From the IFC Mekong Private Sector Development Facility

63 Ly Thai To Street, 3rd floor Hanoi, Vietnam Tel: (84 4) 824 7892 Fax: (84 4) 824 7898

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. This brochure features “lessons” from the IFC Mekong Private Sector Development Facility (IFC MPDF), IFC’s advisory services facility that works across Vietnam, Cambodia and Lao PDR, and its partners.

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 Great Expectations but Disappointing Results. What Went Wrong with the Cambodia Institute of Banking? by Margarete O. Biallas

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SmartLesson 2 Commercializing NGO Enterprises: Very Worthwhile but Challenging

by Ann Bishop, Karla Quizon and Chee Chung Tham

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SmartLesson 3 Banking on IFC—How Advisory Services Have Paved the Way for Investment in Lao PDR by Margarete O. Biallas

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SmartLesson 4 How to Build and Keep a Good Client Relationship—The Case of Techcombank in Vietnam by Hanh Nam Nguyen, Margarete O. Biallas, Sin Foong Wong, Mai Nguyen and Tuyen Nguyen

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SmartLesson 5 Shifting the Focus to “Quality at Exit”—an Effective Approach to Improving the Business Environment at the Subnational Level

by Le Duy Binh and Thomas Finkel

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SmartLesson 6 The Process of Policy Reform: Sharing Lessons from IFC-MPDF

by Trang Nguyen and Nguyen Van Lan

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SmartLesson 7 The Banking Training Center in Vietnam: Results and Challenges of a Wholesale Approach by Jacco Minnaar

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SmartLesson 8 Working with Business Associations in Frontier Countries: Myth and Reality by Lili Sisombat

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Great Expectations but Disappointing Results. What Went Wrong with the Cambodia Institute of Banking?

Margarete O. Biallas There were great expectations of success in January 2004 when IFC’s multidonor advisory initiative, the IFC Mekong Private Sector Development Facility (IFC MPDF) launched the Cambodia Institute of Banking (CIB), Cambodia’s first training center for the finance industry. There was obvious need, the Association of Banks in Cambodia was backing CIB with members’ own money, and IFC advisory staff were well qualified to help launch and advise CIB after three years of advising a similar, successful institution in Vietnam. So, with many good reasons for success, why was CIB a disappointment, and what lessons can be learned from this?

Background There were good reasons for thinking the Cambodia Institute of Banking would succeed.

First, Cambodia’s fledgling commercial finance industry was growing fast. But after decades of war and isolation that only ended in the 1990s, banks and microfinance institutions (MFIs) were held back by a lack of qualified staff.

Only 40 percent of Cambodians were served by the finance industry, and services were limited to individual loans secured by property of much greater value, group loans, deposits, and transfers. As a result, small and medium enterprises (SMEs), which make up more than 95 percent of Cambodia’s private sector, lacked the financing and financial services they needed to improve and expand their businesses and make a greater contribution to job creation and economic development.

With surveys of SMEs listing access to finance as their chief constraint, IFC MPDF made increasing access to finance a priority. Along with improving governance and managerial systems in leading institutions, and helping to attract longer-term international financing, advisory staff also provided on-the-job training for loan officers.

Second, CIB would have no real competition. Periodically, one donor or another ran a short course on some aspect of banking, but there were few of these courses, they reached only a fraction of potential trainees, and with high-priced foreign consultants giving the courses, 4 SmartLessons

and donors subsidizing these costs, the approach was not sustainable. By using international experts to develop curricula in partnership with local trainers who would then give the courses, CIB expected to offer international-standard training at a price that local banks and MFIs could afford.

Third, CIB had strong government and industry support. The National Bank of Cambodia and the Ministry of Finance both saw the need for a permanent institution with capacity to train all levels of banking staff. In addition, seven prominent members of the Association of Banks in Cambodia (ABC) each pledged $10,000 to launch CIB, and ABC itself gave the new institution free office space in its building.

Fourth, IFC MPDF had prior bank training experience. In 2001, in collaboration with a consortium of nine Vietnamese commercial banks, IFC MPDF helped launch—and continued to advise—the Bank Training

Center (BTC) in Ho Chi Minh City. After three years of operations, there was strong and growing demand for BTC courses, and it was progressing well toward spinoff (July 2006). BTC not only showed the way for CIB, but also had curricula that potentially could be adapted for Cambodia at a very reasonable cost. The experience with BTC versus the ongoing work with individual institutions in Cambodia also showed that “wholesaling” through a bank training institution was far more costefficient and sustainable than developing capacity in a few institutions.

The final reason for optimism was the availability of a capable adviser who had experience with banking, curriculum design, and training delivery. His role was to help CIB recruit staff and consultants, set up office procedures, install an accounting system, and oversee needs assessment, curriculum development, training of trainers, and marketing and delivery of courses.

With so many promising reasons for success, why didn’t CIB succeed?

Board members must be chosen with care, understand their responsibilities well, and commit to fulfilling them.

Initially, members of CIB’s board were very committed to participation. But they were all busy CEOs of large banks and had little time to devote to CIB. They were also unwilling to contribute more money in order to pay the salary required to recruit a competent general manager. Instead, board members continued to manage the institute as best they could. With no strong direction from the top, CIB lacked a strategic plan, a business plan, or secure financing, and little was done to promote CIB to the banking community.

Lesson learned: The role and time requirements of board members must be made very clear upfront.

Lack of qualified staff was a challenge for CIB.

CIB was set up with two objectives: 1) to introduce international-standard bank training that would be locally affordable and subsidize the development of the curriculum and local trainers; and 2) to build a sustainable institution that would become self-sufficient after a few years of advisory services.

Finding a qualified local manager and trainers turned out to be much more difficult than expected. Although a capable local manager was finally identified after several rounds of recruiting, the salary offered was too low and the recruitment fell through. CIB also found it difficult to recruit capable trainers. The Bank Training Center in Vietnam had much better success in recruiting both a manager and associate trainers, because the overall level of education in Vietnam is much higher and the finance sector is much larger and better developed.

Lesson learned: Although CIB’s board preferred to have the institute managed by IFC MPDF’s adviser, in retrospect, to achieve sustainability, CIB should have been managed by a Cambodian from the start, with coaching from the adviser. Also, the salary needed to recruit a capable manager should have been in place from CIB had three core functions: the beginning, and ABC should have played a greater • Product development: developing or localizing in- role in finding a manager. In addition, CIB should have ternational-standard but locally affordable train- more actively drawn on its shareholders to develop a ing materials, software applications, and certifica- local network of associate trainers and invested more in tion programs. training the trainers.

• Trainer development: identifying capable, locally based trainers and developing their capacity.

• Market development: promoting CIB’s brand through industry events and media relations.

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Replication of a good model is no guarantee of success, if demand assumptions are wrong.

CIB appeared to have very good prospects for success.

The IFC–MPDF–supported Bank Training Center was showing success in Vietnam, a bank-training needs assessment conducted in Cambodia in July 2003 showed great need, and the banking industry appeared to be committed to sending their staff. For these reasons, IFC MPDF concluded that there would be sufficient demand, even in a relatively small market. This conclusion turned out to be wrong. In 2003, banks and MFIs in Cambodia employed a total of 2,300 people, with top and middle managers accounting for only about 8 percent of all employees. Although the number of employees was growing, it turned out not to be realistic to project that all banks would send 65 percent of their employees to at least one three-day training program, or send a smaller percentage of employees to a number of programs.

Although some banks patronized CIB and sent staff to all 27 courses offered, not all banks were willing to do so.

Some sent staff only a few times, and other banks never participated at all—particularly rural banks, whose costs for participation were significantly higher. In addition to course fees, rural banks had to pay trainees’ travel and accommodation costs. With enrollments well below expectations, CIB was far from breaking even after three years, and this finally led IFC MPDF to withdraw its support.

CIB is still operating under the Association of Bankers in Cambodia, and if donors are willing to provide the funding, training materials, and staff resources, CIB will organize courses on an ad hoc basis.

Lesson learned: Be realistic about demand and the willingness of target beneficiaries—in this case, banks— to pay market prices and other associated costs. This is particularly important in a market flush with donor funding that will subsidize the costs of training.

CIB’s pricing policies were not realistic.

It was a mistake for CIB to apply the same $30 fee per training day for all courses regardless of the type of employee being trained. Banks were much less likely to spend $120 for a four-day course for tellers or clerks who earned only $960 per year. On the other hand, $120 was too low for training a senior loan officer whose annual salary was over $4,000. Unfortunately, although a tiered pricing structure was planned as the project evolved, it was implemented too late.

Lesson learned: CIB should have introduced a tiered pricing structure from the beginning and charged much higher prices for senior staff, because these prices would still be far below the cost of sending senior staff abroad for training. Tiered pricing would have taken into account the high costs of overseas training as well as the local salary structure.

CIB’s projections for reaching the break-even point were overly ambitious.

The business plan projected that CIB would break even in its fourth year, based on the assumption that CIB would offer 60 three-day courses for a total of 1,500 training participants, each paying $30 per training day. This target was not reached for two reasons. First, with its pricing, the organization was not covering the variable (direct) costs of training, let alone its fixed costs.

Increasing throughput would only increase the deficit.

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The plan envisaged slowly increasing prices over time; however, this was blocked by CIB’s Board. They felt that their banks had already contributed enough by capitalizing CIB. A second problem, as already stated, was the limited size of the market.

About the Authors Margarete O. Biallas, the manager of IFC MPDF’s Ac-

Lesson learned: Given the much smaller market in cess to Finance Program, is based in Hanoi, Vietnam, Cambodia, the deadline for achieving financial selfand is responsible for financial markets advisory services sufficiency should have been much longer for CIB than in Vietnam, Cambodia, and Lao PDR. Prior to joining it was for the Bank Training Center in Vietnam. Even IFC, Margarete worked for 10 years with KfW. MargaBTC did not reach the break-even point on a cash-flow rete has previously worked with IFC’s SME Department basis until a full six years after its establishment. Also, and the financial markets group for Eastern Europe.

CIB should have tried harder to lower its costs early on by developing the capacity of local trainers, rather than Ann Bishop, Communications Advisor, IFC MPDF, relying so much on costly international trainers. edited this note.

