*as effective from 1.1.2012 TAM/BAS Programme has changed its name to Small Business Support (SBS) team, and TurnAround Management (TAM) Programme to Enterprise Growth Programme (EGP)

Small Business Support* Strategic Plan 2011-2015

Table of contents

PRESIDENT’S RECOMMENDATION 1

I. COLLABORATION WITH DONORS 3

II. CLOSER WORK WITH THE BANKING DEPARTMENT 6

2.1 Enterprise Growth Programme (EGP) 6

2.2 Business Advisory Services (BAS) 7

2.3 Local Business Development Programmes 8

3.1 Early Transition Countries 10

3.2 Western Balkans 10

3.3 Ukraine 10

3.4 Kazakhstan 11

3.6 Russia 11

3.7 European Union 11

IV. METHODOLOGY 12

4.1 Enterprise Growth Programme (EGP) 12

4.2 Business Advisory Services (BAS) 16

V. IMPACT ASSESSMENT AND PRIORITISATION OF INTERVENTIONS 18

5.1 Enterprise Growth Programme 18

5.1.1 Project-level reporting and impact assessment 18 5.1.3 Evaluations 19 5.2 Business Advisory Services 20

5.2.1 Monitoring at project level 20 5.2.2 Monitoring at market level – prioritisation of intervention 21

VI. FINANCIAL SUSTAINABILITY AND EXIT STRATEGY 23

6.1 Financial Sustainability 23

6.2 Exit Strategy 28

Annex 1 Overview of Donors by Country of Operation 31

Annex 2 The Grant Guideline Matrix (GGM) 32

Annex 3 Local Business Development Programmes 34

Annex 4 Existing EGP Project Structure and Team 36

Annex 5 EGP Overview of PPMS Reporting 37

List of Abbreviations ACR BAS Annual Consultant Review BAAC Budget and Administrative Affairs Committee BAS Business Advisory Services BDS Business Development Services BEEPS Business Environment and Enterprise Performance Survey CEE Central and Eastern Europe CEO Chief Executive Officer CFO Chief Financial Officer CSU EBRD Consulting Services Unit CRR4 Capital Resources Review 4 DLF Direct Lending Facility ETC EBRD Early Transition Countries ETCI EBRD Early Transition Countries Initiative ESSF EBRD Shareholder Special Fund EU-IPA EU Instrument for Pre-Accession FI EBRD Financial Institutions banking team GGM BAS Programme’s Grant Guideline Matrix HRP Small Business Support Heads of Regional Programme ICA EBRD Industry, Commerce and Agribusiness banking team LEF Local Enterprise Facility MCFF Medium-Sized Co-Financing Facility MSME Micro-, Small- and Medium-sized Enterprise MIS Management Information System MOI EBRD Management, Organisation and Innovation Survey NPD BAS National Programme Director OCE Office of the Chief Economist OCU Official Co-Financing Unit OECD/DAC Organisation for Economic Cooperation and

Development/Development Assistance Committee PPMS EGP Project Performance Management System RIA Randomised Impact Assessment RO Resident Office SIA Senior Industrial Advisor SIDA Swedish International Development Cooperation Agency SME Small- and Medium-sized Enterprise EGP Enterprise Growth Programme SBS HQ EGP and BAS Management in London TC Technical Cooperation TC COM EBRD Technical Cooperation Committee TEECCA Turkey, East Europe, Caucasus and Central Asia TI Transition Impact TOR Terms of References TTC EGP Team Coordinators WIB Women in Business

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PRESIDENT’S RECOMMENDATION The Enterprise Growth Programme (EGP) and Business Advisory Services (BAS) are at a turning point in their operations. Since inception in 1993, EGP has assisted more than 1,830 enterprise CEOs in 30 countries with senior industrial advisors to help them to “turn around” the operations and management of their companies. BAS has carried out 10,000 projects with small enterprises in 25 countries by providing them with grants to support their engagement of local consultants for their development needs. BAS has further supported the development of local consulting markets through more than 450 market development activities in which consultants improve their skills and knowledge, so as to offer better services to small enterprises. A new Strategic Plan for the period 2011-2015 seeks to bring these programmes fully in line with the Bank’s objectives in CRR4 and to better align them with the work of EBRD’s Banking Department, while continuing to collaborate with donors in setting priorities. Key improvements proposed to the programmes are summarised below. Enterprise Growth Programme (EGP). The EGP will assist emerging mid-sized corporates of the countries of operations to become more creditworthy and, therefore, bankable. The EGP will become more selective, working with clients approved by Banking teams, and will seek to achieve measurable results for the client firms. For the first year of the new strategy, EGP projects will be reduced in number to focus more intensively on quality and results. The EGP will reduce costs by making greater use of local managers and experts, while introducing cost recovery among beneficiaries. The EGP will introduce more Sector Dissemination Activities, utilising lessons learnt from direct enterprise assistance and then focusing on core industries to strengthen key backwards and forwards linkages while promoting a value chain approach. Transparency in selection and contracting of advisors will be assured by transferring EGP contracting to the Consultancy Services Unit and engaging those consultants used extensively on longer term contracts following a transparent selection process. Tied funding should be replaced with untied sources to ensure that the programme targets the needs of the companies in the regions and sectors which are strategic for the Bank, and to ensure that companies receive the advice which they require. Tied funding will continue to be used where the expertise available matches the needs of the client companies. Business Advisory Services (BAS). BAS will work more closely with the Bank’s partner Financial Intermediaries in order to improve access to finance for BAS clients and to facilitate the engagement of advisory services by the SMEs receiving funding from FIs. BAS will develop a comparative framework to prioritise interventions at the market level and guide exit strategies – this will categorise the development and maturity of local consultancy markets and the infrastructure of SME support as having low, medium or high transition challenges to better indicate where transition is progressing and where market development has stalled. As a country’s ranking of the infrastructure of MSME support and consultancy market maturity moves from high to low transition challenges, BAS will gradually lower the grant amount, shift focus to market segments that remain additional, for example advisory services geared to energy efficiency and environmental management, and focus on the formalisation of

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the consultancy industry – with an overall view to phasing out operations in the country. Financial sustainability for EGP and BAS for the period 2011-2015 will be provided through a combination of continued support from bilateral and multilateral donors (including, importantly, the EBRD Shareholders Special Fund), cost-recovery, and increased cost-sharing with the Bank’s budget. Programmes will exit countries following the same principals of transition and additionality that were used when exiting from EU-8 Member States. The Strategy builds on the paper which was discussed at the annual Small Business Support Workshop with Donors on 25 March 2010 and with the Board of Directors at a meeting of the BAAC in June 2010. I recommend that the Board of Directors approve the Small Business Support Strategic Plan 2011-2015. Thomas Mirow

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I. COLLABORATION WITH DONORS The Small Business Support (SBS) has been funded by donors since its creation in 1993. More than 20 bilateral and institutional donors have supported the EGP and BAS with over EUR 170 million in funding (please see Annex 1). Donor funding has enabled the programmes to contribute to EBRD’s transition mandate, while donor involvement with local stakeholders and policymakers has facilitated policy dialogue and transition impact in the countries of operations. The Small Business Support has benefited from the development experience and expertise of donors on certain issues or countries. The SBS works closely with donors in order to respond to specific needs in line with each donor’s strategy. The approach used by the SBS to mobilise funding is to work directly with donors through individual meetings in which the progress of programmes overall and including those funded specifically by the given donor are presented and discussed. Meetings lead to decisions on the potential for the SBS to fulfil donor and Bank objectives, both geographically and by sector, and result in SBS preparing proposals for the specific donor for the funding of new initiatives and ongoing programmes. Funding has been also mobilised within the context of Donor Meetings at EBRD Annual Meetings, in specific Donor Steering Committees such as the Early Transition Countries Initiative and the Western Balkans Fund, and through the EBRD Shareholders Special Fund. The EU was an early contributor to the Small Business Support, and is the biggest single donor to the EGP and BAS. The EU has provided funding through the Technical Aid to the Commonwealth of Independent States (TACIS), the European Agency for Reconstruction (EAR), PHARE, and currently through EuropeAid and the Instrument for Pre-Accession Assistance (IPA), which are supporting the restructuring of economies of mainly Central European and Western Balkans countries. Multi-donor funds including the ETC Fund and Western Balkans Fund, among others, are also important contributors to the programmes. In addition to official government donor support, going forward, the Small Business Support team will also seek to work increasingly with suitable private sector donors. Such an approach, as implemented with Energy Resources in the South Gobi and described in Section 3. 3, enables investors to meet corporate social responsibility objectives while expanding sources of support for EGP and BAS. SBS addresses cross-cutting objectives to take into consideration community-wide effects, such as climate change, gender equality, and environmental improvements, of Bank operations. These cross-cutting objectives, which are priorities the Bank shares with donors, will be an important part of the project selection process. At the same time, such cross-cutting objectives may be best addressed when incorporated into standard projects. The reason for this is that “single issue” projects may distort project selection and, ultimately, run the risk of failure where company managers have wider concerns. Where feasible, objectives such as improving environmental management and energy efficiency will be incorporated into all projects where the production process is a focus of the EGP. This can help companies to realise savings through energy efficiency investments, while creating a pipeline of funding clients for the

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Bank or its FI clients. Gender awareness should be raised as a matter of course when considering the ways to make a company more effective. Incorporating cross-cutting objectives as components of advice, alongside traditional objectives such as financial and organisational improvements, teaches the enterprise that these cross-cutting objectives deserve as much attention as other, more traditional, objectives. BAS is including cross-cutting objectives in its Grant Guideline Matrix (see Annex 2), so that, where relevant, a higher grant is available for a project which addresses priorities including fostering women’s entrepreneurship, energy efficiency, youth employment, or rural development. This is an approach which EGP may also adopt where appropriate. Cross-cutting objectives may also be addressed through community projects, which are similar to Local Business Development projects described in Annex 3. An example of an EU-funded community project to assist agribusinesses and rural tourism in Serbia is described below. Here the objective of rural development has been addressed at the community level where a greater impact could be achieved than through individual projects. Enterprise Growth Programme (EGP) Community Project in Sombor, Serbia – Funded by the EC: The Sombor region in Serbia has a high concentration and tradition of farms (salaši) and local development is mainly linked to agribusiness activities. In recent years local businesses have lost their competitive edge and this has progressively led to a stagnation of activities. Many farms have been abandoned and local unemployment has reached almost 20%. A group of citizens, with the support of the municipality, promoted the idea of establishing a cluster organisation with the aim of re-vitalising the economy of the region. The cluster organisation was conceived to:

re-vitalise the farms, and to improve their productivity and competitiveness; improve performance of food processing enterprises and build stronger relations between food

processors and farmers; develop rural tourism potential.

