25 September 2017

Quick scan of models to support local

SMEs in oil and gas supply chains in

challenging regions

This discussion paper was authored by Eelco Benink and Willemijn Jonkheer of RebelGroup, Netherlands, and was commissioned by Oxford Policy Management Limited (OPM) for the Kenya Extractives Programme (K-EXPRO). The contact points for the K-EXPRO are the Team Leader (OPM) Mark Essex messex@kexpro.org, and the Senior Responsible Officer (DFID Kenya) Ian Mills i-mills@dfid.gov.uk

K-EXPRO Level 3, Clarendon House Tel +44 (0) 1865 207 300

52 Cornmarket St Fax +44 (0) 1865 207 301

Oxford OX1 3HJ Email admin@opml.co.uk

United Kingdom Website www.opml.co.uk

© K-EXPRO i

K-EXPRO ii

Executive summary

The development of oil resources in Kenya offers possibilities for small and medium enterprises

(SMEs) in local communities to grow and prosper by being part of the oil sector supply chain. As a

programme under the UK’s Department for International Development (DFID) focused on poverty

reduction in Northern Kenya, the Kenya Extractives Programme (K-EXPRO)1 aims to support the

expansion of these pathways through harnessing backward linkages with the oil sector.

As part of the scoping for this programme, K-EXPRO has been exploring and will be testing new

SME development models related to the oil sector value chain, and in this context has considered

a partnership with the Northern Kenya Growth Initiative (NKGI) - a local investment fund and

support program targeting SMEs in Northern Kenya (largely sector agnostic). The NKGI is an

innovative and broad risk-capital initiative of the Canadian Lundin Foundation2 that has received

funding from Africa Oil Corporation (part of Lundin Group of companies) and from MEDA3, a

Canadian organization that is itself a recipient of Canadian government aid funding.4

From a potential partnership, K-EXPRO is specifically seeking to focus support on the

development of SMEs related to the oil sector in Turkana, an underdeveloped region in Northern

Kenya where most of the oil discoveries have been made. Structuring the partnership between K-

EXPRO and NKGI asks for a tailored and sensible approach and as input into this design process,

K-EXPRO asked RebelGroup5 to conduct research regarding models to support local SMEs in oil

and gas supply chains (often called ‘local content’) in similarly challenging environments.6 To this

end, this ‘Quick Scan’ looks at examples of other programs and initiatives around the world in order

to draw out lessons that could be applied to the design of the K-EXPRO – NKGI partnership.

Lundin Foundation’s Value Proposition - Northern Kenya Growth Initiative

The Northern Kenya Growth Initiative (NKGI) consists of two main components:

1. Northern Kenya Growth Capital, NKGC, an investment fund targeting SMEs in Northern

Kenya set up in 2016 by the Lundin Foundation;

2. The Turkana Catalyst Initiative (TCI), an Accelerator Program and a Seed Financing facility

for development and financing of SMEs in the County. It will act as a feeder fund to NKGC,

completing a vertically integrated approach to supporting SME growth in Turkana.

1 https://devtracker.dfid.gov.uk/projects/GB-1-204339 2 http://www.lundinfoundation.org/ 3 http://www.meda.org/ 4 http://www.international.gc.ca/ 5 http://www.rebelgroup.com/ 6 For essential background reading see the paper on ‘Incentivising Community Content’ by Dr Michael Warner https://www.odi.org/publications/1415-incentivising-community-content-interface-community-investment-programmes-local-content-practices

K-EXPRO iii

Northern Kenya Growth Capital - Lundin Foundation

Description The Lundin Foundation created an innovative risk-finance model to address the capacity and financing needs of SMEs in Northern Kenya. The fund objectives are to: (1) Catalyze investment that enables local companies to participate in procurement in the oil business and large infrastructure projects in Northern Kenya; (2) Foster economic diversification in Kenya and avoid over-reliance on oil revenues in the future; and (3) Stimulate economic growth and employment creation in Northern Kenya.

Investors/initiators The Lundin Foundation has so far mobilized commitments of $1 million, half from Africa Oil Corporation and the other half from MEDA, a likeminded Canadian organization that has received aid funding from the Canadian Government.

Fund size $1.5 million, target is $5 million.

Type of instruments

Loans with more flexibility on collateral and repayment profiles than banks.

Ticket size Up to $250,000

Fund type Fund will last for 5 years, of which first two will be the investment period.

Targeted return At a minimum, return all committed funds to investors, but targeting returns up to 5%.

Interventions Risk capital and capacity building (pre-finance business assistance).

Best practices Integrated solution of risk finance and business support

The case of the Turkana region, Northern Kenya

Turkana’s cultural profile is distinct: many people in Turkana generally feel a great distance to the rest of Kenya (especially Nairobi) in terms of geography, culture and economic linkages. Local SME activity in Turkana has mostly been limited to agriculture and construction unaligned to the oil sector value chain. The under-developed state of infrastructure and insecurity has also limited the development of local SMEs. Correspondingly, business and entrepreneurial skills are under-developed and finance plays almost no role in the local economy - both the understanding of the merits of finance for business, and actual access to finance, are lacking. As a result, it is particularly challenging to try and use the emerging oil sector as an accelerator for local SME development.

From Turkana, to identifying broader applicable lessons, and back

The aim of supporting local SMEs in Turkana formed an interesting case study to explore the available knowledge and practical experiences with regard to developing effective models for supporting local SMEs, in oil and gas value chains, in challenging regions. Combining various perspectives and insights allowed for the identification of important lessons that need to be considered when designing models for support. A reflection on these lessons in light of Turkana paints a useful picture of this distinct region and provides indications of various pathways towards SME development.

This need for learning more about the variety of models and practices in facilitating local development through SME support draws on the following key questions: 1. What can we learn from other interventions focused on supporting SMEs in the oil and gas

supply chain?