Conclusion Establishing business development service providers such as CIB is a good use of donor money, because many more enterprises can be served. But the approach is based on several important assumptions that should not be underestimated. The market must be large enough; financing must be sufficient; and the sponsor must be committed and provide enough funding. Also, Board members must have the right skills and enough time, and be willing to serve for several years. And in a frontier, postconflict country like Cambodia, where qualified staff are in short supply, the time frame for spin-off must be much longer.

Published in November 2007.

In retrospect, given the Cambodian situation, IFC MPDF would have been better advised to focus on its first objective for CIB—that of developing the demand for international-standard finance industry training at locally affordable prices. Rather than spend time establishing an institution, IFC MPDF should have focused on bringing demand-driven professional training to Cambodia by effectively promoting the need for training to the finance industry as a crucial investment. Finally, industry commitment should have been achieved from the start through an appropriate cost-sharing arrangement, while institutional sustainability should only have been considered once the market was well established.

Relevant Resources: Go to www.mpdf.org to download the fact sheet and the financial sector diagnostic for Cambodia. Additional information is also available from Transaction Leader Pak Sereivathana.

SmartLessons 7

Commercializing NGO Enterprises. Very Worthwhile but Challenging.

Ann Bishop, Karla Quizon and Chee Chung Tham Over the course of five years, from 1999 to 2004, the IFC Mekong Private Sector Development Facility (IFC MPDF) helped nine non-governmental organizations (NGOs) turn their training and income-generation projects into commercial enterprises. This work proved so promising in Cambodia and several other countries that IFC established its Grassroots Business Initiative (GBI) to manage the Cambodian projects and many others. IFC MPDF cautions that although this work is very worthwhile and is congruent with IFC’s mission, it is not easy. This paper summarizes lessons learned with regard to separation from the parent NGO, whether to register, improving access to finance, and providing long-term assistance at a lower cost.

Background The private sector often fails those at the bottom of the pyramid – victims of trafficking, the orphaned, those with disabilities, those living on the streets. With little or no education or training, and often emotionally as well as physically disabled, the poorest face huge disadvantages in the market economy. Employers often will not hire them, and multiple disadvantages block the way to starting their own businesses.

In recognition of the difficulties the poorest people have in earning a livelihood, social development NGOs are increasingly running small businesses for their target groups. These provide training and income-generation opportunities that beneficiaries would otherwise not have, and some NGOs hope to generate profits that will reduce their dependence on donor funding.

In Cambodia, out of more than 700 local and international NGOs, some 200 operate income- generation projects. These NGOs began working in Cambodia in the 1980s and 1990s to help the country recover from decades of civil war and isolation. Many NGO enterprises are revitalizing the country’s traditional handicrafts, but they are also running restaurants, manufac-turing food products, providing loans to micro-entrepreneurs, and offering other goods and services.

8 SmartLessons

NGOs began to approach IFC MPDF in 1999 for help in commercializing their income-generation projects.

IFC MPDF had developed tools for rapidly assessing the operational and management problems of small and medium enterprises (SMEs); it could source local and international consultants; and it could help SMEs access financing.

IFC MPDF agreed to take on these unconventional clients because using private sector tools to contribute to poverty reduction is central to IFC’s mission. Also, staff were inspired by the vision of the NGOs and excited by the challenge of helping the poorest. Staff also thought these enterprises could succeed. The well-established NGOs that approached IFC MPDF had a track record, established customers, and experienced, honest managers who knew how to plan, raise money, account for it, and train and manage people. In a country with a short recent history of private enterprise, and few role models, NGO enterprises stood a better chance than most.

NGO success story - ACLEDA Bank MPDF’s first NGO client, the microfinance provider ACLEDA, has become a huge success. After only a few years of advisory services from MPDF, IFC, and others, and financing from international lenders, including IFC, ACLEDA has become Cambodia’s second largest bank and the one with the widest coverage. It is now considered one of Cambodia’s best managed banks, with a financial strength rating from Moody’s that is higher than all the banks in Indonesia, and better than most in Thailand. In 2005, IFC named ACLEDA the worldwide winner of its Client Leadership Award. Despite its commercial success, ACLEDA remains committed to lending to Cambodia’s poorest borrowers.

Lessons learned: Avoiding separation anxiety Bigger is better: As with SMEs, NGO enterprises that are larger usually have more chance of success. Thus IFC MPDF generally selected those with larger sales, larger staff, and more established customers. Based on experience, IFC MPDF advises against start-ups.

Minimizing conflict and confusion: NGO management and staff must be fully committed to commercial practices, or conflict can arise between NGOs’ ideals and the realities of running a business. For example, the socially committed visionaries who often set up NGOs may find it hard to relinquish control. Also, volunteer or minimally paid NGO managers may be resentful of more highly paid professionals hired to run the business.

Another issue is what to do with NGO beneficiaries that do not meet commercial standards.

Ownership models include: • registering as a formal business but still owned by the NGO • ownership held in part by strategic or trusted partners • ownership sold to a private sector business or individual who will give the business undivided attention and continue to employ the staff.

To register or not to register…only one answer to the question: NGOs are often reluctant to become fully registered companies because it is costly, and once registered, they lose their tax-free status. They can also become prey to demands for unofficial fees. But if the enterprise is going to grow and engage in exporting and/or raise financing, the company will need to be legally registered and pay taxes. In the end, beneficiaries will gain much more if the company becomes large and profitable, and for To minimize such problems, IFC MPDF found that that to happen, it should be legally registered. Although separation should be planned from the beginning, plans the enterprise should separate from the NGO as soon made clear to all, and funds allocated in the transition as possible, after the decision is made to commercialize, plan to support all the costs of separation. NGO manag- registration should wait until the enterprise has a reliable ers and staff need to understand that for the business to customer base and can afford the costs of registration. succeed, professional managers are a necessity and must be paid market rates in order to attract them. Beneficia- Lessons learned: How to do it better and less expenries need to understand that their jobs are not guaran- sively…from retail to wholesale teed, but that funds have been allocated in the transition plan to train them to commercial standards. They also Allow enough time: Those used to advising commercial need to know that if they cannot make the grade, alter- companies may underestimate the time frame for advising an NGO enterprise. Rather than two or three years, natives will be provided. transition will likely take four or five years, or even lonWhen and how to separate: Separation should take ger. For assistance to end, the enterprise should be not place as soon as the customer base is sustainable and only sustainable financially, but able to manage effectivecash flow can pay the costs of setting up and operating ly with the right structures and corporate governance in commercially. The enterprise should also have its own place. To avoid an unending commitment, IFC MPDF advises starting with a defined period and benchmarks board.

SmartLessons 9

to measure results. If benchmarks are not achieved, then reconsider the commitment.

Promising NGO enterprises−Hagar Design and Hagar Soya Hagar is a Swiss-founded local NGO that helps abused and homeless women and their children rebuild their lives. Since 1994, the NGO has assisted over 100,000 people through its shelters, foster homes, schools, farms, water purification projects, school feeding programs, and other services. Since the late 1990s, Hagar has started three income-generation projects – a silk craft unit, a soya milk production unit, and a catering unit.

With IFC MPDF’s help, what is now Hagar Design Ltd. secured an IFC Capacity Building Facility grant to buy industrial sewing machines and hire design and marketing consultants. IFC MPDF also helped register the enterprise and introduce a management information system. The number of employees has grown from 44 in 2003 to 90 today.

Sales revenue totaled $157,000 in 2005, but it will take more time to become entirely self-supporting.

IFC MPDF helped Hagar turn its small soya milk unit into a $1.2 million factory with UHT processing and packaging equipment. This increased production capacity from 500 liters per day to a maximum of 12,000, and UHT gives Hagar’s soya milk a long shelf life. IFC MPDF undertook a marketing study, helped Hagar develop a business plan, registered Hagar Soya Ltd, found investors, including IFC, and sourced technical experts from IFC’s worldwide network. Hagar Soya now employs a total of 60 staff; in 2005 it generated over $200,000 in sales; and it is working toward cost recovery.

A second successful approach to lower costs is that of helping enterprises to recruit experienced national and expatriate professionals to serve on their Boards of Directors. Directors with the right knowledge and skills and a commitment of several years can provide invaluable assistance in crucial areas such as marketing, finance, and human resources management.

Over the long term, the support provided by IFC MPDF proved too expensive, and the Facility sought ways to lower costs while continuing this worthwhile work. This included recruiting volunteers and working with groups rather than individual enterprises.

Recruit volunteers: IFC MPDF has been relatively successful in recruiting locally based national and expatriate professionals who are willing to serve as volunteer mentors for a few hours a month for six months or more. In a poor country such as Cambodia, many local professionals feel an obligation to give something back. IFC MPDF promoted mentoring and then helped mentors and mentees define terms of the assignment.

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Work with groups rather than individual enterprises: The cost-cutting approach with the widest impact has been setting up a structure to help groups of enterprises rather than individual ones. In partnership with IFC’s Grassroots Business Initiative, IFC MPDF has established and is advising CraftNetwork-Cambodia (CNC).

Since September 2005, this new entity has been helping five handicraft producers increase their local sales and exports by connecting them with buyers and ensuring that they meet buyers’ requirements with regard to design, quantity, quality, and deadlines. CNC is also helping enterprises improve their own operations and, in partnership with ACLEDA Bank, is providing access to operating capital. So far this approach has proven very successful, with orders worth nearly $100,000 in the first year, compared with a target of $40,000. When the pilot ends in mid-2006, CraftNetwork will offer its services to at least ten producers. Within five years, CNC could be serving several dozen producers and become a self-sustaining service provider itself. CNC is currently improving the livelihoods of some 1,200 artisans, and as CNC expands, thousands could benefit.

Promising NGO enterprise - Digital Divide Data (DDD) DDD trains disabled and disadvantaged people to digitize printed materials such as old newspapers, yearbooks, and maps for local and overseas clients.

Profits are spent on expansion, and donor funding provides health care and education grants for staff. With MPDF’s help, DDD improved its management, resolved technical problems that affected quality, and set up new operations in western Cambodia and Lao PDR. With assistance from MPDF and other donors, DDD has grown from 20 employees in 2001 to more than 180 across the three offices. DDD is working toward full cost recovery.

Lessons learned: Access to finance‌ solving one of the biggest challenges

About the Authors

Accessing working capital, and especially the longer-term Ann Bishop, Communications Adviser; Karla Quizon, Program Manager, Environment and Social Sustainabilfinancing needed to upgrade facilities and equipment to ity; and Chee Chung Tham, Associate Operations Ofexpand, is a problem for many small and medium enterficer, IFC Grassroots Business Initiative. prises.