EGP was approached in 2008 with a request for assistance in organizing the cluster, planning the project activities and implementing them. With EU funds, a Team was assembled with experienced agribusiness and tourism specialists to support Sombor. The following results were achieved:

The cluster concept was further developed and an agreed plan for future actions defined; A legal basis and organisation for cluster activities was created (Klaster Salaši doo for Sales

and Marketing and Somborski Salaši ooz as Farmers cooperative); Klaster Salaši doo has been recognised by the Serbian Ministry of Agriculture, Ministry of

Finance and Vojvodina Province as a model for community development in rural areas; A machinery service concept for promoting farm mechanisation was introduced; A marketing and sales organisation and plan for rural tourism was established.

Following completion of the first phase of the project, the Klaster Salaši management requested a second phase to achieve the following objectives:

Strengthen cluster management and capacity to steer the Community activities (transfer skills in organisation development, strategic and financial planning, etc.);

Further contribute to the Farm mechanisation process and improvements in food processing; Build the capacities of local farmers, improving their technical and business skills; Further strengthen the cluster identity and cohesion.

BAS Market Development Activities (MDA) will be designed and delivered to address training needs of approximately 50-75 farmers.

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EGP and BAS promote public awareness of their activities and recognition of the role played by its partners in its operations through various means, all aimed at informing target audiences in donor and beneficiary countries. The SBS places great emphasis on ensuring appropriate donor visibility in countries and in the Bank. The website has been updated together with the EBRD website but requires further work to improve the access to donor pages on the SBS country pages. Other forms of visibility include press conferences and other public events in countries, articles in Blueprint; EBRD press releases and promotion materials; local press and TV coverage in the countries of operations and in donor countries; and preparation of brochures and fact sheets designed for specific target audiences.

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II. CLOSER WORK WITH THE BANKING DEPARTMENT Since 1993, EGP and BAS have operated as donor-funded programmes, serving private enterprises in the Bank’s countries of operations. In recent years, the Small Business Support team moved from operating autonomously from Banking operations – including funding – to become an integral part of EBRD. In 2010, the shift of the Team from the TEECCA Group to the newly formed Industry, Commerce and Agribusiness Group (ICA), has facilitated closer working relationships with sector teams and a better alignment of the objectives of the programmes with the objectives of the Bank set out in CRR4. These include supporting the diversification of economies and promotion of sound management practices and strong corporate governance at the level of the firm, as well as achieving greater quality, efficiency, and effectiveness in the management of technical assistance. CRR4 calls for substantially increased capacity within the Banking Department to support corporate capacity building and governance and transition-oriented client relationship work. Central to the Bank’s effort to diversify economies will be development of productive sectors including manufacturing and services. EGP and BAS will support these objectives through their work with enterprises. The approach of EGP and BAS will be altered in favour of greater coordination of efforts with the Banking Department. 2.1 Enterprise Growth Programme (EGP). The original mandate of the EGP was to offer autonomous and independent advisory assistance to SMEs, de-linked from investment projects. The EGP’s ability to continue to take on projects where Bank financing is unlikely will in no way be hindered by the new Strategy. However, in future, EGP clients should also be companies which should qualify for EBRD support in terms of management capacity and commitment, business prospects, potential financial viability and transparency of information. While the EGP exists to strengthen management capacity, it should focus on firms where there is a suitable management, receptive to advice, and committed to learn, with which to begin working. Moreover, SBS will avoid concentrating in capital and large cities and will give priority to enterprises from underdeveloped regions. EGP clients should have reasonable future business prospects which can be improved with advice. The EGP will strive to better position companies for future growth and investment whether by EBRD or other intermediaries. When EGP takes on corporate restructuring cases, the company’s future viability must be achievable. EGP project visibility, screening, and advisor selection will be carried out in full coordination with the Banking Department. When the EGP holds visibility events in countries, the Head of Office and sector team bankers are invited to speak alongside donors including EU officials and other stakeholders. This facilitates closer identity of the EGP with EBRD, and provides the potential clients who attend with information on EBRD banking products as well as the EGP. Steering committees organised at the request of donors will increasingly include the participation of donors' representatives and of EBRD bankers, increasing information sharing on donor programmes and policy dialogue with the authorities (e.g. Ministry of Economy and SME Agency officials are typically members of EGP Steering Committees).

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The EGP will make a concerted effort to educate other Banking teams about opportunities for co-operation, as previously, there has been a lack of understanding within the Banking Department about SBS project work. Meetings with key banking units (especially in the ROs), and a general presentation about both the EGP and BAS to all Banking Teams will help raise awareness and share opportunities for joint work. In addition to work with ICA Group teams, EGP will provide referrals to and take referrals from the Corporate Equity Team, LEF, and the ETCI of suitable candidates for Bank investments. EGP will provide post-investment support when required for Bank investee companies in the countries where EGP is working. An example of the EGP post-investment support is the project with Forma Ideale, a Serbian furniture company, where the Bank invested in 2009 as a balance sheet restructuring operation. Financial reporting by the company was poor, and management based decisions on wrong information. A new CFO was hired and an EGP project was started with a financial expert. Three months later, financial reporting to top management, the Board and shareholders has improved dramatically. As a result, the Bank is able to better track progress in the turn around, and more importantly, the management finally appreciate the value of reliable financial information. In addition to the EGP projects for post-investment support, the Team will continue to assist with searches for suitable consultants for Bank due-diligence projects and/or Nominee Directors for Bank investee companies. 2.2 Business Advisory Services (BAS). BAS has small enterprises as its clients, and so, has fewer opportunities than the EGP for cross-referrals to the Banking Department for direct transactions. However, the Bank is now moving to work more closely with the BAS in several ways. Firstly, an effort is underway to systematically introduce the BAS to the Bank’s financial institutions’ (FI) clients in the countries at the working level, including seminars on BAS for the SME departments of banks, to inform them of the advantages for SMEs of working through BAS. Conversely, BAS hopes to gain referrals of clients from the banks. These introductions do not entail obligations for either party, but should open doors for the SME clients, whether to financing or to advisory services. Secondly, as opportunities arise, the Bank is bringing BAS teams into Resident Office (RO) premises. This fosters better communication and coordination between the BAS team and the RO, and reduces the overhead costs borne by donor funds, so that more funding is allocated to projects. At present, most BAS Offices are in different premises to ROs and have separate lease agreements. However, in the Kiev RO, which relocated in 2010, the BAS team is treated as any other sector team. In September 2010, the Executive Committee decided that the overhead costs of BAS will be borne by the Bank in other offices where it is feasible to co-locate BAS with the RO. In 2011-12 BAS teams are expected to move into ROs in Yerevan (expansion of the RO), Skopje (relocation of the RO), Ashgabat and Minsk (new BAS programmes will commence), Chisinau (reconfiguration of the RO space), Almaty (subject to the expansion of the RO space), and Bishkek and Dushanbe (subject to the relocation of the ROs to new premises). A BAS office will open in Ankara in the first quarter 2011 with a short lease so as to co-locate with the Resident Office in Ankara when the office will open.

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As BAS personnel will work side by side with Banking Department employees, their status as contract personnel should be addressed in a more equitable way than at present. Currently, 84 BAS personnel work on contracts as consultants in which they receive no benefits such as medical insurance or leave. Many of these personnel have worked for the BAS on this basis for several years. Reputational and operational risks related to the current contracting arrangements can be rectified by instituting externally-funded EBRD fixed term employment contracts. It is anticipated that new contracts should be provided to some 50 core professional programme personnel, while other positions can either remain on a consultancy basis or may be rationalised in the co-location with ROs. Externally-funded contracts will be limited to the period for which BAS will be funded by donors. The positions will not be internalised as permanent Bank staff positions now or in the future. Thirdly, BAS will endeavour to more closely follow the needs of Banking clients and provide market development activities to support those needs. An example is a programme under preparation with the ETC Initiative to improve the financial literacy of SMEs in the region. This will include the provision of grants to support enterprises to introduce adequate financial reporting systems and, in parallel, the training of local accounting firms in the preparation of consistent, transparent financial statements for SME clients. Finally, BAS will support work by the Bank on the wider enabling environment for micro, small and medium sized enterprises (MSMEs). For example, BAS should be fully aligned with and integral to the Bank’s SME strategy in any given country. The Small Business Support Heads of Regional Programmes and BAS National Programme Directors (NPD) can provide input to policy dialogue on legislation, regulations, and governmental policies to support MSMEs. Interlocutors will include SME associations and other non-governmental organisations, as well as national authorities. An innovative joint BAS/Small Business Finance programme under discussion with the EU in Mongolia is envisaged to incorporate a full-time team member who will work on policy dialogue and the enabling environment for SMEs. This approach may be considered on a smaller scale elsewhere, making policy dialogue part of BAS’ work in future. 2.3 Local Business Development Programmes. Opportunities exist for BAS, as well as EGP to have a greater role around the Bank’s investments in natural resources, to increase the participation of local entrepreneurs and small business and therefore to increase the projects’ transition impact. At the same time, such interventions may reduce costs to the Bank’s clients and enhance their corporate social responsibility. A pilot programme is currently being carried out in the South Gobi desert in Mongolia alongside the Bank’s investment in Energy Resources. BAS and EGP projects are working jointly together to improve local SMEs' technical and business skills, helping them generate sustainable new sources of income, facilitating access to finance for local suppliers through the Bank’s supported intermediaries and strengthening local supply and distribution networks. This approach may be replicated in other regions alongside other investments.

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The Team is also working with the Agribusiness Team to prepare a framework approach to support the supply chain of small food producers and processors up to the stage where they sell to exporters, traders or retailers. For more information on Local Business Development Programmes, please see Annex 3.

