
2001
2002 Year
5,842,677
154,528
2000
3,650,567
931,184
1999
1,541,609
34,217
1998
15,000,000
10,000,000
5,000,000
0
130,583
20,000,000
1997
2003
Guarantee in US$
6,367,950
15,267,034
35,000,000
2004
2005
2006
0 2007
Status Today: As the demand for sustainable energy programs has increased within IFC, it is essential that we learn from these lessons and build them into current and future program designs. The adaptive management style employed allied to regular management review meetings has meant that CEEF has modified its systems and approach to increase its impact. The following top three lessons have been incorporated into the design of IFC’s newest EE programs, the Russia Sustainable Energy Finance (RSEF) initiative and the China Utility Based Energy Finance Program (CHUEE): • Monitoring of advisory activities: Russia has an extremely robust monitoring system which is carefully managed. A database tool has been created to help the team with acquisition of information • Financing alone is not enough: In Russia and in CHUEE, more attention has been paid to market development activities that go beyond just working with the FI. • Menu approach: The Russia team has developed a structured approach for working with FIs to identify which items from the menu they want/need and then have a MoU that states what each party will do. • Adoptive management: With the benefit of working with financial institutions on energy efficiency projects over several years, IFC has learned to exploit the competitive advantage of financial institutions in processing small transactions—the typical deal size of EE projects. IFC has adapted its energy efficiency products and services to the capabilities and needs of FIs. The result, depicted in Figure 2 above, shows how changing our project review procedure through delegating credit appraisal responsibilities to partner FIs enables the completion of a much larger volume of transactions without compromising credit quality. This change brought about a 2.5-fold increase in the volume/value of deals competed in the 2005-2006 timeframe, a trend that has continued into 2007. 30 SmartLessons
Mass Manufacturing on a Diet—Introducing Lean Production in Russia Carl Watt
Poor management of quality and of production in general is one of the main reasons why businesses in developing countries have difficulty linking into global value chains. With this in mind, the Private Enterprise Partnership for Europe and Central Asia (PEP-ECA) has chosen to focus many linkage-supplier development efforts specifically on developing knowledge in the market of Lean Production (LP), a modern management philosophy and set of methods for low-cost factory improvement. LP helps suppliers clean up their production areas, cut back on waste of time and materials, and become an agile organization responsive to customer demands. For example, some of our Russian clients have seen work in process inventories reduced by 400 percent, and a 500-percent decrease in the time required to respond to customer orders. This SmartLesson will review the conditions and implementation strategy that have made it possible to introduce and demonstrate advanced Lean Production methods in Russia in a short time and for relatively little investment.
Why Lean Production? Lean Production, also known as the Toyota Production System and “just-in-time” manufacturing, was developed by the Japanese car maker in the years after the Second World War when working capital was scarce. It uses methods such as reducing equipment downtime and rearranging work area floor space to minimize redundant movements and eliminate overproduction. A good recent example is the global office furniture company Steelcase, which has adopted Lean Production as part of its overall sustainability efforts. The company saw efficiency improvements of 40 percent, a reduction of production time from 8 days to 3.5 hours, and a decrease in finished goods floor space of 85 percent.
A process that does not waste time or resources has to be done right every time, and Lean Production is therefore a quality improvement tool as well as a cost reduction method. Waste reduction also has a positive effect on environmental impacts as well. Because lean methods focus on low-cost, incremental, and continuous improvements, they are very appropriate for industries in developing countries. Also, many global customers require that suppliers start to implement lean methods to ensure the lowest possible production costs.2 The main barrier to adopting Lean Production is lack of experience with the process among local companies in developing countries. This is where IFC can intervene. Lean Production fits into both the Value Addition to Firms (VA2F) and Sustainability business lines, as it not only improves the overall competitiveness of manufacturing enterprises but also increases the efficiency of their use of resources.
Launching Lean Production in Russia With automotive production booming in Russia, the ability of IFC to offer local supplier development became important to differentiate the IFC investment offering. The “Automotive Component Supplier Project” was the IFC Private Enterprise Partnership’s first foray into Lean Production. The IFC Advisory Project funded by US government helped Russian automotive supplier clients come out of 70 years of isolation to meet their commitments to Ford Motor Company for low-cost, high-quality production. As a result of the project, three out of four client suppliers were able to sign production contracts with Ford.