Financing is especially challenging for NGO enterprises because they often have no land to offer as collateral.

Even when an NGO does have land, lenders may still be unwilling to lend because they know that if the financing is not repaid, it will be difficult to foreclose on a charity.

Published in March 2006.

IFC MPDF advises laying the groundwork for future financing from the beginning. This means placing accounts and establishing a track record with a bank or microfinance institution that specializes in micro and small enterprise lending. Over time, through the handling of company accounts, the bank will become familiar with cash flows and viability. Proper registration is also important in obtaining financing. Lenders can see lack of registration as a lack of commitment to commercial success.

It is also important to consider the most suitable type of financing, given the needs of the business (working capital, long-term loans, equity, leasing etc.). Those advising NGO enterprises should also be prepared to guide them in applying for financing, as successful borrowing requires a good plan and records.

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Banking on IFC—How Advisory Services Have Paved the Way for Investment in Lao PDR Margarete O. Biallas Lack of competition has been a major constraint in developing a modern banking system in the Lao Peoples’ Democratic Republic (Lao PDR). Thanks to advisory assistance from IFC’s Mekong Private Sector Development Facility (IFC MPDF), significant improvements have been made in legislation governing commercial banks. In only seven months – record time – a new law has been written and passed. This in turn has facilitated IFC’s first financial sector investment in the country, the start-up of a new local bank and plans for existing banks to expand. Within a few years, tens of thousands more small and medium enterprises and individuals should finally have the financial services they need to prosper.

Consequences of restrictive legislation In Lao PDR, a mountainous landlocked country with a largely rural population and a fledgling private sector, fewer than 25 percent of the people have access to financial services, compared with over 90 percent in developed countries. This means that few people in this Southeast Asian country have a safe place to save or transfer money, and little or no access to the financing they need to start or expand a business.

Since the late 1990s, Lao PDR’s government has encour- IFC’s policy advice was designed to level the aged private enterprise, but finance industry legislation playing field has not kept pace with private sector needs, and the country’s finance sector is consequently very small. In Recognizing the crucial role that a thriving commercial 2005, total assets were only US$676 million. finance sector plays in stimulating private enterprise, economic growth, job creation, and ultimately poverty Legislation has strongly favored state-owned banks over reduction, IFC MPDF agreed when the government private ones and also discouraged foreign players. For exasked for assistance in improving finance industry ample, although state-owned banks had no minimum legislation. Through comprehensive support to the capital requirements, private local banks had to post drafting committee appointed by the Bank of the Lao US$3 million, and foreign banks US$10 million. Rules PDR (BOL), IFC MPDF: on branches limited foreign banks to a single branch in the capital, Vientiane, and natural resource companies • Helped the committee develop the new Law on could only bank with and borrow from state-owned Commercial Banks. commercial banks. As a consequence of finance industry •

Amended the Presidential Decree on the Managerestrictions, no new banks or branches have opened for ment of Foreign Exchange and Precious Metals. years, loans have barely kept pace with GDP, and bank• Recruited international experts from the World ing services are available only in the capital and a few Bank Group to advise on international best praclarger towns. tice and improvements to draft legislation.

• Facilitated meetings between the law drafting Lao PDR also has no stock exchange, no leasing compacommittee and private finance industry stakenies, and only one state-owned insurance company. holders to ensure that the views of the latter were 12 SmartLessons

considered.

• Prepared National Assembly members to debate the legislation through a comprehensive briefing by the law drafting committee.

Throughout the drafting process, IFC MPDF’s goal was to level the playing field for all finance industry players, whether state-owned, privately owned, or foreignowned.

Ensure a broad range of perspectives IFC MPDF’s client, the BOL, particularly valued the broad perspective that IFC MPDF and related experts brought to discussions. Along with an understanding of the needs of regulators, the experts had in-depth understanding of industry constraints.

Lessons learned Pair international and local experts IFC MPDF’s advisory services included conducting a comprehensive review of the legal framework governing commercial banks and reviewing initial drafts prepared by the BOL drafting team. The Facility’s expert also proposed a draft law aligned with international best practice for the committee’s consideration. To maximize effectiveness, the international expert from the World Bank Group’s pool of consultants was paired with a local lawyer who had in-depth knowledge of local banking regulations and industry culture. Both experts were selected for their extensive knowledge of banking legislation.

Draw on relevant best practice To ensure that the new legislation capitalized on lessons learned elsewhere, IFC MPDF facilitated an exchange between the drafting committee and finance industry regulators in Thailand.

After the exchange, participants shared what they learned in a seminar for the Lao PDR finance industry. Both the exchange and the seminar were a new approach.

IFC MPDF added value as well by consulting its wide network of lawyers who are knowledgeable about banking legislation from three different perspectives: that of an investor (IFC), that of a regulator (World Bank), and that of an operator (CGAP, ANZ, and ACLEDA). Consultations with these experts significantly improved the law and ensured that it is practical as well as understandable.

Facilitate ongoing stakeholders

transparent

dialogue

among

IFC MPDF arranged several workshops that brought together all stakeholders, including representatives from the national and international banking community, relevant government agencies, the National Assembly, bank clients, and the drafting committee.

Not only were current market players invited, but also foreign banks, and the comments of all were well received by the drafting committee and were reflected in improvements to the law. Inviting foreign banks to participate in discussions counterbalanced the domination of the state-owned commercial banks. Participation of foreign banks also ensured forward-looking legislation that covered issues not yet relevant to the Laotian market, such as electronic banking.

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Go to the top if necessary Direct dialogue with the BOL governor on a few key issues in the draft law complemented work done with the BOL drafting team and key stakeholders. For example, a direct appeal to the governor resulted in removing severe limits on the establishment of branches.

Ensure successful implementation Based on other successful law-making advisory work in Vietnam and Lao PDR, IFC MPDF has found that drafting good legislation is only part of the solution. The government also needs advisory services to ensure effective implementation of new laws. Based on good results in drafting the new banking law and the decree on foreign exchange and precious metals, both the government and the BOL have asked IFC MPDF for help in developing the implementing regulations needed to put the new law and decree into practice.

Conclusion: Better finance law paves the way for investment and economic growth Thanks to the new law, IFC joined ANZ Bank in investing in Vientiane Commercial Bank (VCB), and as part of this deal IFC MPDF is likely to work with VCB staff to develop capacities in trade finance, small business finance, and lending to improve agri-sector supply chains.

Other positive impacts include the start-up of a new local commercial bank in March 2007, and encouraging foreign banks, such as Cambodia’s ACLEDA Bank, to operate in Lao PDR. Most important of all is the impact that the new legislation is expected to have on economic development in Lao PDR. Within a few years small and medium enterprises, which make up almost the entire private sector, and individual consumers should have much greater access to both finance and financial services.

Relevant Resources: Go to www.mpdf.org, to download the fact sheet and the financial sector diagnostic for Lao PDR.

A comprehensive approach yields results in record time Thanks to the comprehensive approach taken, the new Law on Commercial Banks and the Amendments to the Presidential Decree on the Management of Foreign Exchange and Precious Metals were passed in record time by the National Assembly in December 2006. This was only two days after submission and just seven months after the drafting process began.

By working closely with World Bank colleagues and the whole range of stakeholders, including top officials, not only did IFC MPDF succeed in leveling the playing field for all players, including foreign ones, but the new regulations enable non-state banks to lend to the lucrative power and mining sectors, which represent almost 80 percent of GDP. Minimum capital requirements (US$10 million) are now the same for all players, and foreign banks have the right to establish branches country-wide.

The government has gained as well, because the new law improves banking regulation, supervision, and transparency.

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About the Author Margarete O. Biallas, manages IFC MPDF’s Access to Finance Program. Before joining the Facility, she worked at KfW in various investment departments as well as with IFC’s SME Department and the financial markets group for Eastern Europe.

Published in April 2007.

How to Build and Keep a Good Client Relationship—Techcombank in Vietnam Hanh Nam Nguyen, Margarete O. Biallas, Sin Foong Wong, Mai Nguyen and Tuyen Nguyen We have all heard stories about IFC client relationships going bad and about clients who are confused and annoyed by uncoordinated visits from multiple IFC teams. But there are also stories of excellent client relationships, and this SmartLesson is about one of those. Since 2000, well-managed collaboration with Techcombank in Vietnam has laid the foundation for this important bank to become a substantial client for both advisory services and investment.

1. Advisory services related to SME market segmentation, business strategy development and implementation, and risk management 2. A $10 million Global Trade Finance Facility - a “first entry” investment product 3. A $20 million term loan that was expected to be disbursed before the end of 2007

IFC’s relationship with Techcombank, one of Vietnam’s first commercial banks, began in 2001. With IFC advisory support¸ Techcombank and nine other shareholder banks launched the Bank Training Center (BTC), Vietnam’s first and only established institution providing international-standard but locally affordable training for the commercial finance industry.

Based on positive experiences through BTC, Techcombank was the first bank to commit to becoming a shareholder in a new, crucially needed enterprise—Vietnam’s first private credit bureau, an IFC advisory initiative.

The next step in IFC’s growing relationship was direct engagement with Techcombank. Leveraging rapport built through broader advisory projects, IFC advisory staff were asked by Techcombank to help improve its risk management capacity by advising on how to modernize its core banking system. In 2006, this was followed by an advisory services diagnostic which recommended how best to expand Techcombank’s financial services for small and medium enterprises (SMEs).

As revealed by the diagnostic, the bank could benefit from a package of both advisory and investment products, and a proposal was developed that included:

Lessons Learned Building on already established relationships helps ensure success.

Clients tend to stay in their comfort zone and prefer to work with those they already know. This is particularly true in developing Asian countries, and Vietnam is no exception. As Techcombank’s CEO had worked with IFC staff on various advisory projects, he was already positively disposed to IFC. This meant he was always very accessible, which helped to speed up investment negotiations.

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Successful advisory work can lead to successful investments, but the client needs to be approached in a coordinated manner.

Developing a client engagement strategy helps ensure more investment transactions.