2. How can these lessons be applied to K-EXPRO’s partnership with NKGI?

K-EXPRO iv

Types of interventions

Literature on the subject shows that interventions in support of local development through SME activity can be categorised as follows:

Interventions addressing capacity development, such as training in financial literacy, management skills.

Interventions addressing access to finance for SMEs, such as providing risk capital in the form of hybrid and flexible instruments, establishing risk sharing facilities.

Interventions addressing general constraints in the infrastructure facilitating SMEs, such as establishing enterprise development centers, aligning procurement and implementation of financial reforms.

What do we know - lessons learned

Firstly, there is no blueprint for models supporting local SMEs. Interventions have been very much tailored to a particular country and to particular private sector actors. However, there are a number of important generalisations:

Local content development is a long term, iterative process: learning and flexibility are critical across the ecosystem of policies, laws, regulations, and interventions.

Specificity versus inclusive development - a trade-off: the more targeted and specific local content initiatives are the better the outcomes. However, that said, if the local context is just not ready in terms of basic capacities or even opportunities, more broad based efforts to build the fundamentals should be considered. Requiring engagement of a broader base of businesses from the local community (sometimes referred to as funding the ‘bottom-of-the-pyramid’ SMEs).

Structuring interventions sequentially is key: sound SME capacity is a pre-condition to any further investment and hence should be the starting point for investment. The fundamentals for business development, such as basic financial literacy, must be in place in order to absorb further investment, tailored training can help.

Providing skills and technical assistance is a prerequisite to leveraging supply chain opportunities. This counts for both the development of common skills and the creation of cluster developments with other industries that have synergy with the extractive industry.

The importance of tackling information asymmetries. SMEs generally lack information and knowledge on when and how to prepare for procurement opportunities.

Lessons about the influence of the context of supporting models – the role of the private sector

Engaging the demand side. The procurement strategies of the oil and gas industry should be known and involved as early as possible, and should align with domestic capacity.

Fostering the role of finance: The strongest predictors of SME willingness to invest are found to be having investment capital, access to credit, information and owning fixed assets.

Fostering commitment: Independent of the nature of a fund or programme, the degree of commitment of participating SMEs is a critical factor in the success of a supporting model.

K-EXPRO v

Lessons about the influence of the context of supporting models – the role of the public sector

Prioritizing the supporting legal and policy framework towards private sector development: governments should prioritize their policy objectives towards investments and establishment of key institutions. Supporting infrastructure that effectively facilitates SMEs is a prerequisite for accessing finance.

Coordination and strategic alignment. A lack of coordination and strategic approach towards SME support programs between technical and business service providers, and with development institutions, dramatically limits the impact of programs. The risk of a gap in business development continuity and complementarity is high when investment funds are not aligned with capacity building.

What we don’t know - uncertainties and risks

Uncertainty: attempts to document local content experiences are scattered and there is no evidence of which strategies produce better outcomes.

Single client dependency risk: SMEs whose sole or major client is an extractive company are vulnerable to that client’s business cycles.

Governance risk: setting inappropriate targets for local content encourages perverse behavior, presenting governance risks.

Two key models to support local SMEs

In practice, a distinction can be made between (1) investment funds, which support local SMEs

with capital instruments, and (2) capacity building programs, which invest in support to SMEs in

the form of capacity building. A selection of examples from both categories is presented below.

1. Investment funds

Fund Comments

GroFin (Shell Foundation Africa)

General SME finance (non-asset, non-bank) finance provider, co-founded by Shell Foundation in 2004, pioneering SME development providing funding based on viability of growth, integrated solution of risk finance and business support. GroFin has grown into a leading SME finance provider in Africa with >$500 million under management, funded mostly by Development Finance Institutions.

Weston Oil and Gas Fund Ghana

Supports the drive for local participation in the oil and gas industry by helping build

the financial capacity of local companies operating in the sector. Objective is to

boost SME financial inclusion by investing in SMEs operating in the oil and gas

sector. Has close cooperation with oil and gas companies. Oman SME Oil and Gas Fund

Good example of a large scale, government initiated (sector agnostic) SME finance and development program that managed to raise funding from private investors. The main reason for the Government of Oman to initiate the fund was to help the country to diversify away from over-dependency on oil and gas. Further capital was raised from pension funds and other investors. Current capitalization is $250 million. The fund provides a wide range of financing types, and also supports SMEs with monitoring and mentoring and professional accounting software.

K-EXPRO vi

2. Programmes primarily focused on building SME capability7

Programme Comments

Chevron Angola Partnership Initiative

Chevron-USAID partnership provided technical assistance and financial support to SMEs in Angola with an emphasis on the agricultural and water sector. Total size of the initiative is $50m. Partnership focused on vocational training and job creation and bottom-up, integrated investment in bottom-of- the-pyramid SMEs

SME Linkages Program – Chad

Initiative of Exxon mobile and IFC with the goal to create a reliable, high quality flow of goods and services from local SMEs for the pipeline consortium, and ensure that the people of Chad benefit from increased economic opportunities.

Ghana Western Region Coastal Foundation

Technical and vocational training in alignment with oil and gas supply chain. Size of the initiative is £8.4 million in total, £1.2 for SME support, funded by DFID. Focuses on crowding-in private sector funding for oil and gas companies with the aim to facilitate and manage dialogue between communities, government, and industry to build trust and address tensions caused by the extractive industry.

Ghana Supply Chain Development Program

Works to improve the competitiveness of SMEs operating in the oil and gas sector supply chain in Ghana. Initiative of PYXERA Global (INGO), funded by USAID, focusing on capacity development, business development and matching SMEs with financial institutions. The program offers specific training, focused on policies and systems in Environment, Health, and Safety (EHS), Procurement, Information Technology and Quality Management and Industry specific technical certifications.