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III. DELIVERY OF OBJECTIVES OF CRR4 As noted above, CRR4 has established clear guidelines for the Bank’s work in the period 2011-15. EGP and BAS will support the achievement of CRR4 objectives in each of the regions where the programmes are working, as described below. 3.1 Early Transition Countries. EGP and BAS aim to continue to work closely with the Early Transition Country Initiative (ETCI) Team and the debt and equity instruments targeted at medium to large-sized local enterprises. EGP and BAS referrals have contributed significantly to the number of the transactions signed under DIF and DLF in recent years. EGP project origination is increasingly conducted hand-in-hand with the Resident Offices (RO), responding to RO references and providing referrals to the RO from EGP Team Coordinators. The limited universe of good companies with which the Bank can work requires close coordination to ensure resources are used judiciously and, to ensure that where both SBS and Bank financing are involved, interventions are sequenced appropriately. EGP and BAS will facilitate diversification of economies from resource dependence, improvement of efficiency and productivity in the agricultural sector, improvement of transparency and business conduct (including transparent accounting and financial reporting), and improvements in energy efficiency. 3.2 Western Balkans. EGP will support the CRR4 objective of engagement with the private sector in particular through a closer association with the LEF. EGP and LEF have complementary strategies; EGP having provided pre-investment assistance to potential LEF clients, such as Tikves, Mesopromet, Tulltoria, and Pestova, with the financial support of mainly the EU and Italian government. Going forward, the EGP Team will pursue much closer working relations with ROs, where LEF bankers are based. EGP and BAS will address the need for restructuring companies, compliance with EU standards in the agricultural sector, improving quality of products, and increasing energy efficiency. Given the growing presence of regional sectoral leaders in certain markets (e. g. , Agrokor in Croatia in food and retail), it is anticipated that EGP may also draw on the expertise of Bank clients to assist market dissemination activities or to provide advisors for EGP projects. The Bank will work closely with EU delegations on priorities, given the importance of the EU as the main donor to these programmes. 3.3 Ukraine. The MSME sector in Ukraine is facing severe challenges in terms of production quality, business sophistication, goods market efficiency, export opportunities and attracting FDI. The corporate sector generally needs improvement in corporate governance, transparency and business standards, as well as post-crisis restructuring. Barriers to firm entry, such as licensing and permitting, make starting and building up a new enterprise challenging in Ukraine. EGP and BAS will assist with these challenges while addressing the over-arching need to improve energy efficiency as a component of wider EGP projects. (It has become clear that energy efficiency projects require access to financing to attract clients.) Work in Ukraine will be closely coordinated with the EU’s Eastern Partnership programme. As described in more detail in Section V, a random impact study will be conducted with EGP in Ukraine. The study will assist a large number of private enterprises and should reveal useful information about both EGP and private sector development in this large and important market.

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3.4 Kazakhstan. In Kazakhstan, EGP and BAS will work on diversification of the economy from reliance on natural resources and, as in Ukraine, will seek to assist companies entering the market (e. g. this does not mean working with start-ups, but rather assisting the development of companies which were established as greenfield operations). In addition, the programmes will assist with improving business standards, transparency, and competitiveness, as well as energy efficiency. 3.5 Turkey. BAS will start operations in Turkey during the first part of 2011, following a feasibility study conducted in late 2010. EGP, which has commenced operations in eastern Turkey in 2010 through the EU Turkish Private Support Facility, will continue working. Both programmes will address investment plans of companies and will focus operations in the east and in rural areas, promoting the CRR4 objective of MSME rural financing. EGP will prioritise companies in Eastern Turkey that are engaged in trade with the neighbouring Caucasus countries. Considering Turkey is a key transit country for natural resources projects, SBS will seek to replicate the "Local Business Development Programme" (refer to Annex 3) to support oil and gas pipeline projects. The strategic economic importance of agribusiness activities in Turkey creates potential for SBS to support SMEs, including EBRD investee companies, along the food chain, from primary agriculture, to processing, storage and warehousing and wholesale and retail activities. The SBS contributions to policy dialogue will focus on identifying key challenges to enterprise reform and competition policy, by communicating key bottlenecks directly affecting SBS beneficiaries. 3.6 Russia. In Russia, EGP will support diversification from natural resources, in particular to support companies in high technology and the knowledge economy. Energy efficiency will continue to be a priority. Improvement in efficiency of agriculture may also be considered. BAS will focus on improving business practices and standards, and transparency of business reporting. 3.7 European Union. While historically EGP has played a large role in the eastern block countries, EGP is no longer working in any of the European Union countries, as international advisory assistance is thriving. It is envisioned that more EGP advisors can be recruited from EGP “graduate” countries to work on current projects. Additionally, EGP hopes to encourage previous EGP recipient companies from within the EU to act as role models to current EGP clients, through site visits or facilitating with business matching opportunities and trade links. In line with the exit strategy described later in the document, BAS is expected to exit from Bulgaria and possibly Romania during the CRR4 period. In the interim, BAS will gradually lower the grant amount, shift focus to market segments that remain additional, for example advisory services geared to energy efficiency and environmental management, and focus on the formalisation of the consultancy industry – with an overall view to phasing out operations in the countries.

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IV. METHODOLOGY 4.1 Enterprise Growth Programme (EGP). As part of the new ICA group, EGP is expected to play a central role in the promotion of sound management and corporate governance among emerging mid-tier corporates. In order to meet this challenge, and to facilitate a closer engagement with EBRD banking teams, some changes will be made to the way the EGP is working in the field. The collaboration with the Banking department was described above. EGP will ensure that its operations are subject to more rigorous assessment in terms of their impact on firms and where possible, on the market. This is addressed in Section V below. In order for enterprises to qualify for the EGP assistance, the enterprise must adhere to the following criteria:

Privatised or irrevocable government commitment to privatise. The company must be majority locally owned and have no more than 49%

foreign ownership (some donors may restrict foreign ownership even further). The enterprise CEO must have strong willingness and commitment to

participate. Any sector area except: banking or financial services, military

products/services, gambling, tobacco or hard liquor. Industry sectors may also be ruled out if the respective EBRD country strategy excludes them from the Bank’s operations.

Preference is given to companies with EUR 50 million or less turnover. The enterprises are normally medium-size entities, with usually fewer than 250 employees. Where donor agreements have not established size criteria, EGP will be available to companies with up to 500 (exceptionally 1000) employees, with sales up to EUR 50 million (exceptionally EUR 100 million). Exceptional cases have to be justified by the impact on the local economy; and will normally include a cost-recovery arrangement with the client.

The enterprise must have significant importance for the local economy and also preferably manufacture products or offer services with the potential to generate export earnings or import substitution.

Acceptable debt structure. Companies must not have crippling outstanding debt or tax liabilities, or any contingent liability for formerly polluting activities which would make them economically un-viable.

Preference should be given to enterprises from less developed regions at the level of the countries.

The standard format of the EGP interventions has changed very little since the inception of the programme in the early 1990s. The standard approach was an assignment of 18-24 months with a staffing complement of expatriates and a set budget framework. The programme’s formula was well suited to the needs of local firms at the beginning of the transition process, but the approach needs to be updated to reflect the current needs of local firms. However, in 2008, EGP gained approval to have more flexible project budgets (in Western Balkans from EUR 45,000 to EUR 70,000 and elsewhere from EUR 60,000 to EUR 90,000). In 2009-10 EGP introduced short-term and focused Crisis Response projects, which have proven to be highly effective. These changes provided the Programme with more flexibility and more tailored implementation timeframes. Going forward, the Team will work with CSU to

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ensure that more differentiated budgets and timeframes for projects will be implemented in a systematic way. Under the existing methodology, EGP projects are managed by a team of advisors including a EGP Team Coordinator (TTC), a Senior Industrial Advisor (SIA) and Specialists in various fields. A detailed description of their roles is provided in Annex 4. In summary, TTCs are responsible for general oversight of the programme in a country or for a donor. They screen projects to be approved by the EGP Team and donors; draft Terms of Reference (TOR) for projects; visit clients with the SIA at the start, middle and end of projects; liaise with donors and with EBRD ROs; and manage the administration of the programme including checking invoices, arranging for translation, etc. An important aspect of their main role was to identify and recommend the SIAs and Specialists whose experience best matched the needs of the company. The SIA is the main link between the EGP and the enterprise CEO. The SIA makes 5 – 8 visits to an EGP client over an 18 – 24 month period, working on the objectives identified in the TOR. Specialists provide advice on marketing, human resources, and other expertise, which is outside the main focus of the project, but which is important for its overall success. Changes to the EGP interventions, including the role of the TTC and SIA, are set out below. The TTC. The practice of flying in expatriates to carry out a coordination role, which includes organising trips and other administrative tasks, has proven costly. In countries where there are a sufficient number of projects, a Local Manager will be recruited in a competitive process to carry out screening with input from RO bankers, BAS Offices and other local stakeholders such as SME Agencies or as seen fit by the relevant donor. The local manager will be hired on the basis of knowledge of the local business environment, and from the outset will be oriented to work together with the RO bankers in a way that the TTC is less able due to limited time in the field. Where the number of EGP projects does not justify a Local Manager, the Heads of Regional Programmes will be asked to assist with project screening and monitoring to reduce the trips of TTCs to the region. The TTC’s task of drafting Terms of Reference and project objectives and selecting SIAs and Specialists can equally be carried out by a Local Manager in coordination with the EGP Team and relevant bankers. By involving more people with knowledge of the local market and sectors, during the pre-assignment phase, and by expanding the EGP advisor database, there are likely to be fewer repeated contracts with the same individuals, barring those with outstanding track records. The selection process will also be more transparent, involving a larger number of people. The EGP has a new “Candidate Database”, which will improve the efficiency of selection of advisors for the projects. The EGP program should move towards more use of advisors from recently graduated EGP countries and, where appropriate, local experts. Currently, this database is only accessible to the EGP Team in London, but in the future will be available online, allowing Local Managers and/or TTCs to access it remotely. In countries where there are too few projects to retain a Local Manager, the Bank will seek greater transparency in the contracting of TTCs, by working with Consultancy

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Services Unit (CSU)1, to retain key individuals on a framework contact on an annual basis. TTCs will also maintain involvement in the Programme by conducting periodic screening for enterprises, and potentially conducting one year post-completion reviews of projects in which they have had no involvement, serving as an unbiased evaluator. Given their deep knowledge of the programme and experience, their involvement will continue to be important, especially where the number of projects or donor funding are insufficient to hire a full-time local project manager. Whether EGP projects will be coordinated by a TTC or by a Local Manager in future, the contracting for the programme will be managed by the Bank’s Consultancy Services Unit, and any EGP TTCs who will be contracted on a longer term basis will go through a transparent selection process. It is expected that the number of TTCs who will be retained under this process will be around 10. Most other TTCs are expected to carry out their current contracts to completion. The SIA. Since inception, the SIA has been the key input to EGP advisory assignments, maintaining a close and direct relationship with the CEO and key management of the EGP client. The success of any assignment has been dependent on the strength of this engagement. However, the schedule of visits during a standard EGP intervention (typically 5-8 visits, with gaps of 1-2 months in between), has favoured the appointment of individuals with high flexibility in their work schedules who are typically in retirement. In the past, the EGP has struggled to recruit women with 15+ years of industrial experience, but this will be remedied with outreach activities to attract more senior women as advisors. The criteria of number of years of industrial experience will be relaxed, with a focus on recruiting women with specialist knowledge, such as finance, marketing and human resources. These measures should also enable the Bank to engage more local advisors (individuals, not consulting firms) as well. Local advisors and BAS consultants may be paired with expatriate SIAs where feasible. This can facilitate transfer of know-how and sustainability by improving the local knowledge base, contributing to the mandate of BAS to build local consultancy capacity and skills. In some lines of business, the Bank will seek advisors from leading companies to assist EGP clients on a pro bono basis, as many multi-nationals now release management for corporate social responsibility initiatives. This approach will allow more current market knowledge to be transferred and potential trade links developed. This may also be achieved through business matching arrangements (see below). The quality of individual advisors in the local markets has improved and the experience gained in the transition process gives advisors from the CEE region (including EU-8 countries) advantages. The EGP Team will work with CSU and with Corporate Equity to recruit a wider field of advisors for work both in EGP and as Nominee Directors. Type of advice. The commitment of the CEO to the EGP project’s objectives remains critical. However, the focus on the CEO – SIA relationship should evolve to reflect the maturing of companies in transition. CEOs increasingly need to learn to devolve responsibility to their management teams. Advisors should be working with management teams, led by the CEO. The lack of a Chief Financial Officer (CFO) is a

1 All EGP contracts will be issued by CSU going forward. This includes the contracts for any potential TTC, Local EGP Manager and/or individual advisors and specialists on projects. Additionally, any other speciality EGP intervention, such as sector dissemination activities, visibility event or hiring of local consultants will be done through CSU.