When Techcombank was judged ready for investment, Continuity should be assured by always having “old fac- the joint advisory and investment team prepared a stepes” accompany new ones, and by making sure that all by-step client engagement strategy. The first step was admessages to the client are consistent. To enable invest- visory work on SME banking that would help Techcombment officers to leverage the good relations that advisory ank understand the SME market (market segmentation), staff have built with the client, a number of joint client develop a business strategy for selected target segments, visits took place in which specialist staff, such as those for and determine which products and distribution channels should be used for this. As a second step in client engagetrade finance, were introduced to the client. ment, a trade finance line with IFC was initiated by the investment team because it would help the bank meet the stricter standards required for more sophisticated investment products. If the first two steps are successful, as a third step IFC will provide a long-term loan to fund the growth of Techcombank’s MSME portfolio.

Benefiting from the diagnostic work, IFC’s appraisal and processing for the loan are being undertaken in record time (from appraisal and due diligence to disbursement in under six months). Once all of these steps have been Clients can easily become confused and unhappy if they completed successfully, Techcombank will be ready for receive visits from too many teams and get what appears more sophisticated IFC products such as a bond issue to be contradictory advice. Not only is it important to guarantee, subordinated debt, or equity finance. inform the client when IFC staff will be coming to see them, but the purpose of their visit should be clearly explained. Experience also shows that it is crucial to debrief team members following completion of their work at the bank. This means that regular communication, and especially feedback on results, needs to be communicated within the team.

Coordination between various IFC teams can be greatly improved by maintaining the same person as the Client Relationship Manager (CRM).The advisory staff member who is the transaction leader for the private credit bureau pitched the SME diagnostic to the client and followed up jointly with the Access to Finance program manager. She also brought in different members of the investment team.

The investment team has also benefited from having an investment officer who previously worked on the advisory staff as the CEO of the Bank Training Center.

Through this work, she developed in-depth knowledge of the strengths and weaknesses in the commercial banking sector and good relationships with managers in several banks, including Techcombank.

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Creating a “One IFC” team takes time.

Since the CRM and the One IFC team were new functions, it took some time for the roles and responsibilities of each team member to be defined. As this process took several months, it gave rise to confusion both on the part of the client and within IFC’s own office.

Working on each separate advisory and investment component meant that team members were initially working in isolation. Work on the SME marketing study, the trade finance line, and the SME loan were not initially as well coordinated as they should have been. Consequently, the client failed to appreciate the “one team” approach, and

while the advisory work progressed as planned, delays commitment. were encountered on the trade finance line and the SME loan.

Another aspect of the problem was that, given limited staff resources in a frontier country, outside experts were required to ensure that the client got the best advice possible. This included a banking specialist to perform the due diligence, a trade finance specialist to perform the trade finance review, and three banking experts to complete the portfolio review. The team quickly learned that it was crucial to clarify the roles, tasks, and outputs of each team member and outside expert, and to make all of this as clear as possible within the team and to the client.

About the Authors Hanh Nam Nguyen joined IFC-MPDF in 2002 after working for KPMG, Vietcombank, and a leasing company.

Margarete O. Biallas is the manager of IFC MPDF’s Access to Finance Program based in Hanoi, Vietnam.

Sin Foong Wong is IFC Country Manager for Vietnam, Lao and Cambodia.

Mai Nguyen is Investment Officer, Global Financial

Yet another problem was that there was no single partner Markets based in HCMC. to negotiate with. Each specialist worked with a different department, and opinions about what was needed varTuyen Nguyen is an Investment Officer in the Hanoi ied greatly. We found it very helpful to start comparing office. notes on discussions held and results achieved with different members of the client’s staff. Good and frequent communication within IFC’s team helped to ensure that the client got the best results in the shortest time pos- sible.

Published in October 2007.

In the end, however, difficulties were resolved and an integrated IFC team was created. All the team members met together with the client and indicated that all pieces of work needed to move forward in tandem. Once Techcombank realized the importance of a coordinated effort, it integrated its own internal teams in order to ensure harmony on all three fronts, and the work progressed as planned.

Conclusion - Building and keeping client trust.

While Techcombank has been happy with IFC, this good relationship cannot be taken for granted. Building a good relationship with a client is challenging, but maintaining it for the long term is even more difficult.

IFC staff must now deliver on all the commitments they made. In Techcombank’s case, this means ensuring that the highest standards of quality and efficiency are met in delivering advisory services, as well as in disbursing and managing the term loan IFC will provide for SME financing. Hence the team has to continue to work together very closely for a long time beyond the initial SmartLessons 17

Shifting the Focus to ¨Quality at Exit¨—an Effective Approach to Improving the Business Environment at the Subnational Level Le Duy Binh and Thomas Finkel—GTZ Impact monitoring and quality assurance have always been an uphill task for donors, implementing agencies, and recipient agencies. In the last few decades, we have witnessed the evolution of impact monitoring work with lots of new methodologies and concepts, resulting in thick documents that are sometimes difficult to digest. This paper does not aim to describe this evolution. Rather, it focuses on how the GTZ SME Development Program in Vietnam has adopted a new approach in impact monitoring and the challenges that we are facing. It also describes first results and achievements, as well as key lessons drawn out of the process.

I. The GTZs SME development program in Vietnam

II. Analysis of key issues and problems

Vietnam is a rising economy with discernible economic achievements in the last few years. Since 2000, the private sector in Vietnam has grown remarkably and is becoming increasingly important for the national economy. However, constraints facing the private sector are numerous, at both national and subnational level.

For a long time, quality assurance within technical assistance projects was oriented heavily on the quality of the inputs provided, or in other words, on “the quality at entry.” Many GTZ projects and interventions in Vietnam, particularly during the 1990s, were designed, implemented, and monitored with this focus being the bedrock. The success of the projects was measured mostly in terms of the number of consultant days contributed, training courses organized, participants in workshops, or other types of inputs (with much emphasis laid on the quantitative aspects). This approach failed to bring about the best desirable results and, in many cases, sent the wrong messages to project managers as well as partners.

As a result, the effectiveness and impact of the projects were limited.

The GTZ SME Development Program aims to improve the competitiveness of private SMEs in Vietnam by contributing to a favorable private sector policy framework.

It also supports creating an enabling business and investment environment at the provincial level and fostering local economic development. Additionally, it helps enterprises to integrate into domestic and international value chains and supports the upgrading of business services.

Right at the formulation of the SME Development Program, this challenge was recognized and timely action was taken. A decisive shift toward results-based management and measuring impact was undertaken. However, this is always easier said than done. Despite many guidelines, examples, and case studies that were available, it has been an uphill learning process.

The Program started in 2005, replacing a four-phase III. Description of outcome SME Promotion Project implemented by GTZ since 1994. The Program has a budget of € 8.3 million for a The SME Development Program, besides its intervenfour-year phase. tions at the national level, also provides support to four provinces: An Giang, Dak Lak, Hung Yen, and Quang Nam. Despite discernible economic success, the eco18 SmartLessons

nomic governance and competitiveness of these four provinces remain serious concerns, with their business and investment climates lagging far behind the most progressive provinces of the country.

of the intervention and track the impact as far down as the enterprise level. As compared with the national level, it is also easier to implement baseline studies and to maintain a database for impact measurement.

In consideration of the actual context and needs for assistance in each province, separate action plans and intervention strategies have been developed. However, all of the provincial action plans are founded on the following three pillars:

This represents both opportunities and challenges for the GTZ SME Program, particularly in the context that it is focusing increasingly on the “quality at exit.” On the one hand, the Program can document and demonstrate its impact and outputs in a plausible manner. On the other hand, it still remains a challenge for the Program management and its partners to identify the right mix of interventions that produce really tangible and measurable impact, despite the fact that the attribution gap at the subnational level is apparently narrower. But still, the fact that an impact (or no impact) of a given intervention by the Program can be traced more easily helps to better set the intervention strategy—that is, if the impact monitoring system is used and managed as a knowledge management instrument, where learning of project staff and partners is the key aspect. This focus on learning from the successes and failures of interventions and trying to continuously improve intervention strategies is what our impact monitoring system and the “quality at exit” approach are all about.

1. Improving the provincial regulatory framework through improved governance capability, strengthening the capacity for implementing business laws and regulations.

2. Assisting local stakeholders in selected provinces in implementing essential promotional policies and initiatives, for example in investment promotion, public private dialogue, promotion of business startup, etc.

3. Strengthening business and cooperative relationships between the stakeholders (production, processing, trade, and services) of selected value chains.

The three pillars cover a wide range of activities, but they Key Lessons Learned • •

•

• • •

A change in the mindset of GTZ staffs and partner organizations is a precondition for success.

The shift must be reflected in all binding documents under the Program, ranging from the framework cooperation agreement to a simple TOR for a consultant.

Internal monitoring is redesigned on the basis of the shift of focus, with clear and logical impact chains developed.

Impact monitoring must be every staff member’s task.

Don’t be too obsessed with the “attribution gap.”

Set up a well-structured database to support the illustration of the achievement of impacts.

are strongly interrelated. Thus, coordinated implementation and monitoring of impacts are manageable. Often, it is easier to measure impacts of subnational-level interventions than national-level ones. With the average population size of approximately 1 million, 2,000 formally registered enterprises and 10,000 household businesses in each province, it appears easier to measure the impact

An important lesson here was trying to make all Program members understand the importance, the need, and the beauty of the new approach. This was achieved through training, a short-term assignment with an international consultant, and learning by doing on the job. The whole approach and its concepts were clarified in a simple and understandable manner.

The knowledge was then transferred to partners at both the national and subnational level—those who will design and implement the Program’s activities later on.1 The shift in the approach is also reflected in all binding documents between the Program and the partners, as well as in the Terms of Reference (TORs) for consultant missions or other activities.

In order to better steer this shift in thinking and acting, the Program, local governments, and other stakeholders worked out different impact chains, using them as the navigator for the design, implementation and monito– _________________ The ownership of Vietnamese partners in implementing the Program’s activities is quite high.

1

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OUTPUTS

USE OF OUTPUTS/ SERVICES

DIRECT BENEFITS

IMPACT

ring of every single activity in the Program. For the subnational interventions, the impact chains are consolidated in an abbreviated manner in the diagram below. It does not provide a full account of the output and the use of the output which the Program creates. The examples given in the diagram are for illustrative purposes.

would become less obliged to integrate the concept in their daily work.