Enterprise Centre – Papua New Guinea

Public-private partnership Exxon Mobil and the PNG Institute of Banking and Business Management. Focuses on economic opportunities for SMEs, developing capabilities of local landowner companies and contractors, suppliers and vendors.

Enterprise Development Center - Ghana

The EDC is a Government of Ghana initiative to provide support to SMEs so they can position themselves to take advantage of business opportunities in the oil and gas sector. This includes business training, advisory services, access to markets and info.

Centro de Apoio Empresarial -Angola

Program set up by Sonangol, BP, Exxon Mobil, Total and Chevron. Focus on providing assistance to SMEs - financial literacy, preparation of bids, training relevant to providing goods and services to oil and gas, access to finance, company directory.

Key considerations

In summary, a number of critical factors for the design and implementation of models supporting development of local SMEs in oil and gas value chains in challenging regions can be identified:

Commitment to a long-term, iterative process by the sponsors (of the model).

Understanding the local context and specificity in terms of region, skills and alignment to procurement of oil and gas companies; and strategic alignment with other initiatives relevant to the development of SME activity in the region.

Additionality of the instruments chosen (i.e. the extent to which a new input (action or item) adds

to the existing inputs (instead of replacing any of them) and results in a greater aggregate) and

flexibility of the instruments in terms of content, timing and size.

Commitment of the local economic community.

…in reflection on Turkana

A model able to effectively contribute to SME development in the Turkana region needs to:

Take a highly local, yet pragmatic approach.

Should ensure early involvement of the demand side - procurement teams in oil companies.

Focus on capacity building to provide a foundation for investment (focused on enhancing procurement capabilities).

Focus on true value creation, within an integrated and flexible approach.

7 In addition to these interventions that primarily focus on directly building the business skills and access to finance of SMEs, there are other approaches that have successfully focused on supporting smaller businesses (‘Micro-SMEs) through a more hands-on and vocational skills training angle. See summary in section 2.1 on Employment for Sustainable Development in Africa (E4D/Skills for Oil and Gas in Africa) https://www.giz.de/en/worldwide/31947.html

K-EXPRO vii

Table of contents

Executive summary ii

1 Introduction 1

1.1 Background on K-EXPRO 1

1.2 Structure of this document 1

2 Models to support local content development through SME finance and support 2

2.1 Definition of local content development 2

2.2 Types of interventions 2

2.3 Examples of investment funds 3

2.4 Examples of technical assistance and capacity development programs 4

3 Lessons from other SME support programs 7

3.1 What do we know? Leading principles 7

3.1.1 Lessons about the nature of supporting models 7 3.1.2 Lessons about the influence of the context of supporting models – private

infrastructure 8 3.1.3 Lessons about the influence of the context of supporting models – public

infrastructure 8

3.2 What don’t we know? Insecurities and risks 8

3.3 Lessons from other programs 9

4 Applying the insights to Turkana 10

4.1 The Turkana Region 10

4.2 Critical success factors for local content development in Turkana 11

4.3 Recommendations 12

Annex: list of references 13

K-EXPRO 1

1 Introduction

1.1 Background on K-EXPRO

Recent years have brought significant foreign investments into exploration and appraisal of oil

resources in Northern Kenya. These investments have the potential to offer increasing economic

opportunities for small and medium enterprises (SMEs) to participate in, and benefit from,

procurement opportunities of the extractive industry. The Kenya Extractives Programme (K-

EXPRO) aims to facilitate the development of new models supporting SMEs in oil and gas supply

chains in challenging regions.

K-EXPRO is a UK funded aid programme whose broad goal is to contribute to inclusive, equitable

and sustainable economic growth in the extractives sector. Specifically, K-EXPRO targets

interventions that aim to improve the enabling environment for extractives investment and a

localised and inclusive approach to business and community development.

This document is part of an assessment conducted by RebelGroup of a proposed financial contribution from K-EXPRO into the Northern Kenya Growth Initiative (NKGI), a risk-capital finance facility and support program set up by the Lundin Foundation focused on supporting SMEs in Northern Kenya. As part of the assessment, this quick scan was conducted on similar initiatives around the world focusing on SMEs in oil and gas supply chains, specifically in similar challenging environments.

1.2 Structure of this document

This report intends to provide K-EXPRO with insights from these other SME support programs in

challenging environments. This document is not meant to be an exhaustive research document,

but merely serve to provide K-EXPRO with additional input for structuring a partnership agreement

with NKGI.

This document is structured as follows:

First, a number of general types of interventions around local content development through SME support are discussed. These examples were collected from multiple policy documents, practice briefs, research papers, and experience from international practitioners. This section describes a number of specific programs, funds and other support initiatives in the oil and gas supply chains in challenging regions around the globe.

Second we summarize the main lessons learned from the initiatives, based on a literature review and a number of interviews with sector experts.

We conclude the main document by applying the main conclusions to the Turkana region.

Generally, this document builds up towards answering the following questions for K-EXPRO:

1. What can we learn from other interventions focused on supporting local SMEs in the oil and

gas supply chain?

2. How can these lessons be applied to the partnership with NKGI?

K-EXPRO 2

2 Models to support local content development through SME finance and support

2.1 Definition of local content

In specific regard to the oil and gas sector: “Local content refers to a set of policies that increase the utilization of national human and material resources in the oil sector and domiciles in-country oil-related economic activity previously located abroad”.8

2.2 Types of interventions

To set the stage for this quick scan, we categorize the interventions aimed at supporting local

content development through SME activity as follows:

1. Interventions addressing access to finance for SMEs (including investment funds)

o Provide suitable risk capital in the form of hybrid and flexible instruments.

o Establishing risk sharing facilities, credit lines (especially for long-term capital) for oil

and gas suppliers; developing capital markets; strengthening credit infrastructure.

2. Interventions addressing capacity development

o Provision of training in appropriate skills to the local labor force or business

development skills to local suppliers.