15

widespread problem among SMEs in the Western Balkans and ETCs. EGP projects will help the CEO to understand the need for a proper CFO and provide bridging assistance to strengthen the finance function of the companies on a sustainable basis. Training up and coaching a new CFO is an example of a different but much-needed type of EGP assignment. EGP can improve corporate governance and effectiveness of management by encouraging the CEO to delegate and empowering managers to carry out their functions without counterproductive interference. Payment of advisors. Under its current approach, EGP pays a daily fee rate of EUR 600 to TTCs and EUR 500 to SIAs and Specialists, in addition to in-country per diems and out-of-country reimbursables. These standardised payment rates have kept the programme attractive to donors, due to their simplicity and the pro bono element of the advisors’ work (they may command significantly higher fee rates for other clients). To the extent possible, the Bank aims to maintain current fee rates as the programme is made more flexible. However, the fee rates may be revisited, particularly if there is a decline in quality of advisors. Local Manager contracts will be issued by CSU reflecting local market conditions based on feedback from HR. EGP will retain local managers at lower daily rates (reflecting local market conditions) than the rates paid to EGP expatriate advisors. Duration of assignments. Typically, EGP projects have had a standard duration of 18-24 months, with the recent exception being the 2009-10 crisis response projects, which had an average duration of around 6 months. The duration of EGP assignments should be more flexible. The Bank will test shorter and more intensive assignments. Depending on their success, the approach may be more widely implemented. Cost Recovery. Up to now, the EGP has not operated on a cost recovery basis. This compares unfavourably with the cost recovery practices of BAS, especially as BAS clientele tend to be smaller enterprises. The main reason for not seeking cost recovery for the EGP was that the project model was based on the close relationship between the EGP SIA and the CEO of the company, and the ability of EGP to cancel projects where the CEO was not engaged. As EGP projects will engage with management teams, there will be more work involved in formulating EGP project teams, and there will be less interest from both sides to readily cancel projects. At the same time, the closer association of the EGP to Banking operations will introduce more opportunity for the clients of EGP to pay a portion of project costs. The Team propose to proceed with cost recovery in a gradual way, initially seeking cost recovery in EGP follow-on projects with the same client and for EGP projects which lead to Banking operations (as the cost can be covered from the Bank’s financing). This will be implemented in accordance with a simplified Grant Guideline Matrix based on similar principles to that employed by BAS. Depending on the level of acceptance of cost recovery in EGP, the principle can be applied more widely. The Team will report back to the Board on the approach which is adopted after testing with clients. Proceeds will be allocated to a fund to support further EGP projects.

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Business matching. EGP projects have enabled enterprise management to travel to other countries to explore business matching opportunities alongside the SIA. Typically the advisor organizes these trips within their country of origin, linking the company with other companies in the same industry, facilitating exchange of knowledge and potential import/export links, as well as franchising opportunities. Companies may attend trade fairs and expos as well. These business matching trips have provided valuable opportunities for EGP companies, and it will be important to continue these efforts and strengthen the opportunities further, involving host companies from the Bank’s countries of operations as well. 4.2 Business Advisory Services (BAS). BAS has undergone careful reformulation following the review carried out in 2007. The main recommendation of the 2007 Special Study on the Business Advisory Services was for BAS to streamline and consolidate its strategic objectives throughout the Programme and to work more overtly towards sustainable market development as opposed to its assistance being geared solely to enterprise development. Consequently, the Study also called for a review of the programming and implementation model – largely input/output based – reflected also in the approach to indicators of achievement. While the Study recognised that BAS had been an efficient ‘grant disbursement machine’, it maintained that the Programme was not fully exploiting its impact potential. A number of operational recommendations were also included, the most notable on the nature of contracting of the former Regional/Programme Directors. In 2009, the field management structure was reviewed and the 14 contracted Regional/Programme Directors were replaced with 6 Heads of Regional Programme, which are on the Bank’s headcount, each responsible for the national BAS programmes in their region of competence. As a result, BAS now has a clear strategy towards development of a sustainable and commercially viable infrastructure of local business advisory services in the 20 countries where it operates. This is in addition to its strategy to improve performance and competitiveness of BAS assisted enterprises, as it will contribute to the improved performance of the MSME sector once BAS exits the country. Developmental sustainability – in terms of ensuring sustained benefits to MSMEs – is therefore at the core of the Programme’s mandate. In order to achieve this objective in the countries of operations, BAS has refined its core instrument – BAS projects with individual enterprises – and introduced market development activities (MDAs), such that its intervention in the market is systemic and that its impact goes beyond the assisted enterprises. Target enterprises remain enterprises meeting the following criteria:

Size: up to 500 employees, with the key target group under 50 employees; Ownership: Be majority privately and locally owned; Area of activity: Operate in all sectors except banking and financial services,

military products or services, gambling, tobacco; Viability: Be able to demonstrate potential for growth; Management attitude: Be open to cooperate with BAS and the consultant; Respectability/Integrity: Enterprise and management are credible and

respectable;

17

Experience with external consultancy services: Have a genuine need for business advice and a capacity to absorb the assistance given yet little or no previous experience of using external consultants, and/or do not have resources to finance a complete project;

Financial commitment: enterprise is ready and able to pay 25-75% of the total project cost (programme specific).

A core feature of the BAS projects is now the flexible grant (25-75% of the net project cost capped at EUR 10,000 per enterprise) determined by the Grant Guideline Matrix (GGM). While the GGM is country specific to reflect local market conditions, higher incentives are typically given to smaller enterprises in less developed or rural areas and with no previous experience with advisory services. Similarly, assessments are made on the type of advisory service to be provided, with larger grants provided for less mature market segments. GGMs are reviewed annually to ensure that BAS remains additional – as the market develops, the share of client co-financing is increased such that the grant component is gradually phased out. The strategic use of the GGM to determine the level of client co-financing will remain a key feature of the Programme throughout the 2011-2015 period. The use of MDAs is illustrated in the paper ‘Ensuring sustained benefits for MSMEs in EBRD countries of operations through the SBS (SGS09-387) distributed to the Board in December 2009. In summary they are used to: 1) broaden the supply of local advisory services, by directly increasing the number of consultants and the spectrum of available advisory services; 2) increase quality in local advisory services, by increasing consultants’ professionalism in terms of the quality of their projects and their skill levels; 3) promote the consolidation of the advisory services industry, by facilitating the grassroots building of association or assisting existing ones grow further; and 4) build strong demand for local advisory services, by specifically targeting advisory services with weak or insufficient demand. MDAs are broadly categorized into: MSME and consultancy trainings; visibility and dissemination activities; capacity building activities geared to the support and development of, local institutions; and policy dialogue. While these instruments will continue to be used, BAS will also work to develop key “products” in this field (such as Core Consultancy Skills training, Start-your-consulting-business trainings etc) in order to increase the efficiency of these operations. The BAS Team will coordinate with CSU in preparing and offering MDAs to local consultants.

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V. IMPACT ASSESSMENT AND PRIORITISATION OF INTERVENTIONS 5.1 Enterprise Growth Programme. 5.1.1 Project-level reporting and impact assessment. In order to meet the expectations of donors and to gain important knowledge of results for future management of the programme, the EGP is undertaking several measures to improve reporting, monitoring and evaluation of projects. These steps are described in detail in Annex 5 and are summarised below. EGP will implement a new Project Performance Management System (PPMS) for which an MIS system will be required to aggregate and analyse data produced. The PPMS will track and measure information about the enterprises while also benchmarking specific project objectives, starting from the project screening stage, the mid-point, conclusion, and finally, one-year post-completion. A Management Questionnaire, tracking improvements in management practices and a CEO Questionnaire, evaluating the management’s satisfaction of the project, will also be administered. The information captured in the PPMS will track, among other things:

Number of employees Average wage Total labour cost per worker Total foreign sales Key Financials, such as: total sales, costs of capital, return on assets, cash

flow, EBITDA Number of managerial level employees Specific benchmarks measuring results from core advisory activities and

objectives. This data will provide analysis, which can be used by Bank management and donors to assess the impact of EGP projects. This will allow for modification to the methodology of the Programme to identify and share effective practices and address weaknesses. EGP will also sharpen and focus reports provided to enterprises. 5.1.2 Systemic-level Analysis and Dissemination. EGP will use aggregated results from the PPMS to prepare systemic level analyses on the development of private enterprises in regions or sectors where there are sufficient EGP projects to draw conclusions from results. The PPMS will also enable EGP to analyse more thoroughly the common objectives pursued in projects, leading to a better understanding of common problems enterprises are facing in particular sectors and countries. This “inside” knowledge that EGP teams acquire while working at the enterprise level, allows the EGP to identify common problems and bottlenecks facing SMEs. There are valuable lessons learned and expertise taught that should be disseminated more frequently to a wider audience, whether through trainings or other events.