The absence of a full-time impact monitoring staff has not affected the integrity of the monitoring and evaluation (M&E) process or of the data collected. The Program’s internal monitoring system will GTZ SME Development Program – Improvement of Subnational Business Environment be cross-checked and supported by independent evaluators INCREASE IN # OF ENTERPRISES AND EMPLOYMENT INCREASE IN INVESTMENT AND EXPORTS and consultants. In addition, HIGHER RANKING OF FOUR PROVINCES IN PROVINCIAL TIME AND COST FOR REGISTERING AN ENTERPRISE though not full-time, one techCOMPETITIVENESS INDEX REDUCED nical advisor in the Program Local governance capacity Good programs and In selected value chains, is tasked with monitoring the improved, effective business law initiatives for local economy institutional framework whole M&E process. As a qualimplementation, good lessons development designed and improved, better access to and practices learned, fed back to implemented, provincial business services, business ity controller, she is tasked with national level and replicated in image improved, increased linkage strengthened, value other provinces services for investment, and added to local products, obliging every staff member to significant increase in income. business start-ups available follow the M&E rule, reviewing all reports and data. She •Business registration at provinces •Economic reforms in four •Strategy action plans for value performs this role by holding are now on-line, computerized, provinces are effectively chain development in selected reducing registration time by 30% Implemented products formulated and talks with every staff member implemented •Local government is addressing •Innovative instruments for for at least two hours on M&E problems raised by business. promotion of investment and •Improved advocacy for SME is business start-ups are carried out and support services •With technical advice offered, every two months and by faimplemented for selected products are offered local government streamlining adminsitrative procedures for •Best practices & lessons •Tools and instruments for value cilitating and documenting the business and implement the learnt disseminated in other chain development are elaborated Enterprise Law and Investment prov. and national level and disseminated knowledge management meet•Business •Training •Institutional • Investment •Subsector •Market Law better. registration courses on capacity for and start-up dialogue and interventions ings which are held once every procedures business laws stakeholders initiatives strategy for specific reformed and strengthened implemented development BDS services •Technical year. computerized •Policy

advice on law implementtation

•Forum on

•Locational

•Strengthe-

•Partnerships

local economy established

marketing program implemented

ning of the institutional framework

with business community (PPP)

The Program’s internal monitoring system has been reengineered to reflect the shift to “quality at exit.” Regular knowledge management meetAs mentioned, the impact chain diagram is used to guide ings are held to review the achievement of milestones the design and implementation of every single activity. and indicators of impacts, and to see whether the logic of In addition, impact monitoring has become the task of the impact chains is still correct. Reports both by GTZ every Program member, without having a full-time im- and partners are prepared with an increased focus on this pact monitoring staff. The advantage is that this requires logical chain of “output – use of output – indirect benefit an impact-oriented mentality that will navigate and gov- and final impact.” ern everybody’s behavior and performance. Each time an activity is discussed or proposed, every partner agency There is a strong argument that the indirect benefit or will naturally ask the following questions: (i) what is the impact (e.g., contribution to the competitiveness of output to be produced? (ii) how will it be used? and (iii) Vietnam private SMEs) cannot easily be attributed to how will it contribute to the indirect benefit and the the Program’s interventions. Despite this, it is the shared objective of the Program? The same questions are also belief in the Program that if one or a series of activities/ asked when the Program staff reviews or discusses any interventions is implemented, producing a good prodproposed activity with the partner and with the manag- uct which is used by the national partners and yielding ers. A full-time impact monitoring staff would be desir- tangible and measurable indirect benefits (e.g., a reducable for allowing more time on crucial data collection, tion in business registration time, an increase in the turnbut the disadvantage would be that everybody would over of a selected value chain, etc.), this will result in lose the direct obligation to do impact monitoring and the desired impacts. In reality, impacts are quite difficult dialogues platforms set up

REGULATORY FRAMEWORK

LOCAL ECONOMIC DEVELOPMENT

20 SmartLessons

VALUE CHAIN DEVELOPMENT

to measure, but they are quite feasible to observe at the References provincial or subnational level as long as we think about 1. http://www.sme-gtz.org.vn them right at the outset. So don’t be too obsessed with 2. http://www.businessenvironment.org the attribution gap! Don’t let the attribution gap let you 3. http://www.publicprivatedialogue.org down! Work out a plausible system of impact chains, and implement activities persistently along this line to produce desirable outputs and direct benefits. Then you are About the Authors contributing significantly to generating impacts.

What has not worked very well is the setting up of a systemic and well-structured database to support the illustration of the achievements in indirect benefits and impact. At the outset, the database is structured according to the impact chains and the indicators system developed at the advice of an international consultant. However, the limited availability of data statistics in Vietnam and the already heavy workload of the Program’s staff members have hindered the completion of the database.

To address this issue, everybody will be charged with updating the database with data and information most relevant to his or her area of work.

The selection of indicators to reflect the achievement in terms of output, use of output, or benefits has also not been very satisfactory. Some of the indicators turned out to be irrelevant or impossible to measure. Some of the indicators are very vulnerable to the attribution gap trap or too abstract to be measured, thus making it difficult to measure the impact of the Program’s intervention. For instance, “selected sub-indices of the Vietnam’s Competitiveness Index are improved by the end of the Program” is far less relevant, useful, and measurable than “the time and cost spent by local authorities and business in the four selected provinces on business registration be- ing reduced by 30 percent by the end of the Program.”

Therefore, adjustments to the indicator system needed to be made, and this required negotiation with the client, the German Ministry for Economic Development and Cooperation (BMZ).

Le Duy Binh started his career at the State Bank of Vietnam in 1994 in the field of credit and finance. From 1999 to 2001, he worked at the National Economic University as a trainer and a researcher. During this time, he also worked as a senior consultant for the Japan Bank for International Cooperation, with the focus on private sector and SME research. Since 2001, he has been an advisor to the GTZ SME Development Program in Vietnam, with a focus on investment climate, business environment, and SME policy.

Thomas Finkel started his career working in Small and Medium Enterprise (SME) development projects. In 1999 he changed continents and worked for GTZ’s new Public-Private Partnership (PPP) office in Germany. In 2003 he moved to Hanoi as senior technical advisor in an SME development project of GTZ in Vietnam and is still working as project manager for GTZ’s PPP program in the region. Since December 2005 he has been in charge of GTZ’s SME Development Program in Vietnam in the capacity of Chief Technical Advisor.

Published in May 2007.

In summary, though the Program is still in the learning process, we are not hesitant to state that our shift to “quality at exit” has been a good choice. The implementation process has had more success than failure. Lessons have been drawn from both what worked and what did not work. They definitely will be the basis for strengthening and improving our impact measurement approach in the years to come.

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The Process of Policy Reform—Sharing Special Lessons from IFC MPDF Trang Nguyen and Lan Van Nguyen Discussions on donor-supported policy reform advisory services projects tend to focus on the specific results, e.g., laws passed or regulations changed, and the activities undertaken by the project team to achieve those results.

In addition, we have continued to engage beyond the enactment of the laws, providing both advisory services to the drafting committees as they develop related implementing decrees and ongoing help with monitoring implementation.

The focus of this note is different. It shares the experience of an IFC MPDF policy reform project from the angle of The Advisory Services Project: Policy change process rather than activities, and shows how focusing on process can bring about broader mindset change in the is about mindset change institutions and range of stakeholders involved in policy reform.

IFC MPDF’s advisory services focused on changing the mindset of a whole range of stakeholders – the business policy experts, the media, and especially The Background: Responding to government community, lawmakers (members of National Assembly in particuneeds lar). Over the two-year legislative process, we provided and/or assisted many of the stakeholders with numerous In late 2003, the government of Vietnam announced that products and activities, including: it would revise the legal framework for businesses in or• Research and Information Dissemination: We der to improve the investment climate by a) leveling the conducted and published high-quality research playing field among domestic, foreign, and state-owned that covered a range of topics, fed into the draftbusinesses, and b) ensuring that Vietnam complies with ing of the laws, and was disseminated in several international agreements as it seeks to join the World forms, including reports for the drafting teams, Trade Organization (WTO). The government set out to policy bulletins targeting policymakers, presentado this by combining four laws that regulated all types of tions/workshops for the business community, and businesses and investment into two comprehensive laws: articles for the press.2 the Enterprise Law and the Investment Law.1 During 2003-2005, at the government’s request, IFC MPDF worked with the government, the business community and other donors and development partners to provide a range of high-level advisory services. The resulting two laws, passed in December 2005, are widely considered investment-friendly and are expected to contribute significantly to private sector growth. _________________ Prior to passage of the new Enterprise Law in December 2005, three laws - the Enterprise Law of 1999, the State Owned Enterprise (SOE) Law of 2003, and the Foreign Investment Law – governed different types of businesses. The new Investment Law, which was also enacted in December 2005, supersedes the previous Foreign Investment Law and the Law on Domestic Investment Encouragement.

1

22 SmartLessons

_________________

Our colleagues from FIAS, as well as consultants Ross Chapman from the Center for International Economics (CIE) in Australia and Cally Jordan, Professor of Law from the University of Florida, provided the expertise for this component.

2

• Engagement of the National Assembly: IFC MPDF provided lawmakers with written information and analysis of the laws at different points in the drafting process and also helped them access the drafting team through workshops. These efforts enabled National Assembly members to participate more fully in the ongoing debates on the two laws.

• Workshops and seminars: We organized ten different events throughout the process to ensure ongoing dialogue, debate, and feedback among the drafting team, business leaders, members of the National Assembly, and others. We also facilitated many informal meetings and discussions among relevant stakeholders to discuss both the policies and strategies for continuing advocacy.

• Ongoing advocacy through the media: Through our efforts, over 70 articles were published in local newspapers, and the issues were discussed on television through interviews and commentaries. The widespread press coverage helped equip the general public to engage in the debate through mechanisms like the Vietnam Chamber of Commerce’s (VCCI) bulletin board, where entrepreneurs could post their comments and suggestions.

was revised significantly to incorporate inputs from ongoing research, workshops, and feedback sessions; the version that finally passed was Draft # 18.

The more significant impact of the IFC MPDF advisory services program, however, was not on the actual laws but rather on the lawmaking process itself, and on the National Assembly as a key constituent in that process. This initiative was widely considered “unprecedented” and Vietnamese policymakers even suggested it as “a model for future legislation.” The numerous written briefings and workshop sessions gave National Assembly members an in-depth understanding of the proposed legislation and of different constituencies’ varied concerns early on in the lawmaking process; this, in turn, fostered a true debate and allowed for a series of revisions before the laws were finally passed. Both legislators and the staff from the Office of National Assembly informed us that they referred extensively to the briefing materials while participating and commenting during the formal discussion in the National Assembly session.