3. Broader based interventions addressing general constraints in ‘SME infrastructure’

o Establishing an enterprise development center to provide comprehensive local content

development programs to potential suppliers in the extractive industry.

o Making extractive industry procurement plans known well in advance; establishing

facilities which inform suppliers of upcoming opportunities.

o Harmonization and/or simplification of quality standards of the extractive industry;

completion of the documentation of the required quality standards.

o Unbundling contracts where possible to ensure that more local suppliers become

eligible to bid; improving access of suppliers to finance to increase capacity.9

o Implementation of investment climate reforms. E.g. simplifying business registration,

licensing, obtaining permits, getting electricity, paying taxes, registering property.

o Facilitation of credit information bureaus.10

8 Oyewole, B. (2017). UNCTAD Project 1415P: Strengthening development linkages from the mineral resource sector in ECCAS countries. Presented on United Nations Conference on Trade and Development, February 15-18, 2017, Malabo, Equatorial Guinea. 9 World Bank and International Bank for Reconstruction and Development (2016). Republic of Uganda: leveraging oil and gas industry for the development of a competitive private sector in Uganda. 10 World Bank and International Bank for Reconstruction and Development (2016). Republic of Uganda: leveraging oil and gas industry for the development of a competitive private sector in Uganda.

K-EXPRO 3

2.3 Examples of investment funds

Shell Foundation through GroFin 11 12

Description Shell co-created an innovative integrated solution business model to address the needs of SMEs in Africa and the MENA region. The goal is to create sustainable jobs through catalyzing small and growing businesses. GroFin (Growth Finance) is a general SME finance (non-asset, non-bank) finance provider, co-founded by Shell Foundation in 2004. GroFin provides integrated solutions of risk finance and business support. Since 2004, GroFin has grown into a leading SME finance provider in Africa, funded mostly by Development Finance Institutions (DFIs).

Investors/initiators Shell is one of the largest of a consortium of DFIs, development organizations, foundations, large companies, and private funders.

Fund size $500 million total (around $30 million from Shell)

Type of instruments

Mezzanine finance (mainly): loans with more flexibility on collateral and repayment profiles than banks, royalty loans and warrants (shares with put option to sell back to management)

Ticket size $50,000 – 1.5 million

Fund type 10 years or open-ended. GroFin seeks to invest for a period of 4 - 6 years.

Return Blended (financial and impact)

Interventions Funding. Capacity building (pre-finance business assistance)

Best practices Integrated solution of risk finance and business support

Weston Oil and Gas Fund – Ghana 13

Description Supports the drive for local participation in the oil and gas industry by helping build the financial capacity of local companies operating in the sector. The WOGF’s objective therefore, is to boost SME financial inclusion by investing in SMEs operating in the Oil and Gas industry.

Investors/initiators Institutions, provident and pension funds that are: 1. seeking high regular income to meet short-to- medium term financial needs; 2. primarily concerned with preservation of capital and long-term capital appreciation; and 3. seeking diversification in fixed income investments

Fund size Unlimited number of shares at a set initial price

Type of instruments

Various debt and equity instruments

Ticket size unknown

Fund type Open-ended

Return Positive, varying percentages

Interventions Mainly equity finance, supported by financial capacity building

Best practices Delivering substantial support to companies involved close to core activities in the oil and gas value chain

Nigerian Content Development Fund 14

Description Funding the implementation of Nigerian content development in the Nigerian oil and gas industry. Addresses the paucity of funding and

11 Shell Foundation (2016). Sustainable job creation. 12 GroFin (2016). Leading to impact: annual report. 13 Weston Oil and Gas Fund [website]. 14 Vanguard Nigeria (2017). NCDMB to generate ¤ 200 m for Nigerian Content Fund.

K-EXPRO 4

inability to access credit, which often beset manufacturers, service providers and other key players in the Nigerian oil and gas industry. Promotes development and utilization of in-country capacities.

Investors/initiators Every operator, contractor, subcontractor, alliance partner or any other entity involved in upstream activity shall contribute one per cent of the contract value to the Fund.

Fund size $200 million (planned size)

Instruments Loans with single digit interest rate and repaid within five years

Ticket size unknown

Fund type The fund is a compulsory 1% contribution from all contracts awarded to all operators in the last 7 years, 70% of which is reserved to help develop the capacity of local industries.

Return unknown

Interventions Access to finance

Best practices Only three companies have drawn money from the fund since its inception. While international operators have been remitting, it has been difficult to get Nigerian companies and local contractors to comply with the local content law.

Oman SME Development Fund 15 16

Description Large scale, government initiated (sector agnostic) SME finance and development program. The Government of Oman initiated the fund and further capital was raised from pension funds and other investors. Current capitalization is $250 million. The fund provides a wide range of financing types, and also supports SMEs with monitoring and mentoring and professional accounting software. The fund hopes to create 7,500 entrepreneurs and to see some of them grow to be ‘large’ firms, to create > 50,000 jobs, to bridge 10% of the ‘missing middle’ and to help create a ‘cluster’ of external capability in the form of ‘entrepreneurial’ educational institutions, training, accounting support, incubation, angel investing and a climate of SME development.

Investors/initiators Pension funds and other (local and international) investors (first tranche: $36 million)

Fund size $250 million

Instruments Working capital (among others)

Ticket size Average $100,000

Fund type Close Ended Fund

Return Approximately 15% (1o years equity payback period)

Interventions Entrepreneurial development, nurturing, financing, legitimizing

Best practices Interventions are complementing and highly aligned

2.4 Examples of technical assistance and capacity development programs

15 SMEF Oman (2016). The four point plan. 16 Oman National Company for Projects and Management (2014). SME development fund prospectus. 17 Chevron (2010). Angola partnership initiative: a case study. 18 DevEx (2010). Angola Partnership Initiative (API).