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The EGP has carried out several successful sector dissemination activities (see box below), but funding constraints, the lack of a field structure and priority given to direct enterprise support, have hindered the programme from conducting more sector dissemination activities. The EGP has established a framework for implementing sector dissemination activities, which is the Programme’s main contribution to demonstration impact and systemic intervention. Through dissemination activities, the TTC and SIA would promote added value of the EGP as an additional source of information for SMEs. Dissemination from the projects that are “first” in a sector or a country enhances the innovation aspect of the EGP. Dissemination of successful EGP results may contribute to better management skills, not only for assisted enterprises, but for the SME sector, another rationale for carrying out dissemination activities and tracking transition impact of the EGP. This knowledge sharing promotes better quality, accountability, and efficiency in the management and implementation of future EGP projects. Example Sector Dissemination Activity: Albanian Meat Processing Industry Among companies supported within the framework of the EU-IPA funded Programme in Albania from 2008 to 2010, EGP has assisted two of the bigger competitors in the meat processing industry. Both had consistent growth potential also considering the 15% yearly market growth rate, resulting from the changing diet habits and rising living standards in Albania, especially in the capital Tirana and also other bigger cities. While working with the two clients, a number of wider problems and bottlenecks at industry sector level were identified. The Albanian exports of meat to EU are generally banned due to unsatisfactory veterinary surveillance and inadequate slaughtering infrastructure in the country. The animal production is limited and the quality of fresh local meat is very poor due to bad slaughtering conditions and practices. As a result, most of the fresh meat is imported in frozen state. During the final visibility event, the EGP drew on the two clients’ experiences to disseminate a number of key technical changes and good practices to other enterprises in the industry (e. g. EU standards for slaughtering; European hygiene standards; product label brands, including accurate product declaration). Lessons learnt at company level were also used to introduce a number of wider issues and challenges faced by the whole sector and relevant for its future expansion and development (e. g. introduction of a system for EU licensing; animal passports and tagging for EU importation; need for livestock farmers to record treatments and movements of animals; need to improve the slaughter houses infrastructure according to EU standards). This case shows the capacity of EGP to maximise the impact of its intervention and to extend its mentoring capacity to a wider audience. Through sector dissemination activities, donors and governments can acquire information on the business environment that can be helpful for identifying priorities and steer strategic planning. More enterprises in the same industry can benefit from practical advice. Finally, EGP itself is able to orient its future initiatives in a country, and address needs more effectively.

5.1.3 Evaluations. EGP operations have previously been monitored, evaluated and audited by donors, mainly the European Union, which accounts for 60% of the EGP’s operating budget. Donor evaluations have served and continue to serve as a useful management tool for the EGP to adopt a more differentiated approach. EGP will implement the new PPMS outlined above; however, in order to assess the impact of the EGP on firm productivity and profitability, employment growth, and efficient use of energy, the Team are working closely with OCE to design a rigorous

20

impact assessment study. One component of the study is envisaged to be a comparison of EGP with a more standard intervention provided by a commercial consulting firm. The impact assessment study will provide information on the impact of the EGP in terms of efficiency gains and how EGP compares to working with commercial consultants and with a control group (receiving no intervention). The study should provide insight on whether EGP could be further improved and in what ways. The EGP impact assessment is envisaged to take place among 75-100 firms in Ukraine, where it should be feasible to find the appropriate number of enterprises in a limited group of industries. The box below provides more information. Ukraine Random Impact Assessment: The Ukrainian consultancy sector faces a large transition gap with respect to medium-sized enterprises. This group of enterprises in Ukraine rarely use consultants and perceive little need for them. They have little experience with management consultants. When asked by the MOI survey, only 16 % reported having used such services in the past and only 6% have worked with international consultants. This makes Ukraine the country with the second lowest usage of management consultants among the 10 countries of operations in the MOI survey. For comparison the average exposure of firms in the study to consultants was 39%, of which 19% had worked with international consultants. Meanwhile Ukrainian enterprises surveyed are in the bottom half of countries in the survey in terms of operations and management, which indicates that they may lack awareness of how management consultants could help them.

5.2 Business Advisory Services. All BAS activities (projects and market development activities) are controlled and monitored through the BAS Management Information System (MIS). BAS polices and procedures covering topics such as selection, contracting and grant management are applied uniformly across all countries of operations through standardised process flows with clear delineation of roles (via differentiated user roles) and responsibilities (via customised tasks and alerts). Advanced reporting features within the MIS enable the Programme to conduct enhanced analysis of programme activities and achievements, and track progress against established objectives. 5.2.1 Monitoring at project level. At the project level, the BAS team monitors each project routinely at three key stages of implementation – approval, completion and one year after completion. Metrics are captured over time on: percentage local ownership (disaggregated by gender), annual turnover, number of employees (disaggregated by gender). The need for and ability of MSMEs to attract finance and investment is also monitored at each of these stages. Projects are conducted by local consultants on behalf of client MSMEs, hence the BAS team’s role is primarily one of facilitation rather than direct implementation of projects. To monitor progress and derive ‘lessons learned’ the BAS team evaluates each project using a standardised scoring system. Project implementation is assessed at completion in terms of relevance, effectiveness and efficiency based on the OECD DAC evaluation criteria. One year after completion, impact is assessed in terms of whether the advice was implemented and its overall effect on the business. Depending on the project objective, standard questions range from increased sales or productivity to quality certification or reduced emissions. The BAS team then calculates an overall score, incorporating implementation and impact considerations, and assigns a project rating of unsatisfactory, satisfactory, successful or highly successful.

21

BAS proposes to supplement the established monitoring framework with a number of more in-depth evaluations by an evaluator external to the team. Given that BAS conducts approximately 1,300 projects per year, with an average grant below EUR 4,000, it is neither feasible nor cost-efficient to commission detailed independent evaluations of each project. A stratified sampling methodology will therefore be utilised to randomly select a number of projects from particular groupings, e. g. based on company size, type of advisory service, or country. It is envisaged that up to 5 percent of the total number of projects in any given year will be evaluated by an external evaluator, such as PED. The sampling will be performed by these representatives as well. These evaluations would consist mainly of desk research, with additional (telephone) interviews with key stakeholders in the project. These independent evaluations would validate and enrich the information that is provided by the BAS team’s regular monitoring process and would also enable the Programme to better demonstrate the causal relationship between project intervention and outcomes. 5.2.2 Monitoring at market level – prioritisation of intervention. In order to track progress of the programme in contributing to achieving a sustainable infrastructure of advisory services, local BAS Teams review all local providers of advisory services engaged in BAS projects on an annual basis. The Annual Consultant Review (ACR) is designed to provide quantitative and qualitative information which are to be used to assess: changes in demand and supply for local consultancy service, changes in the quality standards in local consultancy services and any improvement in institutions supporting the sector. Following on from the SBS Sustainability Paper in 2009, BAS is collaborating with OCE to develop a comparative framework to prioritise BAS interventions and guide exit strategies in each country of operation. BAS operates where there is a transition gap in the sense that the market for advisory services for MSMEs is still underdeveloped, there is sufficient demand for these services and alternative sources on terms and conditions considered by the Bank to be reasonable are unavailable. Determining when sustainability has been achieved is therefore not about saturation of the market for business advisory services, but rather about assessing when the demonstration effects of SBS have led to the creation of a self-sustaining market for these services. To improve prioritisation, BAS will develop a simple benchmarking tool to compare the relative strengths and weaknesses of the advisory services market in each country of operation. This will complement the MSME fact sheet with data sourced from both BAS and external data, such as the BEEPS and MOI surveys. During the Country Strategy preparation, each country’s infrastructure of MSME support and consultancy market maturity will be categorised as having low, medium or high transition challenges (see example below), based on assessments along several dimensions: (i) Demand for business advisory services: a comparative assessment of the health of the MSME sector, e. g. in terms of contribution to overall GDP, as well as the perceived value of business advisory services and the relative dependence on co-financing.

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(ii) Supply of business advisory services market: a comparative assessment of whether MSMEs have access to and can make an informed choice from a number of business advisory service providers across a broad spectrum of services. (iii) Quality of business advisory services: a comparative assessment of the quality of services available in terms of the professionalisation of the local consultancy industry and the complexity of projects undertaken for MSMEs. (iv) Formalisation of consultancy industry and institutional framework: a comparative assessment of the extent to which the business advisory services market has developed, matured and been formalised, e. g. through the establishment of internationally accredited associations, and whether the institutional framework is in place to support the MSME sector, e. g. through the establishment of SME agencies and government led voucher or BDS schemes. Example market level assessments - Kazakhstan:

The Kazakh consultancy sector faces high transition challenges with regard to SMEs. It is characterised by dominant international players and low-quality local providers. EBRD’s MOI survey reveals that medium-sized enterprises in Kazakhstan are as much used to employing consultants as the rest of the transition region – 24 % of them have done this compared to 26 % elsewhere. However, Kazakh MEs are more likely to hire international rather than local consultants and find high prices to be a major issue. Not surprising: a survey of 175 local consultants as part of the ACR 2009 shows they have attended less training, are less internet-savvy and less likely to be registered as companies than consultants in other markets. There is no professional association of consultants and no local certification is recognized by the government.

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VI. FINANCIAL SUSTAINABILITY AND EXIT STRATEGY 6.1 Financial Sustainability. The EGP and BAS are recognised as an important part of the Bank’s work in the enterprise sector, effectively the third pillar together with SME finance and policy dialogue in the Bank’s support for SMEs. Yet, the activities of the EGP and BAS have been patchy, with full-scale operations in some countries and limited or no operations in others. Financial sustainability in the context of this Strategy is thus considered as a combination of continued donor support, cost reduction (lower cost of EGP), increased cost-sharing with the Bank (BAS co-location), and increasing levels of cost-recovery (both EGP and BAS). Given funding uncertainties faced by the programmes in the past, it is essential to reach agreement with the Bank’s shareholders that the Shareholders Special Fund (SSF) will be available to ensure a stable, uninterrupted source of funds for the period 2011-15. BAS requires a field infrastructure and therefore raises more questions regarding financial sustainability than does EGP, which manages to work with funding as and when available in countries. This Strategy is focused on financial sustainability of the EGP and BAS in the Bank’s Early and Intermediate countries of operations together with Russia and Turkey. For the countries of the Western Balkans, ETC, Kazakhstan, Ukraine, Turkey and parts of Russia, the Bank proposes to maintain a degree of financial sustainability of BAS and EGP operations for the duration of the CRR4 framework. The maps below provide an indication of the project distribution by programme, which are the basis of the funding projections to follow.

Albania

TAM project distribution (ongoing and pipeline)

Belarus

Moldova

Kyrgyz Republic

Kazakhstan

Albania

Serbia+

Mongolia

ArmeniaTurkmenistan

Turkey

Ukraine

GeorgiaFYR Macedonia

Azerbaijan

Tajikistan

BiHCroatia

Montenegro Uzbekistan

Romania

BulgariaKosovo

TAM exit

15 - 30 projects30+ projects

<15 projects

Russia

Albania

TAM project distribution (ongoing and pipeline)

Belarus

Moldova

Kyrgyz Republic

Kazakhstan

Albania

Serbia+

Mongolia

ArmeniaTurkmenistan

Turkey

Ukraine

GeorgiaFYR Macedonia

Azerbaijan

Tajikistan

BiHCroatia

Montenegro Uzbekistan

Romania

BulgariaKosovo

TAM exit

15 - 30 projects30+ projects

<15 projects

Russia

As effective from 1.1.2012 TurnAround Management (TAM) Programme has changed its name to Enterprise Growth Programme (EGP)

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Albania

Belarus

Russia

Moldova

Kyrgyz Republic

Kazakhstan

Albania

Serbia+

Mongolia

ArmeniaTurkmenistan

Turkey

Ukraine

GeorgiaFYR Macedonia

Azerbaijan

Tajikistan

BiHCroatia

Montenegro Uzbekistan

Romania

Bulgaria

50 - 75 projects p.a.75 + projects p.a.