At its heart, Lean Production focuses on educating and with a team of workers. empowering worker teams at all levels to make improve- working 2 For an explanation of Lean Production, see “Lean Thinking” by 1 ments to eliminate waste of all kinds. Womack and Jones, or check their Web site: 1
See PEP-ECA film “Factory Kaizen” which shows the process of
www.lean.org
SmartLessons 31
In 2005, IFC received a donation from the Government project. of Austria for a project called “Volga Automotive Project” to demonstrate quality and efficiency improvements in cooperation with Zavolzhski Motor Factory (ZMZ), located on the Volga River near Nizhny Novgorod. ZMZ is a unit of the large Severstal Avto Group of companies, and it also contributed significantly to the project for consulting services. PEP-ECA decided to work with a large company for demonstration projects on Lean Production for the following reasons: • Working with a prominent group like Severstal helps to ensure the nationwide impact of a demonstration project, because the training and experience flow down to the company’s many local suppliers. • The experience of such a prestigious company has more national impact than improvements at a small firm. • Severstal/ZMZ is in good financial condition and is able to provide funding for improvements suggested by the project. Many small firms in Russia are unable to make even small investments, so the Do not assume this is easy. Russian Lean Production demonstration effect is not strong. This was a les- Consultant Andrei Gavrichenkov (Kioda), working at a factory office with old traditions. son learned in the Ford project. • Severstal Avto is very much a potential client of IFC’s investment side. Go Local! Together with the project’s co-funding partner, the Severstal Avto group, we selected three ZMZ supplier companies for Lean Production demonstration work. This lesson focuses on our experience with the Cheboksari Aggregate Factory (ChAZ). ChAZ is a traditional mass production factory producing cast metal products for the automotive and agricultural sectors. It has more than 8,000 employees and is located in the Chuvash Republic of Russia (Chuvashia)–one of the “frontier regions” of Russia where incomes are well below the national average. ChAZ needs to improve its production management in order to meet growing competition in its markets.
The project found a local partner company dedicated to the lean production concept and hungry to demonstrate its abilities. The Kioda company is based in Moscow and has about 10 employees. No one is older than 40 in the firm. With modest funding (ChAZ partly contributed to it), we still managed to have at least 30 consultant days on site, which includes all the consultant expenses.
Choosing to work with the local consultants, we effectively helped to open a new market segment for Lean Production in Russia. It was very important for us that these consultants would not go their separate ways after From many aspects of Lean Production, we chose to fo- the project, but are already a viable commercial entity cus on “Kanban”—a production system used to reduce providing sustainable impact. Having work done for an work-in-process (WIP) inventory without investing in IFC client, in turn, had a very important positive impact expensive computer systems. Accumulation of large for the local consultant. amounts of inventory between production steps is one of the biggest wastes of traditional mass production and The company gained new experience, since it had not is a typical problem in former Soviet countries. This previously worked in the automotive or foundry indusmade Kanban perfectly suited for the LP demonstration tries. Such a contract for in-depth work was simply not 32 SmartLessons
available to Kioda without the subsidy of the IFC project. ChAZ management, as well as management in many other large manufacturing companies in Russia, had no clear idea of what Lean Production is, how to implement it, or what it might do for the company. It was only funding visiting local consultants to give lectures for one or two days. ChAZ certainly did not believe that local consultants had anything substantial to offer. So in addition, the consulting company gained credibility through working with IFC. We have seen our partner consultants from the Ford project using examples from the project in their training and marketing materials for years.
The product chose was a cast spacer for automotive clutch systems (see picture 1). Using this product for the demonstration reduced the factory risk, since it is a minor part of the overall factory production, and if a few hours of production are lost due to implementation problems, there is not a large financial impact on the client. Production of this item is also localized in a few areas and does not mix with other products. That helps keep the story simpler.
With the availability of management support and consultant time, the team was able to follow the standard route to Kanban very rapidly. First, we identified one But the most important aspect of using the local consul- area of inventory accumulation. This was a permanent tants was that the project delivered. One of the project’s pile of 4,200 castings at the start of the machining operaother clients has spent two years with Japanese consul- tions line, and is shown in pictures 2 and 3. tants on site and still has not fully implemented a Kanban supply system3. While the Japanese consultants were The main reason for such a pile is that each shop is getprobably technically more experienced and knowledge- ting production orders for the month, but they are not able, the local consultants better understand the unique coordinating how they fill the orders. Often, the pile of situation in Russia and are better able to explain to man- 4,200 did not contain any of the castings needed for the agement the changes needed. current customer order. The spacer machining line often used to have to process the spacers that were sitting in Picture 1. This clutch spacer was the object WIP inventory while waiting for the right spacers for a of the demonstration of Kanban at ChAZ. customer order. This is typical in mass production. Pictures 2 and 3: Some 4,200 castings that were waiting for processing before the “Kanban” implementation reduced it to 1,000 units.