Chevron Angola Partnership Initiative 17 18

K-EXPRO 5

SME Linkages Program - Chad19

Description The goal of the IFC initiative: to create a reliable, high quality flow of goods and services from local small and medium enterprises (SMEs) for the pipeline consortium, and ensure that the people of Chad benefit from increased economic opportunities. IFC’s linkages team partners with the oil consortium, sub-contractors, international NGOs and Chad’s Chamber of Commerce to support local SMEs in this work.

Investors/initiators International Finance Cooperation with (primarily) Exxon Mobil

Initiative size not applicable

Initiative type Partnership which facilitated creation of enterprise center

Interventions Entrepreneurship capacity building

Best practices Extensive entrepreneur training and support program delivered through adequately equipped facilities located in N’Djamena, with satellite centers. Also, the EC promotes the establishment of business linkages between local companies on the one hand, and contract opportunities (primarily from Exxon-Mobil and its subcontractors) on the other hand. Through the EC, Chadian companies are offered internet access, and receive support and training throughout an electronic bidding process.

Ghana Supply Chain Development Program 20

Description Works to improve the competitiveness of local small and medium enterprises (SMEs) operating in the oil and gas sector supply chain in Ghana

Investors/initiators Initiative of PYXERA Global (NGO), funded by USAID

Initiative size not applicable

Initiative type Non-governmental development program

Interventions Capacity development, business development. Matching SMEs with financial institutions

Best practices Extensive meetings with local stakeholders before determining strategy Specific training, focused on policies and systems in Environment, Health, and Safety (EHS), Procurement Best Practices, Information Technology and Quality Management and Industry specific technical certifications

19 Fantamady Kante, C. and Mohrmann, B. – International Finance Corporation (2009). Linkages highlights: the Chad SME linkages program. 20 PYXERA Global (2015). Ghana supply chain development program.

Description The Chevron-USAID partnership provided technical assistance and financial support to small enterprises in Angola with an emphasis on the agricultural and water sector. Partnership focused on vocational training and job creation for small and medium businesses in Angola.

Investors/initiators Chevron and UNDP / USAID

Initiative size $50 million

Initiative type Public-private partnership - 2002 to 2007

Interventions Education, training and business development

Best practices Intensive investment in bottom-of-the-pyramid SMEs (e.g. agriculture) Set-up of special conditions local bank for SMEs Investment in entire community, not only economic development

K-EXPRO 6

Ghana Western Region Coastal Foundation

Description Focuses on crowding-in private sector funding for oil and gas companies (Tullow Oil, Kosmos, Anadarko, among others) with the aim to facilitate and manage dialogue between communities, government, and industry to build trust and address tensions caused by the extractive industry.

Investors/initiators DFID

Initiative size £8.4 million in total, £1.2 for SME support

Initiative type Foundation - locally owned, funded by DFID

Interventions Capacity development, Creation of linkages, Stakeholder dialogues

Best practices Extensive multi-stakeholder dialogues. Technical and vocational training in alignment with oil and gas supply chain. Intensive collaboration with Ghana state agency for natural gas resources to create employment.

Enterprise Centre – Papua New Guinea21

Description Focuses on economic opportunities for Papua New Guinean businesses and developing capabilities of local landowner companies and contractors, suppliers and vendors

Investors/initiators Exxon Mobil Papua New Guinea

Initiative size not applicable

Initiative type Public-private partnership between Exxon Mobil Papua New Guinea and the PNG Institute of Banking and Business Management

Interventions Capacity development, supply chain alignment, access to finance

Best practices Supplier registration and database creation (Employment and Supplier database), Developing gap analyses and business improvement plans

Enterprise Development Center (EDC) – Ghana 22 23

Description Identifying opportunities and facilitating the development of local SMEs for their participation in the oil and gas sector; communication required standards, promoting collaboration between SMEs, training and development, business incubation and consultancy services to SMEs

Investors/initiators Government of Ghana, Enablish Entrepreneurial Network

Initiative size not applicable

Initiative type Public-private partnership

Interventions Capacity development, business development

Best practices Facilitation of cooperation, information generation and sharing, long-term capacity building

Centro de Apoio Empresarial (CAE) – Angola24

Description Assistance to SMEs with regard to financial literacy, preparation of bids, training on specific elements of provision of goods and services to oil and gas industry, access to finance, company directory

Investors/initiators Sonangol, BP, Exxon Mobil, Total, Chevron

21 PNG LNG and Exxon Mobil (2016). ExxonMobil PNG and IBBM Enterprise Centre to develop capacities of more SMEs in PNG. 22 Advocates Coalition for Development and Environment Uganda (2016). Local content frameworks in the African oil and gas sector: lessons from Angola and Chad. ELLA Regional Evidence Papers. 23 Enterprise Development Centre [website]. 24 Centro de Apoio Empresarial [website].

K-EXPRO 7

Initiative size not applicable

Initiative type Private initiative

Interventions Technical assistance, Capacity development

Best practices Information generation and sharing, specific and long-term capacity building

Employment for Sustainable Development in Africa (E4D/SOGA) 25

Description Supporting public and private TVET providers as well as efforts to increase competitiveness of local businesses and reduce barriers to entry through sector/ business-specific support mechanisms.

Investors/initiators German Federal Ministry for Economic Cooperation and Development (BMZ). Co-financiers: Quoniam Asset Management, Frankfurt; Korean International Cooperation Agency (KOICA), European Union (EU); E4D/SOGA: Department for International Development (DfID), Norwegian Agency for Development Cooperation (Norad), Shell.

Initiative size Around $20m

Initiative type Mainly focused on supporting public and private TVET providers, and improving teacher training institutes.

Interventions Industry-related training courses for extractive industries and associated sectors (Kenya, Mozambique, Tanzania and Uganda), designed vocational training measures, competence-based modular courses, safety standards.