Kosovo

BAS potential exitBAS project distribution (expected number per annum)

Albania

Belarus

Russia

Moldova

Kyrgyz Republic

Kazakhstan

Albania

Serbia+

Mongolia

ArmeniaTurkmenistan

Turkey

Ukraine

GeorgiaFYR Macedonia

Azerbaijan

Tajikistan

BiHCroatia

Montenegro Uzbekistan

Romania

Bulgaria

50 - 75 projects p.a.75 + projects p.a.

Kosovo

BAS potential exitBAS project distribution (expected number per annum)

In some countries, SSF support will be required to provide and maintain basic operations of BAS and the EGP at a meaningful level, in the absence of bilateral donor funding. This does not mean that bilateral donor support is not needed, as the guidance and political support and participation of all donors is important to give the programmes direction; bilateral support should remain a key pillar of the programme. In the case of BAS, SSF support is needed to avoid national programmes running out of funding due to a delay in the signature of a donor agreement, and to maintain basic operations where there is no other funding for them. An example is Moldova, where support from SIDA has enabled the programme to operate in the sphere of energy efficiency. However, as Moldovan SMEs have wider requirements which cannot be addressed under this envelope of funding, the Bank would seek funding from the Early Transition Countries’ Fund (ETCF) and SSF to supplement that provided by SIDA so as to offer standard advisory services in addition to those focused on sustainable energy. (Sustainable energy is difficult to market where energy prices are not at market levels, and where companies have many business needs, e. g. , preparing to enter export markets). In Russia, BAS is based in the Far East. The Team see scope to operate BAS in other, less developed regions if a source of matching funds can be raised within the Russian Federation. The programmes are demand-driven, but have always worked with limited resources. Availability of grants supports demand, for projects which meet general client needs. The steady level of demand indicated by the projections below is also based on shifts among markets, with activity declining in more advanced markets and increasing in new markets. Given the small number of interventions relative to the number of enterprises in the markets, there is little risk of supply exceeding demand without some dramatic changes within the local markets. However, there has been limited demand for energy efficiency programmes, which is not common to other EGP and BAS especially as cost-recovery is required in case of BAS. Up to now, when programmes have been closed as markets have matured, demand has not substantially declined. With introduction of cost-recovery in EGP and increasing cost-recovery in BAS, it is expected in the future that demand will gradually decline in more mature markets.

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On the basis of this Strategic Plan, the EGP and BAS would require the following amounts of SSF support for the coming period: 2011 – EUR 2 million; 2012 – EUR 2 million; and, subject to a decision to replenish the SSF for the following years: 2013 – EUR 3 – 5 million; 2014 – EUR 3 – 5 million; 2015 – EUR 3 – 5 million. These funds will be used for the following:

Basic provision of BAS and EGP in ETC, Western Balkans, Ukraine, Turkey, Far East Russia, and Kazakhstan;

Provision of untied contracts for competitively selected EGP TCs and some Local Managers of EGP;

Provision of externally-funded Bank employment contracts for BAS personnel where the contracts cannot be revised under existing donor funding arrangements; and

Provision of co-financing for bilateral and multilateral donor contributions where required.

The funding requirement outlined here for 2013-2015 is likely to be on the high side, given the lack of information at present about bilateral and institutional donor support. The table below forecasts the costs of the EGP and BAS (with gradually increasing cost recovery and flat or decreasing donor contributions) for the CRR4 period. The figures are “grossed up” to include the cost-recovery anticipated from clients. In the case of BAS, this is nearly 50 % of average project costs, while EGP cost recovery is expected to grow from a low level in 2011 to circa 20 % of costs by the end of the period. If the anticipated client contribution were removed, the programme costs would be reduced by roughly 28 %.

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TAM/BAS funding overview (€)

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Sum of 2011 Sum of 2012 Sum of 2013 Sum of 2014 Sum of 2015

Shortfall

Probable funding

Secured funding

Country (All)

Data

Category

Secured funding comprises both financial contributions from EGP and BAS assisted enterprises, and donor contributions. Combined the EGP and BAS client contributions are estimated at EUR 6-7 million per year of a total annual programme cost of EUR 23 million in 2011-15. Probable funding includes anticipated funding of EUR 20 million under the EU Eastern Partnership initiative spread over a four year period, and EUR 2 million in EU funding for SBS operations in Bosnia and Herzegovina. Probable funding also includes an addition of circa EUR 1-1.5 million each year in anticipated contributions from bilateral donors. These funds are not currently under negotiation and therefore cannot be allocated to regions, but are likely to materialise in 2011-15 on the basis of bilateral support for the EGP and BAS in previous years.

TAM funding overview 2011-15 (€)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Sum of 2011 Sum of 2012 Sum of 2013 Sum of 2014 Sum of 2015

Shortfall

Probable funding

Secured funding

Country (All)

Data

Category

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The funding overview of the EGP indicates the level of EUR 7 million as the desirable level of funding for the coming five years. Secured funding include estimates of client contributions to projects, reflecting a broad expectation that the average EGP-to-client contribution ratio will evolve from a current 100:0 in 2011, to 95:5 in 2012, 90:10 in 2013, 85:15 in 2014 and 80:20 in 2015. EGP client contributions are estimated at growing from 5% of project values in 2012 to around 20% in 2015, averaging EUR 700,000 per year in 2012-15 (of a total annual programme cost of EUR 7 million). Funding required also reflects a reduced average project cost, taking account of planned savings from involving local managers and reducing travel budgets of Team Coordinators. It is expected that EGP will grow in markets such as FYROM, Bosnia and Herzegovina, Ukraine, Turkey, Belarus, Turkmenistan, while programmes will level off and decline in other markets which have had large programmes in the past. In recent years, the EGP has faced considerable difficulty in matching its mandate to assist companies with the nationality requirements of its donors. Going forward, it is proposed that tied funds for the EGP be used for EGP advisors where there is a good match between the requirements of the client and donor nationality, and for market dissemination activities and company match-making where there is not. In recent years the EGP has targeted industries where the donor country could be sure to offer advisors. This distorted the choice of EGP clients, as the target sector was sometimes of marginal importance in the country of operation. Given that reliance on tied funds risks hampering EGP’s future work, especially as a support to Banking operations, the Shareholders Special Fund is requested to provide support to EGP in an amount up to EUR 9-10 million over this period, depending on other sources including donors and cost-recovery.

BAS funding overview 2011-15 (€)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

Sum of 2011 Sum of 2012 Sum of 2013 Sum of 2014 Sum of 2015

Shortfall

Probable funding

Secured funding

Country (All)

Data

Category

The table above indicates the funding which would be required for the BAS to maintain a stable level of operations in countries with build up in Turkey,

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Turkmenistan, and Belarus, while phasing out Bulgaria and Uzbekistan. Secured funding include estimates of client contributions to projects in 2011-15 (average BAS-to-client contribution ratio of 50:50 in most countries, changing to 33:67 in the Western Balkans and Russia in 2013-15, and to 45:55 in Kazakhstan, Turkey, Ukraine and ETC countries in 2014-15). BAS client contributions are estimated at around EUR 6 million per year in 2011-15 (of a total annual programme cost of around EUR 16 million). BAS funding requirements also reflect a moderate assumption for annual inflation of operating expenses and HR-related costs. Following the decision to more closely integrate BAS and the EGP with Banking operations, it was decided that the overhead costs of BAS will be borne by the Bank in Kiev and in other offices where it is feasible to co-locate BAS with the RO. If new co-location arrangements between BAS country teams and EBRD ROs are implemented in all the locations anticipated, it is estimated that there will be a reduction in the total funding shortfall of EUR 1. 17 million or 6% of the total indicated above (approximately EUR 33,000 per office per year). Further support from the SSF for EGP and BAS in the following three year period will depend upon the replenishment of SSF resources by the Bank’s shareholders. Provided the Fund is replenished, a total figure of approximately EUR 10-15 million support required for EGP and BAS may be sought over the 2013-2015 period. This figure probably errs on the high side, due to the Team’s inability to anticipate accurately at this time the availability of donor funding and the full potential for cost recovery. There is potential for significant cost savings as well, enabling to programme to operate at a lower all in cost. In any case, these projections represent a reduction in operating costs compared to the present and recent years, and as such are responsive to donor requests for the programmes to become more efficient. 6.2 Exit Strategy. Exit of BAS from countries should not be overly prescriptive but will take into account key measures regarding the development of the local market for consultancy as well as institutional infrastructure to support SMEs. As a general rule, BAS follows EBRD’s principles in determining its interventions and assessing whether they are still needed – operations will be phased out when the programme is no longer additional and does not generate transition impact. In terms of implementation, this entails a distinction between: decision making at the project level; and decision making at the sector level within a country. At the project level, actual and potential BAS projects are scrutinised for additionality and transition impact. A lower additionality score translates into a lower grant amount as a percentage of the total cost as guided by the GGM. At the sector level, determining when sustainability has been achieved is not about saturation of the market for business advisory services, but rather about assessing when the demonstration effects of BAS have led to the creation of a self-sustaining market – both supply and demand – for these services. Over time BAS will focus on the consolidation of the local market by facilitating the growth of associations of consultants, supporting business intermediaries or other institutional bodies set up to support the MSME sectors.

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This can only happen once there is a sufficient level of maturity in terms of supply of advisory services and corresponding demand. The maturity of the market will be assessed regularly and when the Bank finds that that BAS is no longer additional or interventions no longer have potential transition impact in any market segment, the BAS will phase out operations in that country. In sum, as a country’s ranking of the infrastructure of MSME support and consultancy market maturity moves from high to low transition challenges, BAS will gradually lower the grant amount, shift focus to market segments that remain additional, for example advisory services geared to energy efficiency and environmental management, and focus on the formalisation of the consultancy industry – with an overall view to phasing out operations in the country. Bulgaria, Croatia and Romania are expected to graduate from BAS during the CRR4 period, barring unexpected developments (new tasks being requested of BAS). EGP operations have always depended on the interest of donors and have varied widely in their intensity and continuity. Going forward, EGP should be available as an instrument for the Bank to offer its clients in all of the countries of Western Balkans, ETC, Kazakhstan, Ukraine, and selected Russian regions. It should be noted that EGP has not been operating in Bulgaria and Romania since the last Small Business Support Strategic Plan, while operations in Croatia continue thanks to EU and bilateral donor support. While the SME consultancy business is reasonably well developed, there is still a huge need for corporate restructuring in Croatia, and EGP is still very much in demand. However, over time, a gradual escalation in cost recovery for EGP projects can be expected in this market. As in the case of BAS, it is appropriate to consider phasing out of the EGP in this advanced market in line with previous practice in EU-8 Member States.