Most important, through this project we changed mindsets by incorporating the concept and practice of ongoing advocacy in the process, as well as opening up the process itself to a wider group of stakeholders. The significance Outcomes and Impacts: A new approach to of this impact is perhaps best reflected in a comment made by Mr. Nguyen Dinh Cung, Director of the Maclawmaking roeconomic Policy Department of the Central Institute of Economic Management and principal author of the As mentioned above, the Enterprise and Investment Enterprise Law 2000 and 2005: Laws, as passed by National Assembly in December 2005, were highly supported by the business commu- “The difference between this time and last time [the draftnity. The Investment Law, in particular, went through ing process of the Enterprise Law in 1999] is that last time, many iterations throughout the two-year process, as it stakeholder feedback involved us [the drafting team] exSmartLessons 23

plaining to the business community what was in the law and its merits.... This time there has been a lot of debate and discussion throughout, and the business community is telling us what should be in the law.”

This can be very effective, but only if the government truly wants and needs that assistance. Too often, however, advisory services are supply-driven and do not take into account the fact that policy reform is also a domestic political issue and that governments may not always be Lessons Learned: What worked, and what we would open to advice from outsiders. IFC MPDF consciously chose to work on the Enterprise and Investment Laws have done differently with hindsight rather than the Bankruptcy and Competition Laws (also developed recently), because the latter two laws were Lesson #1: You have to be in it for the long haul. driven more by the international community than by the Most donor-assisted policy reform projects “declare vic- government’s reform agenda. tory” when the law is passed and/or a report with recommendations is issued. But the reality is that unless they It is also crucial to identify, build trust among, and are followed up with substantial work on the ground, work with appropriate champions within the govsuch laws may stay on the books while the reality re- ernment who can act as policy advocates from within mains very different, and those reports will probably sit the system. This was true in our case, as our partners on a shelf in a government office and seldom be referred particularly praised us for our “willingness to work with government agencies as part of a team.” This was not to again. easy – our first meeting with the Investment Law draftThe main lesson we have learned is that if you really ing team was adjourned after only ten minutes. We spent want to affect policy reform, you have to take a long- the first six months of the project building relationships term outlook. Substantial levels of effort and time have with the drafting teams, responding to small requests for gone into development of the legislation, and our input help with translation, locating papers that shared experiinto researching, developing, advocating for, and passing ences from other countries, and even just following up the two laws have taken more than two years. And yet with people on the phone on a regular basis. One year we are only part of the way through the process – much into the project, IFC MPDF was one of the few “outsidmore work will be needed to develop implementing de- ers” that the drafting team called on regularly for ad-hoc crees, put the laws into practice, and facilitate and moni- input and advice. tor their implementation.

The lesson we have taken away is to spend time up-front Originally, we made the mistake of designing our proj- investing in relationships rather than push ahead into ect to end when the Enterprise and Investment Laws activities too quickly. With trust having been built with were passed. We have now revised the project document, the Investment Law drafting team, that team has specifiexpanding it by two years so that we can assist with a) cally asked IFC MPDF to coordinate the World Bank implementing decrees and b) monitoring the implemen- Group’s inputs on the implementing decrees. tation of the laws. This should have been a part of our Lesson #3: International experts can provide highoriginal project design, and going forward it will be. quality advice, but it takes strong local knowledge to Lesson #2: The government has to want your help, and make things happen. it has to trust you.

Foreign experts can provide top-quality advice and interThe most important criterion for engagement in any national best practice – and yet that best practice could policy reform area is that the issue must be high prior- be inapplicable to the local context. Or the recommenity on the government’s reform agenda; otherwise no dations could be very relevant but be delivered in a way that is inappropriate and hard for the government to amount of donor assistance will likely yield results. take on board. In this advisory services project, we relied Donors and donor-funded projects usually try to im- heavily on the World Bank Group’s internal expert deprove the business environment by introducing laws and partments as well as external consultants; in all cases we policies that comply with international best practice. had to work very closely with our colleagues, bringing our on-the ground knowledge of the business environ24 SmartLessons

ment, local culture, political and administration systems, The National Assembly Briefing Book and supplement and stakeholder relationships. were not part of our original project design; neither was the concerted facilitation of the domestic and internaThe lessons for us included: 1) sometimes you have to tional business communities’ response to outstanding push back on foreign experts, who may be recommend- issues in the Common Investment Law (CIL) after it ing solutions unsuitable for the local context, 2) you have had been submitted to the National Assembly. In both to be prepared to spend the time and effort to guide of these cases, however, IFC MPDF’s added value lay consultants in the local context, and 3) as the contact largely in our ability to respond quickly to needs as they point between the foreign experts and local government, arose. you have to be willing to make the tough calls – delaying or even canceling activities if the different sides are This was a concern because we had not budgeted for not seeing eye to eye. these unanticipated activities in the beginning, and thus had to be very careful about project spending during latLesson #4: The media can be a powerful ally in er stages (we usually set aside just 5 percent of the overall project budget as a contingency). In this case we were advocating for reform. lucky to have been under budget in other areas and thus We used a wide range of advocacy tools – research papers, were able to find the money. The lesson for us has been publications, workshops and seminars, and informal to allocate a larger amount of money for contingency meetings – to deliver and reinforce messages and media product development, as the opportunities will inevitacampaigns. These efforts occurred consistently through- bly arise during the advocacy stage of the project. out the lawmaking process; the laws went through several drafts; and each time a new version was discussed, there was broad media coverage of the issues involved.

About the Authors Moreover, IFC MPDF will continue this kind of advocacy even now that the laws have passed, so that the public Trang Nguyen is currently General Manager of IFC and other stakeholders can follow the implementing deMPDF. She started MPDF’s Business Enabling Envicrees and monitor implementation of the laws. The key ronment Program in 2002 and was the Program Manlesson to be learned is that persistent advocacy over the ager until recently. long term is crucial to developing and maintaining public awareness of legal reforms and relevant issues.

Lan Van Nguyen is the Manager of the business policy reform project at IFC MPDF and the team leader of the Vietnam BEE program.

We also learned to use the media wisely by building relationships and improving their capacity to cover the issues debated. In Vietnam, the media is still very much in an early stage of development; assistance is needed in facilitating public dialogue and representing the views of Published in March 2006. different stakeholders on major issues.

Lesson #5: Plan to be flexible, and leave room for innovation.

While it is important to plan and develop specific project components from the start, it is also important to be flexible and willing to adapt. Throughout the course of the legislative process, the drafting teams made numerous requests for additional information and ad-hoc support; in each case we responded promptly, which helped in building up trust and rapport between them and our team.

SmartLessons 25

The Bank Training Center in Vietnam—Results and Challenges of a Wholesale Approach Jacco Minnaar A wholesale approach to advisory services that focuses on market development, aiming to enable intermediaries, can generate high returns and a lasting impact. The Bank Training Center Project (BTC) in Vietnam was one of the first IFC projects to use a wholesale approach. This essay examines the BTC case: its impact, advantages, how to implement a wholesale approach, what challenges can be expected, and how to deal with them.

Introduction: Retail and Wholesale Approach From 1997 till 2002, IFC facilities active in small and medium enterprise (SME) development largely adopted a “retail” approach to advisory services. This involved direct interaction on a firm-by-firm basis. In 2004, an Operations Evaluation Group assessment concluded that:

direct retail activities. This essay looks at a bank training program in Vietnam in order to draw lessons of experience from a project that was one of the first to be set up under the wholesale approach and is now sufficiently mature to be evaluated.

• firm-level service programs reach relatively few companies; and • training programs and a focus on market development can reach more companies and also generate even higher returns.

IFC MPDF reduced the importance of its firm-level consultancy services and replaced it with a wholesale delivery approach. Whereas the retail approach was trans- IFC MPDF’s Bank Training Program in action based, the wholesale approach is about market Vietnam development, aiming to enable intermediaries to provide services at the firm level. The wholesale approaches that Vietnam’s financial sector, transforming to meet the emerged shared three consistent features: needs of a market economy, had no source of skills train• They sought to address not individual but mul- ing for bankers prior to the Bank Training Center, which is a private company established in 2001 by a consortium tiple firms.

• They sought to work through intermediaries to of nine Vietnamese commercial banks. IFC MPDF provided advisory services to help BTC design and market deliver the services.

• Some form of capacity building was routinely in- courses, train a pool of local trainers, and develop BTC’s volved. management capacity to provide international best practice training, tailored to local needs and at prices VietToday the delivery model is still in flux, as the objec- namese banks could afford. tive of realizing synergies between advisory services and investments has provided new input into the discussion on the advantages and disadvantages of the wholesale approach, and in many cases has led to renewed focus on 26 SmartLessons

Indicators

Project Name: Bank Training Center Vietnam

BTC's Member Banks 2003

2004

Private Sector Loans Growth (aver.)

50%

54%

Period: November 2001 – June 2006

Growth in Total Number of Clients (aver.)

41%

125%

Actual expenses US$ 993,269

Net Profits Growth (aver.)

Total Assets Growth (aver.)

Overdue Debts (aver.)

38%

51%

162%

58%

3%

2%

Impact of the Bank Training Program In June 2005, IFC MPDF hired an independent evaluator to assess the training impacts on participating banks at individual, work, and organizational levels. Bankers are very satisfied with BTC’s training quality (an average satisfaction score of 3.5 out of 4), and most of the bankers have applied knowledge learned back on the job (96% of surveyed bankers confirmed their application).

Impacts at the organizational level have been identified Advantages of the Wholesale Approach at based on a statistical model1 with banks’ data collected BTC for three consecutive years (2002– 2004). Regressions have shown positive correlations as follows: The wholesale approach has several advantages, the most • Profit Growth: On average, one percent increase significant of which are listed below. in the share of BTC training (over total training • Once a critical mass of customers had purchased days) is associated with a 5.8% increase in profit and demonstrated the value of the bank training growth. and consultancy services, impacts were then broad • Reduction of Nonperforming Loans: On average, and long-lasting. BTC continues to deliver serone percent increase in the share of BTC trainvices to financial institutions in areas where IFC ing (over total training days) is associated with a MPDF’s support has already been completed (for 0.02% reduction in the ratio of nonperforming years, in some cases). loans.