Best practices Information generation and sharing, specific and long-term capacity building

3 Lessons from other SME support programs

3.1 What do we know? Leading principles

Based on our literature review and interviews with experts it is clear that there is no blueprint for local content development strategies. Policies and interventions are very much tailored to a particular country, and to particular private sector actors, aligning the interventions with their business activity. Nevertheless, there are many lessons learned from experiences of other countries that are relevant:

3.1.1 Lessons about the nature of supporting models

Local content development is a process – requiring learning, a flexible approach and maintaining an open dialogue. The learning process that local content development entails, can best be viewed as a learning process through which an ecosystem of policies, laws, regulations, and effective programs are put in place. To do this well there must be monitoring mechanisms and transparency around progress, achievements, and challenges. 26

Providing skills is key to leveraging opportunities for jobs creation. This is important to support the development of skills that are common to all sectors, as well as the creation of cluster developments with other industries that have natural synergy with the extractive industry.27

25 https://www.giz.de/en/worldwide/31947.html 26 World Bank Group (March 2016). Maximizing domestic value added in the oil and gas industry sharing lessons learned through public private dialogue in Tanzania. 27 Odon, A. (July 2015). Why local content in Africa’s extractive sector won’t work without homegrown human capital.

K-EXPRO 8

Technical assistance is generally found to be very valuable, through forging stronger relationships in oil and gas value chains.28 SMEs generally suffer from lack of basic financial literacy and tailored training on fundamentals of financial management with robust credit information systems – containing positive and negative information from a wide variety of sources – helps address this asymmetry.

3.1.2 Lessons about the influence of the context of supporting models – private infrastructure

Contracts can be structured to align with domestic capacity. For instance, it would be beneficial to structure procurement into smaller packages for some key industries to enable participation of local suppliers. Preferably, up-front payments should be offered.29

With regard to employing finance, a study of the emerging oil and gas supply chain in Uganda found that the strongest predictors of SME willingness (and/or ability) to invest are found to be having investment capital, access to credit, information and owning fixed assets.30

Independent of the nature of a fund or program, the degree of commitment of participating SMEs is found to be a critical factor in the success of a supporting model.

3.1.3 Lessons about the influence of the context of supporting models – public infrastructure

The development of infrastructure that effectively facilitates SMEs is a prerequisite condition for facilitating access to finance which is generally viewed as the most complex aspect of SME development to support.31

In line with this, it is critical that a strategic approach is taken in the development of SME supporting programs, especially in challenging regions. Lack of coordination and a strategic approach towards SME support programs between technical and business service providers, and with development institutions limits the efficiency and impact of programs. Furthermore, coordination of linkages programs should be encouraged in order to reduce duplication of efforts.

3.2 What don’t we know? Insecurities and risks

To date, attempts to document local content experiences are scattered and there is no solid evidence base of which strategies produce better outcomes. For instance, nothing is known about whether prioritizing national industry participation actually generates more skills and employment, or why African countries with some experiences in local content have no national data aggregate and whether this is due to a lack of skills for documenting or measuring the outcomes of local content frameworks.

Furthermore, African experiences covered in the literature have not been put into context and thus lack adequate analysis relating to good practices and shortcomings or other factors that might explain the varied nature of local content outcomes.

The danger of vulnerability to business cycles:

28 Global Partnership for Financial Inclusion and International Finance Corporation (2012). Innovative agricultural SME finance models. 29 Wamono, R.N., Kikabi, P., and Mugisha, J. (July 2012). Constraints and opportunities for SMEs investment in Uganda’s oil and gas sector. ICBE-RF Research Report, vol. 34, issue 12. 30 Ibid. 31 USAID (2012). Mozambique business linkages review.

K-EXPRO 9

o SMEs whose sole or major client is an extractive company are vulnerable to that client’s business cycles, and there may be little in the way of opportunities for diversification.

o This issue is compounded when the extractive project is in a remote location and is the ‘only game in town’; underlying demand is set by a single source.

o Oil, gas and mining business cycles typically go from boom to bust over several years, and some cycles can last for decades. The competition for resources, such as water, electricity and land, can also reduce opportunities for local content.

o The resulting impacts on employment, income and investments in local businesses can have devastating effects on communities heavily dependent on the industry.

o Those in remote, inaccessible areas could be especially hurt. 32

Setting inappropriate, unreachable targets for local content can encourage perverse behavior, presenting governance risks. One example of this is “fronting” in which companies are established with local ownership or a local address, but the decision-making and benefits are held by individuals who are not targeted beneficiaries of the local procurement policy. 33

3.3 Lessons from other programs

From literature and expert opinions are distilled the following lessons for developing viable, competitive, future-oriented SME activity in the oil and gas value chain:

Lack of evidence-based practice Interventions that target local content development through SME support have been very scattered, and there is no evidence of which interventions produce better outcomes. Interventions are highly context-specific.

Long term, iterative process Local content development through the development of SME activity is a long term, non-linear, iterative process in which all relevant stakeholders should be involved. The process of setting up a supporting model should be open, monitored and regularly and honestly evaluated.

Understanding is key Local businesses need to understand how to do business with firms in the extractive industries; the extractive industry needs to understand the level of development of local SMEs, including possible flexibility in standards.

Specificity versus general development: a trade-off More specific local content initiatives tend to produce better outcomes. However, specific interventions (e.g. limiting investment only to those SMEs that have a high chance of entering oil and gas supply chains) still need to be viable and if the local context is not ready in terms of capacities and development, more integral development should be considered. Such as engaging the entire local economic community by funding bottom-of-the-pyramid SMEs.

Flexibility is necessary Following the point above, flexibility to local context is key. Adaptable, tailor-made initiatives that truly suit local context may not be ideal for the oil and gas supply chain in the first place, but are a viable investment which can be built upon from that moment, to be able to contribute to a thriving local economy and to serve the oil and gas supply chain on the longer term. Doing so, it is key to gain support of the local community, and generate active commitment to participation in a supporting model.