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VII. CONCLUSION The EGP and BAS are and should remain important tools for supporting the development of the private sector in the countries of operations. The fact that the Bank is taking greater ownership of the programmes, by providing increasing support through the Bank’s budget for their management and overheads, enables precious donor funding to be concentrated on projects. The closer relationship with Banking provides tremendous synergies – on one side, ensuring that EGP and BAS are aligned with the Bank’s perception of the priority needs of the private clients, and on the other, enabling the Bank to achieve progress on numerous cross-cutting objectives (women in business, rural development, etc. ) which may be challenging to address in mainstream operations. At the same time, the programmes’ ongoing collaboration with donors and local stakeholders will ensure that they reflect the interests and objectives of key partners in both the countries of operations and in the donor countries. This new Strategy provides a financial scenario which will need to evolve in line with the funding which proves available over the coming period. The Team will keep the Board and management informed on progress on cost-recovery and cost savings during the period. At the same time, it is important that there be agreement to underwrite basic operations for the programmes’ financial sustainability.

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Country TAM/BAS Donors

AlbaniaCanada, EU Private Sector Support Facility for the Western Balkans, EU, Japan, Luxembourg, Netherlands, Portugal, UK, EBRD Special Shareholder Fund, EBRD Western Balkans Fund

ArmeniaCanada, ETC Fund, EU EuropeAid, EU Eastern Partnership (proposed), Taipei China, UK, USAID, EBRD Special Shareholder Fund

Azerbaijan

Austria, Belgium, Canada, ETC Fund, EU EuropeAid, EU Eastern Partnership (proposed), France, Germany, Ireland, Italy, Korea, Netherlands, Switzerland, Taipei China, UK, EBRD Special Shareholder Fund

BelarusEU Eastern Partnership (proposed), Finland, Germany, Italy, Japan, Netherlands, Norway, Sweden, United Kingdom

Bosnia and Herzegovina

BRSF Balkan Region Special Fund (Norway), Canada, Denmark, EU IPA, EU PHARE, Italy, Japan, Netherlands, Portugal, Spain, Switzerland, UK, EBRD Special Shareholder Fund, EBRD Western Balkans Fund

BulgariaAustria, Belgium, BRSF Balkan Region Special Fund, EU PHARE, Italy, Japan, Luxembourg, Portugal, UK

Croatia

Austria, BRSF Balkan Region Special Fund, EU IPA, EU Private Sector Support Facility for the Western Balkans, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Sweden, Switzerland, Taipei China, UK, EBRD Special Shareholder Fund

Czech Republic EU PHARE, Italy, SpainEstonia BTASF Baltic Technical Assistance Special Fund, EU PHARE, EU

FYR Macedonia

BRSF Balkan Region Special Fund, Denmark, EU EAR, EU IPA, EU PHARE, EU SME Framework, EU Private Sector Support Facility for the Western Balkans, Ireland, Italy, Japan, Luxembourg, Netherlands, Portugal, Sweden, Switzerland, UK, EBRD Special Shareholder Fund

GeorgiaCanada, ETC Fund, EU EuropeAid, EU Eastern Partnership (proposed), EU TACIS, Italy, Japan, Netherlands, Switzerland, Taipei China, UK, EBRD Special Shareholder Fund

Hungary Denmark, EU PHARE, Japan, Luxembourg, Taipei China, UKKazakhstan Austria, Belgium, EU TACIS, Japan, Switzerland, EBRD Special Shareholder Fund

KosovoDenmark, EU EAR, EU, Italy, Netherlands, Portugal, EBRD Special Shareholder Fund, EBRD Western Balkans Fund

Kyrgyz RepublicBelgium, Canada, ETC Fund, EU, Italy, Japan, Luxembourg, Netherlands, Switzerland, Taipei China, UK, Switzerland, EBRD Special Shareholder Fund

Latvia BTASF Baltic Technical Assistance Special Fund, EU PHARE, EULithuania BTASF Baltic Technical Assistance Special Fund, EU PHARE, EU

MoldovaBelgium, Denmark, ETC Fund, EU TACIS, EU Eastern Partnership (proposed), France, Italy, Japan, Netherlands, Sweden, Switzerland, Taipei China, UK, EBRD Special Shareholder Fund

MongoliaEnergy Resources LLC, Japan, Korea, Luxembourg, Taipei China, EBRD Mongolian Cooperation Fund, EBRD Special Shareholder Fund

MontenegroAustria, Canada, Denmark, EU EAR, EU Private Sector Support Facility for the Western Balkans, Greece, Italy, Japan, Luxembourg, Netherlands, Switzerland

Poland Austria, Denmark, EU PHARE, SwitzerlandRomania Austria, Belgium, Canada, EU PHARE, France, Italy, Japan, Luxembourg, UK

Russian Federation

Austria, Canada, Denmark, EU, Finland, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Nordic Council Technical Cooperation, Norway, Sweden, Switzerland, Taipei China, TARU, UK, USA, EBRD Special Shareholder Fund

SerbiaAustria, Canada, Denmark, EU, Greece, Ireland, Italy, Japan, Netherlands, Spain, Sweden, Taipei China, UK

Slovak Republic EU PHARE, Greece, Netherlands, Sweden

SloveniaDenmark, EU PHARE, EU, GEF, Greece, Italy, Japan, Spain, Switzerland

TajikistanBelgium, Canada, ETC Fund, EU, FAO, Japan, Luxembourg, Switzerland, EBRD Special Shareholder Fund

Turkey EU IPA, EU Private Sector Support Facility for TurkeyTurkmenistan ETCF (proposed), Ireland, EBRD Special Shareholder Fund

Ukraine

Austria, Belgium, Canada, Denmark, EU, EU Eastern Partnership (proposed), EU TACIS, Finland, Germany, Greece, Italy, Japan, Luxembourg, Netherlands, Switzerland, Taipei China, UK, EBRD Special Shareholder Fund

UzbekistanAustria, Belgium, Denmark, ETC Fund, EU TACIS, Germany, Japan, Korea, Luxembourg, Switzerland, UK, EBRD Special Shareholder Fund

Annex 1 Overview of Donors by Country of Operation As effective from 1.1.2012 TurnAround Management (TAM) Programme has changed its name to Enterprise Growth Programme (EGP)

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Annex 2 The Grant Guideline Matrix (GGM) BAS applies a graduation policy for grants. Local BAS teams develop Grant Guideline Matrices (GGMs), which are reviewed annually to reflect the local business advisory services’ market conditions. As the intervention’s additionality in a specific market segment decreases, BAS will phase out by lowering the grant amount and eventually exiting. This exercise is further guided and defined in the SMALL BUSINESS SUPPORT Country Briefs, part of the Bank’s Country Strategies, developed together with OCE. An example of the Grant Guideline Matrix reviewed annually is displayed below. The grant percentage varies, depending on assessments made by the BAS teams of the overall additionality of the project. Typically, higher incentives are given to smaller enterprises located in less developed or rural areas and with no previous experience with advisory services. Similarly, assessments are made on the type of advisory service to be provided, with larger grants provided for less mature market segments. Assessments are also made on whether the project addresses specific cross-cutting issues that are pertinent to MSME sector development and transition. These include: increasing energy efficiency and reducing pollution at the enterprise level; encouraging Women in Business; reaching out to rural regions; and stimulating young entrepreneurship and start-ups. Table 1: Example of GGM, Serbia

to improve market performance (Market analysis & planning, Development planning, Feasibility studies, Partner Search )

to improve management effectiveness (Reorganisation/restructuring, Computerised financial/management Information Systems)

to reduce costs (Computerised Manufacturing Systems, Engineering Studies)

to introduce Quality Management & Certification

to improve environmental management (Energy efficiency, Environment)

< 50 50% 50% 50% 40% 50%

50 ≤ 99 40% 40% 40% 40% 50%

100 ≤199

40% 40% 40% 30% 50%

≥ 200 30% 40% 40% 30% 50%

< 50 60% 60% 60% 50% 60%

50 ≤ 99 60% 60% 60% 50% 60%

100 ≤199

50% 60% 50% 40% 60%

≥ 200 40% 50% 50% 40% 70%

< 50 70% 70% 70% 60% 60%

50 ≤ 99 60% 60% 60% 50% 60%

100 ≤199

50% 50% 60% 50% 60%

≥ 200 50% 50% 60% 50% 60%

East &

SouthSerbia

Location/ Size Type of Advisory Service

Capital&

NorthernSerbia

Central&

WesternSerbia

The GGM is built on 3 dimensions as follows:

Size of enterprise: Higher grants are given to smaller enterprises. Small enterprises are the group with the least experience with business advisory services and lowest level of business sophistication. Meanwhile, lower grants are given to bigger companies as their ability to pay for consultancy services tends to be higher.

Geographic location: Higher grants are given to enterprises outside the capital city and particularly to those in Eastern and Southern Serbia. There are large economic discrepancies between the capital and the regions; while companies located outside the capital cities tend to need the most help, they find it difficult to find the appropriate business advisory services and often do not have the necessary financial resources to pay for them.

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Type of advisory service: Higher grants are given to support projects involving consultancy services where market demand is less mature: particularly in the areas of energy efficiency and improving management effectiveness. Many enterprises consider such interventions to be more of a cost factor than an opportunity and the provision of a higher grant can be instrumental in changing this attitude.

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Annex 3 Local Business Development Programmes In line with the Small Business Support (SBS) strategy, the team proposes to develop a new joint product between EGP and BAS aimed at EBRD banking clients. Local Business Development Programmes (LBD Programmes) will seek to augment the sustainable impact of EBRD investments through the support of local businesses as indirect beneficiaries of EBRD investments. The SBS team will leverage its existing capabilities in MSME development to support banking investments through LBD Programmes. This will enable Banking teams to complement their existing services with proven sustainable development instruments to improve the transition impact of EBRD projects. IFIs typically require these aspects to be taken into account in project design. Similarly, clients value corporate social responsibility initiatives, particularly benefits deriving from social and environmental development activities, to ensure successful and sustainable investments. Programme Components:

1) Strategic management consulting to EBRD client: provide core consultancy services, such as procurement and supply chain, to create a strategic framework for local supplier development in line with other components of the investment project (EGP).

2) Local supplier development: Build capacity of potential local MSME suppliers through the use of grants or technical assistance (BAS primarily but also EGP depending on the suppliers needs and size).

3) Local SME development: Build capacity of non-related local MSMEs to promote the development of a diversified economy outside the investment through the use of grants or technical assistance (BAS primarily but also EGP depending on the suppliers needs and size).