• SME Lending: On average, one percent increase in the share of BTC training (over total training BTC reaches far more financial institutions than IFC days) is associated with a 0.1% increase in the MPDF could with a retail approach. While IFC MPDF worked with a few individual financial institutions durgrowth of SME loans. ing its first 5-year cycle, over four years of operations Based on the analysis of the data, and after a series of in- BTC has delivered services to 26 banks. depth interviews with banks’ directors and • The wholesale approach allows projects to avoid or managers, the independent evaluator concluded that minimize direct subsidy of the end-user (the bank, BTC training has had a positive impact on banks’ busiin BTC’s case), particularly at the transaction levness performance. el, providing services at reduced rates or for free.

In the case of the wholesale model at BTC, most subsidies occur further back in the process such as investment in product development and capacity building of trainers. This approach is effectively _________________ trying to build the market by addressing market 1 The model tests the correlations between training benefits (Profit failures on the supply side while minimizing marGrowth/SME Loan Growth/NPL Reduction) and Banks’ Growth ket distortion on the demand side. in Training Days, GDP Growth, and Training Acquisition from BTC on Total Training Days.

SmartLessons 27

• By charging market rates, the wholesale approach is demand led. Although clients under the retail approach were requested to cost-share, their share was nominal: only 5% on average during IFC MPDF’s first cycle (1997–2002). IFC-invested banks in Vietnam and Cambodia which receive advisory services typically pay less than 10% of the costs. In the last quarter of FY06, BTC covered 105% of its costs, and in 2006 it is on track to make a profit.

The Wholesale Approach at BTC: Challenges and Recommendations Throughout the project, IFC MPDF has encountered numerous issues. Below is an overview of the main challenges, and recommendations on how to overcome them.

Recommendation: The wholesale approach is less well-suited to small frontier markets, where only a few firms (banks in BTC’s case) demand services. Therefore, thorough market research has to be done up front.

BTC in Vietnam turns out to be a success. IFC MPDF is attempting to replicate this success in Cambodia, and the jury is still out on whether the market is large enough. IFC MPDF has decided that in Lao PDR, where the banking sector is still very rudimentary, a bank training institute is not yet feasible. In countries like Lao PDR, which is a frontier market that lacks sources of industry expertise and local business service providers, a retail approach is appropriate.

Challenge: Multibank courses (with participants from several banks) can help to increase knowledge, but it is very difficult for participants to implement on the job what they have learned during training.

Challenge: Donor coordination. In Vietnam the objective of the Bank Training Program was to build a market Recommendation: It is a misunderstanding that all for bank training, and as much as possible to avoid disBTC courses are multibank. Some 75% of courses have tortion of that market. If a large number of other donors been conducted in-house, tailored to the needs of indi- and/or the government provide subsidized or free-ofvidual banks. BTC also carries out consulting assign- charge services, this will seriously reduce the chances of ments for individual banks to improve key processes and commercial entities like BTC surviving. procedures. These activities help banks implement good practice and increase the value of BTC’s offering.

Recommendation: Donor coordination is key, and a wholesale approach can be successful only if market disChallenge: The wholesale approach requires a longer tortion by other donors is minimized. As a result of IFC gestation than the retail approach. The retail approach is MPDF’s increased donor coordination, donors are now straightforward: firm-level needs are met by mobilizing actively seeking cooperation with BTC, and recently this investment officers and/or industry/ advisory services ex- led to BTC’s winning a tender for a European Union– perts. Projects can be initiated and completed relatively supported SME banking project. quickly.

Challenge: What to do if there is a need and likely a Recommendation: Seeking to address market failures is demand for services, but there is no supply at all as yet? rarely a “quick fix.” Projects with a wholesale approach How to avoid market distortion, when helping to set up and the objective to build sustainable service providers a new supplier of services? can easily take five years and should only be undertaken if there is long-term donor support and strong buy-in Recommendation: It is preferable to work with existing from management. Managing expectations is important, providers and build their capacity. Therefore, the advieven before the start of the program. sory services project should advertise in order to identify and select potential partners. The bank training program Challenge: Is there a critical mass of customers who are in Cambodia determined that while there were no bank ready to buy services at a price level that is high enough training service providers, there were soft-skills service to sustain profitable operations? providers that IFC MPDF could work with. If there are 28 SmartLessons

Challenge: Organizational sustainability. Advisory services providers can easily take too much ownership.

Taking it away from the actual owners will pose a threat when the assistance is phased out. BTC was to a large extent conceived by IFC MPDF, and to a lesser extent by the formal owners. The Technical Advisor who supported BTC was so successful that he was effectively seen as the General Manager, and BTC itself was housed in the IFC MPDF office and therefore seen as a component Challenge: Financial sustainability and pricing. Experi- of IFC MPDF (both by its customers and by its staff). ence shows that it is difficult to raise prices. BTC raised prices successfully twice, but the third increase resulted Recommendation: A key success factor is to make sure that the service provider(s) take full ownership of the in a sharp decline in orders. process. Lessons to be learned on organizational sustainRecommendation: Pricing is very important and should ability are: be a key part of the strategy. There are several price strate• All strategic decisions should be made by the board gies: Three of them are particularly relevant: of the organization, not by the advisory services implementing agency (with or without nominal • Penetration Pricing: The price charged for services approval by the board). is set artificially low in order to gain market share.

• There should be a (local) General Manager hired Once this is achieved, the price is increased. This by the Board who makes the day-to-day decisions. approach was used by BTC. Raising prices proved If it is difficult to find a General Manager who can to be difficult in Vietnam; clients were very price be effective from day one, the owners can appoint sensitive. a ”General Manager Trainee,” under training from • Price Skimming: Charge a high price because you the technical expert. have a substantial competitive advantage. Howev• All arrangements should reflect as much as poser, the advantage is not sustainable. The high price sible the ownership of the actual owners, e.g., a tends to attract competitors, and the price inevitanewly set-up service provider should have its own bly falls due to increased supply. This approach is office. difficult in a price-sensitive market.

• Cost price + margin. The bank training program in Cambodia used this strategy. Full transparency References: on pricing helps owners to set the price correctly 1. OEG, Evaluation of IFC-supported Small and and clients to understand what they pay for.

Medium Enterprise Facilities, June 3, 2004.

2. Bich Hanh Le, Lessons from IFC MPDF’s TrainChallenge: Financial sustainability and costs. IFC ing Programs, unpublished.

MPDF helped pay for some of the costs in the first years 3. McKenzie, John, Retail and Wholesales Apof the project. BTC’s cost structure was similar to IFC proaches, Chapter in 50 years IFC book (draft).

MPDF’s and out of line for a local company. no adequate partners, then it can be justifiable to work with a party that is willing to invest in such an endeavor (e.g., a consortium of the nine most active joint-stock banks in BTC’s case, and the Association of Banks in Cambodia). It’s important to keep testing the market (through advertisements requesting Expressions of Interest) and phase out support to just one institution when the market develops–to avoid further distortion.

Recommendation: It is very important to minimize overhead costs (e.g., for the office). The single largest cost for a service provider is salaries, so this warrants special attention. The service providers should find a balance between fixed costs (only for functions that are crucial and are needed full time) and variable costs (for functions that are not needed full time). Freelance consultants should be courted to join an “associate network,” maximizing flexibility and lowering fixed costs.

About the Author Jacco Minnaar joined IFC in September 2001 to work on IFC MPDF’s bank training program and wrote this while he was Acting Manager of IFC MPDF’s Access to Finance Program. He now works for Triodos Bank, making investments in financial institutions in Africa.

Published in March 2006.

SmartLessons 29

Working with Business Associations in Frontier Countries. Myth and Reality Lili Sisombat Support to business associations offers a new means of improving the business environment in frontier countries. By target-

ing associations in established and promising sectors of the economy, advisors can work through associations to disseminate best practices and experiment with new approaches. Through support to the garment industry association, AGTEK, in Vietnam, IFC MPDF has collaborated in setting up an innovative industry training center. This SmartLesson shows that when development agency programs respond to the real needs of association members and these are congruent with the mission of development advisors and their capacity, both sides will be satisfied and contribute enthusiastically to the success of the program.

Background

secretariat, prepare a business plan for building an online booking system, and establish requisite back-office services to operate the booking system. Support to CAMFEBA was intended to strengthen its ability to carry out advocacy through specialized training to conduct research, disseminate information, and present its views effectively to authorities.

As part of its commitment to private sector development in emerging economies, IFC has been working in Cambodia since 1996. At the time IFC began its work, Cambodia was finally emerging from decades of war and isolation and was still politically unstable. The private sector was underdeveloped, and government had little regulatory capacity. Today, although things have been improv- Myth #1: There are mature business ing over the years, the private sector remains weak, with associations in frontier countries with which few service providers to support businesses, and private companies have difficulty voicing and defending their IFC can work. interests with third parties.

In the handbook developed by IFC’s Small and Medium In 2001, the Mekong Private Sector Development Fa- Enterprise Department to guide program managers in cility (MPDF), IFC’s donor-supported advisory services their work with business membership organizations,1 initiative, started a capacity building program to support a key recommendation is to partner with mature orgathe development of sustainable business associations nizations. When IFC MPDF started its operations in (BAs). The aim, via these associations, was to provide a Cambodia, there were no associations of any kind. The range of business services and capacity building activities country was emerging from decades of war, and the podesigned to improve the competitiveness of private in- litical scene was polarized. But the country was opendustry. The rationale was that the associations could play ing up, and starting in 1997, tourists flocked to the city a significant role, not only by providing useful informa- of Siem Reap, home to the world-famous Angkor Wat tion and business services to members, but also by influ- temples. Hotel capacity doubled every year, and tourism was increasing at an annual rate of 30 percent. Before encing public policy that impacted members’ interests.

IFC MPDF’s intervention, the private sector had made MPDF worked in Cambodia with three business associa- several attempts to establish a hotel association, but all tions: two regional hotel associations and the Cambodian had failed for what were largely political reasons. If the Federation of Employers and Business Associations. Sup- association president was from one political party, hotel port to the hotel associations was intended to strengthen owners from other parties would not participate. They the management and operations of the organization and had concerns that executives might serve their own into improve members’ access to needed business services, 1 World Bank Group, SME Department, 2001, “Building the in particular to online booking services. To these ends, Capacity of Business Membership Organizations, guiding principles MPDF agreed to support the creation of a professional for project managers.”