Sequence: capacity is fundamental

32 Esteves, A.M., Coyne, B., and Moreno, A. (July 2013). Local content initiatives: enhancing the subnational benefits of the oil, gas and mining sectors. Natural Resource Governance Institute. 33 Ibid.

K-EXPRO 10

However, from the majority of interventions and local practices known, it has become clear that a sound base of capacity at local SMEs is key to any type of growth and further alignment to the oil and gas supply chain. Solid SME capacity is a pre-condition to any further investment and hence should be the first investment. The fundamentals for sustainable business development must be in place. In addition, it must not be underestimated that access to finance is generally the most complex step within the interventions possible to support SMEs, especially in challenging regions. The pyramid-shaped figure presented shows the typical, sequential “building blocks” for SME development.34

4 Applying these insights to Turkana

4.1 The Turkana Region

The Turkana region is a particularly challenging environment for developing SME activity, in particular in relation to oil and gas. The Turkana region can be characterized as distant, both culturally, economically and geographically from Nairobi, and the infrastructure is highly underdeveloped. According to many people we spoke to for this project the repeated statements were that the region has been marginalized since Kenya’s independence and the national government is distrusted. Similarly, initiatives from outside the region and abroad are received with deep skepticism. These are all factors significantly constraining the potential of SME development in Turkana. SME business activity is currently mainly focused on the following sectors: 1. Livestock: the primary economic activity in Turkana. 2. Trade and brokerage: mostly aligned with livestock and other agricultural activity. 3. Transportation: focused on secure transport of people and goods, relatively well development

in the context of underdeveloped infrastructure. 4. Construction and civil works: large projects initiated to improve underdeveloped infrastructure. 5. Hospitality: currently small, but growing from extractive industry development. There is a multitude of factors limiting SMEs but the main ones comprise:

Business skills Widespread brokerage activities do not create value from within Turkana, and business skills of citizens are very limited: this reflects in basic problems such as uncompetitive pricing and many information asymmetries.

Access to finance The understanding of the role of finance and financial services is limited, and so is actual access to finance due to collateral demands from lenders. Financial service providers require collateral in the form of title deeds and other conventional security that is often not available. In addition,

34 International Finance Cooperation (2011). SMEs. Telling our story, vol. 5, issue 1.

K-EXPRO 11

fluctuations in demand require access to financial services for SMEs to fund their varying working capital requirements.

Regional insecurity Turkana faces major security issues, with regular raids and armed groups present across the county.

4.2 Critical success factors for local content development in Turkana

As noted, there is no blueprint for developing a successful model for local SME support in challenging regions aligned with the oil and gas value chain. However, experiences from other supporting models in similar context so far do provide interesting insights when reflected upon in light of the distinctive context of the Turkana region. These insights provide relevant pointers for the characteristics of a model that can effectively contribute to SME development in the Turkana region. In determining a model that is able to effectively contribute to SME development in Turkana stakeholders should consider:

1. The need for a highly local, yet pragmatic approach

The distinctive cultural profile of the Turkana region is characterized by skepticism towards both the government and foreign initiatives. This skepticism is being fed by the promise that is presented by the discovery of oil. Informal, tribal structures impede the formation of formal businesses and hence participation in models which support SME development. In addition, the underdeveloped infrastructure limits the development of more SME activity. Yet, specificity and commitment are two important factors contributing to the success of these models. Hence, the Turkana context requires a thorough understanding prior to implementing particular supporting models. Relevant individuals and organizations in the region should be involved closely as it may increase the commitment of the local community.

2. The need for a focus on true value creation, within an integrated and flexible approach

Currently, most business activity in Turkana is based on brokerage, instead of true value creation. The contribution of brokerage activities to inclusive local content development is marginal, because the added value of brokerage activities is very small.

Therefore, in addition to the need for specific, tailored support, it is key that the focus of supporting models is on true value creation. True value creation, also in light of the necessary commitment of the local population, can only be achieved by applying an approach that is as integrated as possible, involving the local community. In an underdeveloped area such as Turkana, both the need and the window of opportunity involves an entire community.

True value creation in Turkana is only feasible when flexibility is a key component of the supporting model. First, because of the vulnerable context, adaptability is required in order to be able to achieve any result. Second, it is known that fluctuations in demand are the norm in Turkana. Hence, support focused on both capacity building and finance should try to address these fluctuations.

3. The need for a strategic and aligned approach

There is much attention on the Turkana region from both private and non-governmental organizations. The risk of a gap in business development continuity and complementarity is high when investment funds are not aligned with capacity building programs. On top of that, citizens

K-EXPRO 12

remain wary of these outside initiatives. This calls for a supporting model which is aligned with other initiatives in the region, which enables knowledge-sharing, complementarity and efficiency.

4. The need for early involvement of the demand side and alignment with capacity

As mentioned throughout this paper, SME activity in Turkana has been very limited up to this point in time. Next to that, procurement by oil companies has so far been constructed in a way that gives little trust to financiers nor SMEs. Together with the demand side, opportunities for aligning procurement with domestic capacity as much as possible and organizing procurement in a transparent, facilitating way, should be explored.

4.3 Recommendations

In conclusion, a model for supporting local SMEs in Turkana should be a combination of both seed capital and capacity building as it most closely suits both the needs of the Turkana region and the possibilities of K-EXPRO in terms of:

Strategic alignment with industry;

Local commitment;

Clear ‘additionality’;

Flexibility;

Specificity; and

Integration.