4) Institutional capacity building: Strengthen local business intermediaries and local consulting services to address gaps in business support services (BAS).

Building on previous experience: Similar projects currently carried out on an ad-hoc basis can be used as the basis for more systematic SMALL BUSINESS SUPPORT interventions with EBRD clients:

i) EBRD invested in Energy Resources LLC, a high quality coal deposit in the South Gobi Region of Mongolia. The client requested SBS assistance to create a sustainable business infrastructure in the local under-developed area. SBS used a two-pronged approach of utilising senior industrial advisors to provide "hands-on" support to 2 potential suppliers (through EGP), with 5 trainings and 5 grant projects to support local MSMEs and develop local business advisory infrastructure (through BAS).

ii) EGP has supported Agribusiness activities in the Sombor region in Serbia, characterised by a high concentration of traditional farms (salasi), which were stagnating, raising questions about viability of the community. With funding from the EU, EGP established a non-profit cluster organisation and a farmers’ cooperative to promote sales of farms products, mechanisation and initiation of rural tourism activities.

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Potential Focus Areas: Any large investment projects with high potential for job creation, e. g. resource extraction in uninhabited areas, or that impact significantly on local communities, e. g. tourism, presents an opportunity to generate spill-over benefits for local businesses. Discussions with the Natural Resources team shows that this model is of potential interest to pipeline clients such as OT or Centerra in Mongolia; Lukoil Shah Deniz and SCP in Azerbaijan, Georgia and Turkey; and Lukoil NPB in Kazakhstan. In addition, it is expected that there will be demand for this type of programme in support of projects in other sectors, such as Agribusiness and Tourism. Strategic Framework: LBD Programmes should be in line with the relevant strategies for the country and sector, as well as SBS. Although implemented by the SBS team, Programme design and management would be managed jointly with the project OLs, in cooperation with the client, ESD, OCE and potentially other stakeholders such as local governments. Financial Structure: Financial commitment from the Client is a prerequisite for initiating LBD Programmes. Co-financing from EBRD or other donors could be offered to provide up to a maximum of 50% of the total cost. The Programme will be run on a cost-sharing basis with contributions sought from assisted MSMEs. Similar to systems in other IFIs, a cooperation fund would be established to pool resources from client, EBRD and donors.

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Annex 4 Existing EGP Project Structure and Team

Under the existing methodology, EGP field operations are primarily defined by the respective functions of a team of advisers falling under the following descriptions:

EGP Team Coordinators (TTCs): TTCs have been responsible for up to 15 EGP projects at any time, and are intended to become experts on the business conditions in the regions they cover. Typically, the TTC will visit the EGP client at the start, end, and potentially middle of the EGP project, highlighting project challenges. Aside from project screening, the TTC is responsible for the general oversight of EGP projects, which typically includes: advisor selection, disseminating EGP methodology to the project team, scheduling advisor visits and in country logistics, reviewing advisor visit reports and invoices, while also controlling and monitoring the project budget. Where appropriate, TTCs also liaise with the EBRD ROs, financial intermediaries, local authorities, government department and, where established, with local steering committees. Bilateral donors with tied funding generally require the TTC to be a national of the donor country. The TTC’s job is then to recruit nationals of the donor country to work as Advisors and Specialists on the projects. The recruitment and contracting of TTCs (and their role in recruitment of SIAs) has raised concerns about transparency and appropriate checks and balances, as observed by the Bank’s Internal Audit Department. Therefore, going forward, all contracts for TTCs, as well as any potential Local EGP Manager and all advisors and specialists on EGP projects, will be contracted through CSU.

Senior Industrial Advisers (SIAs): One experienced industrial advisor, having a minimum 15 years experience as an international senior executive. The SIA is selected by the TTC, after being provided a short-list of candidates from EGP HQ. The final selection is subject to approval by EGP management. The SIA has been the main link with the EGP client, working closely with its CEO and senior management. The background, experience and expertise of the SIA closely match the particular business or industrial activity of the enterprise. Typically, the SIA will visit the EGP client enterprise a minimum of 5 times over the 18-24 month duration of a standard EGP project.

Specialists: One or more specialist advisors in disciplines such as finance, human resources, design, marketing, and production are used depending on the requirements of the EGP project. Specialists will visit the enterprise only as required and on the basis of a contract request made by the TTC, after consultation with the SIA.

Under the standard EGP methodology, the SIA acts as an advisor/mentor to the CEO and key management within the enterprise for typically 18-24 months. TTCs, SIAs and Specialists are almost exclusively expatriates from economically developed countries, mainly Western Europe, Japan, Taiwan, Korea, and North America.

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Annex 5 EGP Overview of PPMS Reporting Currently, EGP projects are rated upon completion by an external evaluator contracted on a consultancy basis, following a final enterprise report and self-evaluation form completed by the relevant EGP Team Coordinator. Since inception, the programme has conducted a CEO Questionnaire at the end of each project, which depicts the CEO’s perception and satisfaction with the project and advisors. The EGP Team also evaluates each advisor and specialist on all projects, to avoid that poor performers work on further projects. The EGP was subject to a Project Evaluation Department review in 2004, and donors (particularly the EC) carry out their own evaluations, monitoring and audit reviews. Unlike BAS, the EGP does not have a Management Information System (MIS) which allows evaluating and monitoring activities and projects. EGP’s current database (TCS CCS) does not allow EGP to (1) track and monitor required variables, (2) aggregate data in order to draw conclusions from project results, (3) track progress against objectives. To meet expectations of the Bank and donors, EGP needs a new MIS to collate information on project outcomes. In cooperation with OCE and the London School of Economics, the EGP Team has already developed a new more systematic approach to monitoring and reporting. This new “Project Performance Management System” (PPMS) will require an effective MIS to aggregate and analyse the data which it will produce. Project Level Analysis and Monitoring At the project level, the PPMS firstly incorporates a new screening report (already in operation) to strengthen EGP’s approach to project selection. It queries the viability of the enterprise, integrity, management receptiveness and the potential long-term impact EGP can have on the enterprise. The PPMS will then monitor each project routinely at four stages – the base-line (first visit), during a mid-term visit, at completion and one year after the completion. The PPMS will also conduct a management questionnaire at the start, the end, and one year after conclusion of a project, to measure the changes in the management practices of the EGP client (i. e. , “output indicators”). Another key element of the PPMS is to expand upon the existing CEO Questionnaire, which provides an un-biased view and reaction of the project from the perspective of the CEO. During the PPMS process two sets of indicators will be recorded: output indicators and overall indicators. Firstly, output indicators are designed to measure the performance of specific objectives implemented against four core advisory category (Finance, Sales & Marketing, Organization & Management and Operation) by either qualitative or quantitative methods. To effectively measure the progress of agreed project objectives, EGP has established a set of output indicators and benchmarks, applicable to different activities within each category. Output indicators are designed to assess the performance of objectives from the respective category, essentially tracking the current performance and progress throughout the advisory project.

Secondly, complementary to output indicators, overall indicators are designed to measure the performance of the whole project implementation, and the overall performance of the enterprise. Unlike output indicators, which track the current performance of implementing the agreed objectives of the project, overall indicators

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are used to measure long term firm performance, from the baseline report to the 1 year post-completion report. Examples of overall indicators include:

Number of employees Average wage Total labour cost per worker Total foreign sales Key Financials, such as: total sales, costs of capital, return on assets, cash

flow, EBITDA Number of managerial level employees

Reports to EGP Management: The screening report, collates key enterprise information regarding its history, industry specifics, operational activities, production facilities, market structure, assets, overall key financials indicators, organisational aspects, ownership and integrity concerns. The report also focuses on 1. The management’s receptiveness and commitment to participate in a EGP project, 2. Key risks affiliated with the company, sector, or political climate within the region or country, 3. Advisor qualities and potential specialist needs, 4. Potential cross-cutting objectives to be addressed, as well as 5. Outlining potential objectives for the project under key categories. During the first visit to the enterprise, a baseline report will be given, mainly to record the overall indicators while defining the objectives and activities to be pursued, while determining the output indicators, which will be tracked in accordance with each objective. During the first visit, the management questionnaire will also be administered, to establish the level of managerial competence at the beginning of the project. This same questionnaire will be given at the final report stage and at the 1 year post-completion review to depict the changes in the management practices of the EGP client. The midterm report, seeks to track the progress and performance of objectives and activities by measuring the established output indicators. The report mainly serves as a management tool for EGP HQ, while also enabling the programme to report efficiently to donors on project progress to date. The report serves to evaluate the work of the SIA to date, and whether or not more specialists need to become involved in the project before completion. The report will also serve to highlight key challenges and externalities, while also emphasizing any technical expertise that could be demonstrated to other enterprises within the sector. At this stage, it will also be decided whether or not the company will pay for a portion of the project costs at the end of the project. The impact report will be completed one year after the close of a EGP project. Previously, the success of EGP projects was measured immediately at their conclusion. This has not allowed enough time for the impact of EGP’s advice to be fully implemented and measured, which is why the inclusion of a 1 year after impact report will be so valuable. These are all reports for EGP Management to be used for reports to Bank Management and donors, and to better manage the programme.

Apart from these core monitoring reports, a management questionnaire will also be administered during the first visit, last and one year after, to establish the change in

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the level of managerial competence due to EGP intervention. The questionnaire analyzes the management’s skills with regards to;

1) Sophistication or the production/operation process

2) Strategy and monitoring

3) Human Resource Management

4) Corporate Governance: The CEO questionnaire, will also be administered during the last visit, which will assess the CEO’s impression, and overall satisfaction with the EGP project. The CEO questionnaire specifically asks:

- The CEO’s satisfaction level regarding skills transfer relating to operational management, strategic management, performance management, people management and corporate governance.

- Whether or not the CEO’s prospect of his company is better, the same, or worse after EGP assistance.

- The CEO’s overall satisfaction of results as compared to the beginning of the project.

- The CEO’s sentiments towards the EGP Team members and quality of advisors used.

Reports to the Enterprise: Aside from new the management reports, as part of the PPMS, EGP will continue to report directly to the assisted enterprises. These reports consist of a detailed Terms of Reference and essentially a project work plan, drafted by the Team Coordinator and/or Local Manager and SIA after the objectives are clearly established during the first visit. After each sequential visit conducted by the SIA and/or various specialists, Visit Minutes are sent to the enterprise management, outlining key objectives discussed and targets reached, while also outlining the key actions the enterprise needs to complete before the next visit from the SIA/Specialists. Supporting documents may also be sent to the enterprise, such as business plans, etc. The reports to the enterprise are concluded with a final report, essentially a “vademecum” written by the SIA, which may be referred to by the management as an organized record of the project, while also outlining accomplishments and next steps for the enterprise to take to ensure the advisory services provided are implemented in practice.