30 SmartLessons

terests rather than those of members. As a result of these and help in negotiating with unions. Establishment of a concerns, IFC MPDF intervened in two areas: Web site and an online booking service that would enable members to market over the Internet was also highly • Hotel Associations: At the joint request of provin- rated. cial authorities and several hoteliers (from different political parties), IFC MPDF helped establish Fee-earning Services: Rather than first develop a profesa private sector tourism association in Siem Reap- sional secretariat to serve members’ needs – as recomAngkor. As a result, a 15-person board of directors mended by the SME Department in its guide – IFC was elected, representing accommodation provid- MPDF began its advisory work by developing fee-earners from small guesthouses to five-star hotels affili- ing services. The goal was to first ensure sustainability of ated with international chains. In the same year the hotel association and its services by giving it a reli(2002), the Facility helped establish the Phnom able source of revenue. IFC MPDF’s advisors reasoned Penh Hotel Association in the capital. Three years that by developing a successful Internet marketing and later, the two regional hotel associations merged booking service that paid the association a commission into a national hotel association that now covers on each booking, the association would have the reliable the country and in August 2006 had 100 memincome it needed to hire professional staff. These staff bers. would then develop more services for members, which • National Employers’ Federation: IFC MPDF pro- would ensure that membership would continue to grow vided support to CAMFEBA, which represents along with revenue from members’ fees. To this end, IFC more than 700 member companies and includes MPDF developed the online booking system as the main seven business membership organizations. CAM- service offered to members, and to make the service a FEBA is a member of several bi- and tri-partite success, IFC MPDF invested sizable resources in buildbodies, representing members’ interests at both ing a back office: it hired a coordinator; provided specific training in system management; established financial national and international levels. and administrative reporting procedures; and promoted Both the Cambodia Hotel Association and CAMFEBA the booking system in regional tourism trade fairs. are now well respected in the business community, and through the Government-Private Sector Forum, both are Unmet Needs: Although there was strong demand for the Internet marketing and booking service IFC MPDF key participants in public/private dialogue. provided, there were other important needs which IFC Lessons learned: In frontier countries, best practices from MPDF did not address. The larger hotels did not need international experience are sometimes irrelevant, as the the online booking service, as they were already engaged economic and political context is very different. Criteria in Internet marketing through their own Web sites or for selecting partners and ways of working have to be based off-shore e-marketing companies. Instead, they wanted on the characteristics of the private sector in a particular the association to engage in advocacy, marketing Camcountry. Working with business associations means building bodia as a destination, and negotiating with nascent lathem almost from scratch, which in turn requires long-term bor unions. The smaller hotels and guesthouses wanted support from development agencies, both in terms of staff help in coping with unfair competition from the touts time and budget. In undertaking this work, development who hustled bookings at the airport, bus station, and agencies need a great deal of patience and a long-term boat landing. These touts told pre-booked guests that they should switch to the place promoted by the tout perspective, as results will not show for at least 3-4 years. because the hotel or guesthouse they had reserved had Myth #2: We (donors) know what’s best for closed. Guesthouse owners also wanted training that would upgrade the skills of their staff so that they could business associations. provide better service.

Before beginning advisory services, IFC MPDF conducted a needs assessment with members of both hotel associations. A wide array of needs was identified, ranging from training and destination marketing to advocacy

The IFC MPDF team recognized the importance of these other needs, but did not address them. They considered it more important to develop the Internet marketing and online booking service so the association would have a SmartLessons 31

reliable source of revenue and a valuable service that would attract more members. Nor did the IFC MPDF team consider it their role to help members advocate with government, negotiate with labor unions, or provide training to upgrade small hotel and guesthouse human resources.

e-marketplaces such www.asiarooms.com, www.hostelworld, and www.expedia.com.

All these high expectations of board members turned out to be unrealistic. All were general managers or owners of hotels and guesthouses, struggling with their daily operations, and they were only volunteering their time As a result of IFC MPDF’s focus on Internet market- to guide the association. Thus the association was very ing, several of the larger hotels were unhappy with the much secondary to their main hotel industry job, and work of the association and complained that it was not they left it up to the IFC MPDF advisors to manage the doing enough to serve their interests. IFC MPDF be- association staff who ran the online booking service. came frustrated, too, because the association did not provide enough support for the online booking system, and Lessons learned: Business associations in frontier countries members’ commitment to make a success of the associa- are run by volunteers and therefore cannot be expected tion did not match the substantial financial and human to operate like actual businesses. The private sector is still resources IFC MPDF was providing to the association. young in Cambodia, and there are still a limited number of successful companies in any sector. This in turn limits the Learning from these initial mistakes with hotel associa- number of people who have the money to pay association tions, IFC MPDF took another approach in working fees or to volunteer their time to the association. Thus with CAMFEBA. Following an initial needs assessment, business associations in Cambodia cannot charge the kind of advisors established a capacity building plan jointly with membership fees that support elaborate services in developed the board members and focused on what they really cared countries. Nor is it reasonable to expect that board members about: advocacy for members. As a result, membership will be able to volunteer much time. Running a business in a increased by 50 percent, and CAMFEBA is now able to frontier country is very demanding. Not only do owners and communicate effectively with its members through a dy- managers have to cope with the uncertainties of the business namic Web site, professional communications materials, environment, government “red tape,” and the struggle to be profitable, they also have to build the capacity of their and well-trained staff. staff. It is thus unreasonable to expect that association board members will act as managers for a business association Myth #3: BAs in frontier countries can be run when they receive no salary or other benefits.

like businesses.

IFC MPDF dedicated significant resources to make the hotel marketing Web site and booking service a success.

By 2005, the system was doing well. Every month, between 200 to 300 bookings generated enough commissions to cover almost all the association’s direct expenses.

Unfortunately, though¸ the project team saw the hotel association as a “marketplace operator”(MPO), and expected it to provide up-to-date content and recruit new members, not just for the association itself but in order to offer a wider range of choices for the Internet marketing Web site. The team also expected board members to help in negotiating down the prices of hotel rooms and in building a more attractive Web site that would draw more visitors to Cambodia. The team had high hopes, too, that the commissions earned from the online booking service would motivate association board members to make a success of their Web site so that it would be good enough to compete with international and regional 32 SmartLessons

Due to IFC MPDF’s advisors’ perceiving that association board members lacked commitment to the Web marketing initiative, at the end of 2005 the advisors decided to transfer the online booking system from the hotel association to a private operator who had more commitment and resources to devote to the Web site and booking service. Other advisory services to the association have also been phased out. In March 2006, the team that launched and managed the Web marketing initiative for IFC MPDF in Cambodia, Lao PDR, and Vietnam also spun off to become Worldhotel-link.com (WHL). This is the first commercial venture to spin off from a donor agency, and it is expected to repay IFC MPDF’s investment with interest once WHL is profitable. In March 2006, WHL signed a partnership agreement with Lonely Planet, the highly successful budget guide book company, which is directing its readers and Web visitors to WHL’s online booking system, and the model that began the hotel association in Cambodia has since been successfully rep-

licated with private Web site operators in developing countries around the world.

Since IFC MPDF ceased its support, the hotel association has been mainly engaged in advocacy. Through participating in the Government-Private Sector Forum, a public/private dialogue mechanism supported by IFC MPDF, the hotel association has been able to successfully advocate against a new accommodation tax that would have seriously penalized its operations.2 CAMFEBA continues to successfully expand its membership and now employs three staff dedicated to providing advocacy services to its members.

Conclusion and Overall Lessons How should IFC MPDF and other development agencies work with business associations? Is work with business associations worth undertaking, and which kind of impacts can one expect to achieve?

ment- Private Sector Forum, the results will be seen in measurable improvement in the business climate.

Support to business associations offers a new means of

improving the business environment in frontier countries. By targeting associations in established and promising sectors of the economy, advisors can work through associations to disseminate best practices and experiment with new approaches. Through support to the garment industry association, AGTEK, in Vietnam, IFC MPDF has collaborated in setting up an innovative industry training center. This example shows that when development agency programs respond to the real needs of association members and these are congruent with the mission of development advisors and their capacity, both sides will be satisfied and contribute enthusiastically to the success of the program.

Based our experiences with the hotel associations and CAMFEBA, we recommend the following: • Advocacy is an area where business associations can be very effective in frontier markets.

• In frontier countries such as Cambodia, business associations need development agency support if they are to offer services such as a members’ Web site, marketing assistance, and advocacy. Development agencies should be prepared to provide long-term support if they wish their assistance to be successful in demonstrating good practices to other business associations.

• Advocacy services can be low cost, and if successful, the respective business associations will become highly visible, respected by the industry and government, and attract and keep sufficient

members to ensure sustainability.

• If IFC facilities such as IFC MPDF support business associations in building members’ capacity to advocate effectively through public/private dialogue mechanisms such as Cambodia’s Govern-

About the Author Lili Sisombat is the project manager of the Cambodia Government-Private Sector Forum, a public-private dialogue platform to improve the business environment.

Published in March 2006.

2

A new hotel room tax of 2% was to be introduced and take effect immediately. This would have had serious consequences for the industry, as hotels usually sign contracts a year in advance with travel agencies that guarantee fixed hotel rates. Since hotels could not pass on the 2% cost until expiry of their current contracts with travel agencies, they would have had to pay the 2% tax themselves for many months and for a significant portion of their rooms (for many hotels, up to 90% of business is with travel agencies).

SmartLessons 33

IFC Mekong Private Sector Development Facility (IFC MPDF) IFC MPDF was established in southeast Asia in 1997 to stimulate private sector growth, help reduce poverty and improve people’s lives across Vietnam, Cambodia and Lao PDR. IFC MPDF partners with donors, governments and the private sector in developing and delivering advisory services to clients.

Organized under five program areas, IFC MPDF aims to: • • • • •

Improve the environment for doing business Increase access to finance Promote environmental and social sustainability Increase local value-added in global supply chains Expand opportunities for the private sector to participate in the provision of infrastructure services

Regional Office Contact: Trang Nguyen General Manager, IFC MPDF 63 Ly Thai To Street, 3rd floor Hanoi, Vietnam Tel: (84 4) 824 7892 Fax: (84 4) 824 7898