Technical assistance: the outlook for a strategic tool for development finance

Against the background of the COVID-19 pandemic, a recent survey by FMO of more than 900 MSMEs in Eastern Europe and Africa showed that less than 10% of these took action and invested in structural transformations. Here, TA can play an important role.

TA is rooted in traditional development assistance – the programs funded by governments and international organisations. From a DFI perspective, it complements commercial and blended capital to maximise development impact. It is the most concessional instrument of DFIs, and may be a market differentiator because commercial parties may not have access to it.

In terms of private sector development, DFIs offer a unique view of the market and the capability to deploy TA complementary to (or in anticipation of) investments or loans, with catalytic aims (i.e. crowding in others to increase financing flows).

TA is typically financed by a combination of governments (DFI shareholders), own (DFI) resources and other funders (e.g. the European Commission). The way TA mandates are defined is determined by the DFI’s strategy, the criteria of the funding partner, and market forces. Aligning these is important to ensure effective TA programs.

DFIs want TA to be deployed effectively. Thus the additionality test - how likely is the project and its intended outcomes and impacts to be realised without TA? – is important. The transaction-level approach to TA has been most common among DFIs, with a focus on mitigating certain risks, or seeking an improvement of the beneficiary firm’s capabilities.

However, DFIs are increasingly applying advanced program design methodologies, using market intelligence and research to better understand demand and to identify where additionality and impact can be greatest; hence, where the synergy between TA and commercial instruments is strongest. A mismatch could lead to inappropriate subsidies, market distortion, and the inefficient and ineffective use of TA.

FORMS OF TECHNICAL ASSISTANCE

TA takes different forms. It is often synonymous with “grants” or “advisory services”. Across DFIs, the grant has been the instrument of choice, usually structured to share the costs of a project with a client or partner so that both parties have “skin in the game”. It is aimed at achieving a change in the recipients’ practices, policies, and performance; for example, supporting an agribusiness to develop an improved approach to smallholder farmer support. There should be a measurable change or transfer of knowledge, and the TA addresses a gap that has been identified.

This approach remains important to DFIs, and there can be valuable client-/investee-level outcomes; it is embedded in the DFI investment process, with the needs assessment often being undertaken at the due diligence stage by a multi-disciplinary team.

The same principles can be applied to providing advisory services. Here, a DFI-contracted consultant provides a service to the client, with the costs usually being shared. The means differ from those of a grant, but the result is the same or similar.

THE NEW FRONTIER OF TA

DFIs are increasingly innovating in the areas of TA deployment and grant capital use. There are many high-potential approaches being used, including outcome-based instruments (like development impact bonds), using a grant as a “first-loss” buffer or to facilitate impactful partnerships.

Below, in moving beyond transaction-level efforts to build capacity within single organisations, we consider two approaches: recoverable grants and market-level efforts to shape entire markets for greater impact.

Recoverable grants, whether repayable or convertible, sit in-between non-recoverable grants and more commercial instruments like loans or equity. A recoverable grant may be provided to finance a project where the funding covers what otherwise might be considered operational costs (exempting it from traditional grant financing). The repayment or conversion triggers are determined in the grant agreement. For example, a company could use a recoverable grant to finance research or activities to set up a new inclusive business line that reaches excluded populations, such as refugees.

The DFI and the grant recipient share some of the costs and risks associated with the undertaking, and the grant effectively helps to prove a business case. The repayment trigger will be defined with the recipient – for example, repayment of the first hundred loans to refugee-owned businesses.

The market-level approach is supported by the increasing calls for DFIs to redouble their efforts in the wake of the pandemic (for example, Attridge and Gouett, 2021).

DFIs are compelled to improve their TA offering by applying a more sophisticated portfolio or value-chain approach, coupled with ecosystem or market-level programming to make transformative investments work. This enables DFIs to leverage their positions as financing partners to access funding for TA, with zero expectations of a commercial return.

Through a private sector development lens, TA can be provided at five levels. The company that the DFI invests in or finances is at the first level. At the second level, where we look to create a direct impact, is the end-beneficiary/ target group. An example is entrepreneurs being financed by a client microfinance institution. This could involve setting up or supporting existing entrepreneurial support organisations.

At the third level, we use TA to create better and more bankable opportunities for development finance. This could take the form of pre-investment TA, through an incubation or acceleration program or the funding of feasibility studies. TA can be provided at a fourth level to improve key ecosystems or markets. The scope could vary depending on the priorities in a given market. For example, DFIs have collaborated to establish sector initiatives to raise environmental and social standards in markets.

At a fifth level, TA can be used to benefit the development finance space, by creating demonstration effects, sharing learning, and enabling network effects; aims may also include sharing and coordinating market studies, or capturing lessons learned from TA programs, with the express aim of enabling DFIs and others to improve their efficiency, effectiveness, and coordination.

DFIs occupy a key position in this nexus, holding both commercial and non-commercial funding and often the right relationships to make a difference. Further important factors are how coordination occurs, ensuring that each intervention has the right set of partners, alignment on how success is achieved, and consolidation of the voices of the participants.

The TA space is developing rapidly as DFIs recognise its strategic importance in achieving their ambitious goals. The challenge of implementing the Addis Ababa Action Agenda (AAAA) and financing sustainable development has increased. We have started to comprehend the impact of COVID-19 on development finance and we need to close the ever-widening financing gap.

The development finance industry needs to act to regain its balance, to reclaim some of the lost ground: it must adapt, collaborate and innovate to accelerate progress towards achieving the SDGs. DFIs can do this with strategic program management and TA.

CONCLUSION

TA is the non-commercial support provided by a DFI or other organisation that is aimed at developing the capacity or effectiveness of a client, investee, partner or ecosystem/market. Objectives also include reducing/mitigating the risks associated with a project or investment to improve the conditions for impact, and to protect it.

The impact brought about by TA could take the form of more (or better) jobs, developing inclusive or climate-resilient business models, or improved environmental outcomes – essentially, a more inclusive, sustainable world.