K-EXPRO 13

Annex: list of references

Advocates Coalition for Development and Environment Uganda (2016). Local content

frameworks in the African oil and gas sector: lessons from Angola and Chad. ELLA Regional

Evidence Papers. Retrieved from http://ella.practicalaction.org/wp-

content/uploads/2016/07/REP-ACODE-Local-Content-Frameworks-in-the-African-Oil-and-

Gas.pdf

Centro de Apoio Empresarial [website]. Retrieved from http://caeangola.com/en/home-ing

Chevron (2010). Angola partnership initiative: a case study. Retrieved from

http://www.chevroninangola.com/documents/pdf/CABGOC_API_Reprt_ENG_v15.pdf

DAI (2017). Ghana - Western Region Coastal Foundation. Retrieved from

https://www.dai.com/our-work/projects/ghana-western-region-coastal-foundation-wcrf

DevEx (2010). Angola Partnership Initiative (API). Retrieved from

https://www.devex.com/impact/partnerships/angola-partnership-initiative-api-431

Enterprise Development Centre [website]. Retrieved from http://www.edcghana.org/index/about

Esteves, A.M., Coyne, B., and Moreno, A. (July 2013). Local content initiatives: enhancing the

subnational benefits of the oil, gas and mining sectors. Natural Resource Governance Institute.

Retrieved from

https://resourcegovernance.org/sites/default/files/Sub_Enhance_Benefits_20151125.pdf

Fantamady Kante, C. and Mohrmann, B. – International Finance Corporation (2009). Linkages

highlights: the Chad SME linkages program. Retrieved from https://commdev.org/wp-

content/uploads/2015/05/Chad-Linkages-Highlights-dec2009.pdf

Global Partnership for Financial Inclusion and International Finance Corporation (2012).

Innovative agricultural SME finance models. Retrieved from

https://www.gpfi.org/sites/default/files/documents/G20%20Innovative%20Agricultural%20SME

%20Finance%20Models.pdf

GroFin (2016). Leading to impact: annual report. Retrieved from

http://gfazustore.blob.core.windows.net/assets/optimised.pdf?utm_source=Annual%20Report%

202016andutm_medium=Email_Investorsandutm_campaign=annual_report_2016

Hsu, K. (March 2015). Extractives industry study in East Africa. Technoserve. Available upon

request.

International Finance Cooperation (2011). SMEs. Telling our story, vol. 5, issue 1. Retrieved

from

http://www.ifc.org/wps/wcm/connect/409734804c561178926edaf12db12449/TOS_SME.pdf?M

OD=AJPERES

International Finance Corporation (2012). Africa – the power of the private sector. Telling our

story, vol. 6, issue 4. Retrieved from

https://www.ifc.org/wps/wcm/connect/832f31004b1f9746a7a6ef08d0338960/TOSAfrica.pdf?M

OD=AJPERES

K-EXPRO 14

Mozal Aluminium and International Finance Corporation (2008). Developing SMEs through

business linkages. Retrieved from https://www.enterprise-development.org/wp-

content/uploads/Developing_SMEs_through_Business_Linkages.pdf

Odon, A. (July 2015). Why local content in Africa’s extractive sector won’t work without home

grown human capital. Retrieved from http://theconversation.com/why-local-content-in-africas-

extractive-sector-wont-work-without-home-grown-human-capital-45133

Oman National Company for Projects and Management (2014). SME development fund

prospectus. Retrieved from http://ncpmoman.com/images/NCPM.pdf

Oyewole, B. (2017). UNCTAD Project 1415P: Strengthening development linkages from the

mineral resource sector in ECCAS countries. Presented on United Nations Conference on

Trade and Development, February 15-18, 2017, Malabo, Equatorial Guinea. Retrieved from

http://unctad.org/meetings/es/Presentation/UNCTAD_Malabo_Babafemi_Oyewole_feb2017.pdf

PNG LNG and Exxon Mobil (2016). ExxonMobil PNG and IBBM Enterprise Centre to develop

capacities of more SMEs in PNG. Retrieved from https://pnglng.com/Newsroom/Media-

Release/ExxonMobil-PNG-and-IBBM-Enterprise-Centre-to-devel

PYXERA Global (2015). Ghana supply chain development program. Retrieved from

https://www.pyxeraglobal.org/wp-content/uploads/2016/01/SCD-Program-One-Pager-201506-

v.5.pdf

Shell Foundation (2016). Sustainable job creation. Retrieved from

http://www.shellfoundation.org/Our-Focus/Sustainable-Job-Creation

SMEF Oman (2016). The four point plan. Retrieved from http://smefoman.com/forpoints.html

USAID (2012). Mozambique business linkages review. Retrieved from http://www.speed-

program.com/wp-content/uploads/2012/11/2012-SPEED-REPORT-MOZLINKAGES-REVIEW-

EN.pdf

Vanguard Nigeria (2017). NCDMB to generate ¤ 200 m for Nigerian Content Fund. Retrieved

from https://www.vanguardngr.com/2017/07/ncdmb-generate-200m-nigerian-content-fund/

Wamono, R.N., Kikabi, P., and Mugisha, J. (July 2012). Constraints and opportunities for SMEs

investment in Uganda’s oil and gas sector. ICBE-RF Research Report, vol. 34, issue 12.

Retrieved from https://www.africaportal.org/publications/constraints-and-opportunities-for-

small-and-medium-sized-enterprises-in-ugandas-oil-and-gas-sector/

Weston Oil and Gas Fund [website]. Retrieved from

http://wogf.westoncapitalgroup.com/downloads/

World Bank Group (March 2016). Maximizing domestic value added in the oil and gas industry

sharing lessons learned through public private dialogue in Tanzania. Retrieved from

http://unmig.mise.gov.it/unmig/internazionale/connex/20160404-Local-Content-TZ.pdf

World Bank and International Bank for Reconstruction and Development (2016). Republic of

Uganda: leveraging oil and gas industry for the development of a competitive private sector in

Uganda. Retrieved from

http://documents.worldbank.org/curated/en/521361468302082824/pdf/ACS125280REVIS0itive

0Private0Sector.pdf