Cleaning Up the “Mess-Production” Kanban is one of the more difficult lean tools to implement, because any problems arising in the process immediately impact the rate of production. Thus, we needed to choose a simple product in a small and well-defined production process for demonstration and pilot purposes. 3
To learn more about Kanban, refer to “Kanban for the Shopfloor”; visit www.productivitypress.com. Additional information on Lean Production can be accessed at www.leanenterprise.org
SmartLessons 33
Today, this no longer happens. The team created a simple working algorithm (a Kanban system) which allows the final machining shop to create orders itself from the upstream shops, bypassing the centralized system. Long discussions and negotiations were held with the upstream casting shop, which likes to make big batches of castings. Finally they agreed that they would make castings only according to the orders they get from the machining shop. In the end they had to admit that using the new “just in time” system was easier than the old way of dealing with constant complaints from the machining shop.
Finally, IFC’s access to ChAZ factory management allowed us to learn that there was interest in financing for expansion. This led to contacts being established with IFC’s investment side. Is There a Future for Lean Production in IFC’s Advisory Operations?
In our developing markets, it is common to find manufacturers with sloppy work areas and piles of inventory in the shops. Any of these companies can benefit from Lean Production. Lean can also be applied to large companies In two weeks the ChAZ team had the system up and or SMEs4 IFC advisory services on Lean Production can running. Over 3,000 castings have been eliminated from become “just-in-time” assistance to assist in their struggle the permanent inventory of the factory–an inventory re- to become more agile, “green,” and competitive. duction of 75 percent. (The long-term goal is to reduce the excess to zero.) So, inventory levels are down at the PEP-ECA’s projects have demonstrated that Lean ProChAZ warehouse and the customer can lower inventory duction has significant impact on the client companies. levels, because now he knows that the right spacers will Our next challenge is to ensure that the demonstration projects have national impact by including additional be available when needed. activities directly into the design of future operations. Less inventory also has tremendous impact on the en- These components should specifically aim to spread the vironment, for less inventory means that less material is work we do to a wider number of firms. Activities can needed for production, less metal is to be melted, and vary, from “on-site” seminars, to building capacity of loless energy is used. Environmental savings go right to cal consultants that will go on to work with a wider range of firms, to creating and disseminating training films. the bottom line. On-time delivery is also a big marketing plus, and ChAZ will likely see increased orders, now that its competitiveness has been improved. Finally, the Master Scheduler at the plant has pointed out that working with less inventory is also easier in addition to being more profitable.
About the Author
The Bigger Picture While the project affected the work of only about 30 people out of ChAZ’s total workforce of 8,000, the company estimates that the total benefits of the changes being implemented will be around US$40,000 a year. This is a pretty good return on the US$25,000 investment. But more importantly, it provided a vivid example of the Lean Production potential to the rest of ChAZ and to other factories. The demonstration has not been lost on ChAZ management, and during the recent IFC appraisal visit, the director of production showed that he is rapidly trying to use the same methods to reduce inventory in a very large production area.
Carl Watt is Operations Manager, Industrial Supply Chain Development, Private Enterprise Partnership (CEUEP). Prior to joining IFC, Carl Watt worked for 16 years for Rockwell International Corporation, a U.S.-based multinational. In the 1990s he managed Rockwell’s work in Russia on the cockpit for the IL-96M/T passenger jet. Part of that work included starting production of electronics in Russia. From 1999 to 2001 he managed the implementation of Lean Production at Rockwell’s Collins Air Transport division. He holds a certificate from Rockwell as a “lean master.” In 2002 he joined IFC to manage the Russian Automotive Component Supplier Development Project, and later managed the Volga Automotive Project. Published in July 2007.
See: Lean Manufacturing for the Small Shop, by Gary Conner published by www.sme.org
4
34 SmartLessons
IFC Advisory Services in Eastern Europe and Central Asia Since 2000, IFC has implemented advisory services programs in Eastern Europe and Central Asia in partnership with donor governments and private companies. These programs fall under four business lines: • Access to Finance: Fosters development of domestic financial markets in areas such as Banking, Energy Efficiency Financing, Housing Finance, Insurance, and Leasing. • Business Enabling Environment: Improves the regulatory environment and lowers the risk of doing business in countries with difficult investment climates. • Environmental and Social Sustainability: Supports innovative environmental and social business initiatives such as Cleaner Production. • Value Addition to Firms: Strengthens small and medium-sized enterprises through developing corporate supply chains, as well as introduces best practices in Corporate Governance. Within these program areas, IFC undertakes specific projects which facilitate private direct investment to all sectors of the economy; support the growth of the private sector, especially small and medium enterprises; and improve the business enabling environment. Regional Office Contact: Tania Lozansky General Manager, PEP ECA 36, Bldg. 1 Bolshaya Molchanovka Street, 3rd Floor, Moscow 121069 Russian Federation Tel.: (7-495) 411-7555 Fax: (7-495) 411-7556