One Company Town Rehabilitation: Development Through Private Sector-Led Growth

1
One Company Town RehabilitationDevelopment
Through Private Sector-Led Growth
One Company Town RehabilitationDevelopment
Through Private Sector-Led Growth

• Khaled F. Sherif
• ECSPF
• February 9, 2004

2
The One Company Town Model

• A One Company Town is a town or region whose
  economic and social well-being is dependent on a
  single industry and/or dominant enterprise.
  These mostly came to be as a result of the
  national development plans of the 1960s
• Their emergence stems from governments making
  major investments in one region for the purposes
  of transforming it into the center (or hub) for
  a particular industry
• One, or many, state-owned enterprise would be at
  the focus of the towns development

3
The One Company Town Model

• Typically, one company towns have been developed
  to
• Undertake an opportunity for growth within a
  resource-rich, previously-undeveloped region or
• Diverge migration directed at major urban centers
  by
• Building towns and regions
• Generating industrial employment within these
  towns and regions thereby bringing in income to
  the region
• Encouraging population resettlement into these
  new industrial areas

4
The One Company Town Model
5
The One Company Town Model
An industrial initiative (e.g. mining,
cementetc.) is initiated This is generally
Government-led, in the form of a State-Owned
Enterprise
6
The One Company Town Model
The regions infrastructure is built-up to
specifically support the development initiative
7
The One Company Town Model
Numerous spin-off businesses are conceived to
support the focal industry
8
What Happens Next?

• Although these enterprises are often economically
  prosperous, this is often short-lived because
• The towns natural resources are scarce, and
  begin to run out or
• External competitive forces significantly impact
  the competitiveness of the industrys output,
  making it necessary to cease operations, or
  provoking the government to intervene by offering
  subsidies to support the industrys sustainability

9
What Happens Next?

• The industrys disintegration leads to
• Widespread unemployment leaving behind a
  highly-specialized workforce whose skills are
  non-transferable
• Decline (and often failure) of spin-off
  enterprises
• Urban decay
• Environmental decay
• Widespread poverty

10
Addressing Regional Decline

• Historically, government response has been
  reverting to privatizing the the state-owned
  enterprise
• This approach has often been unsuccessful because
  those companies which have been privatized have
  in many cases proved to be unprofitable (and
  therefore unsustainable)
• Many reasons have contributed to their inability
  to successfully privatize these companies,
  including
• Operational inefficiencies
• Diseconomies of scale
• Poor state of the town
• Scarcity of resources
• Lack of overall product competitiveness
  (especially in instances where the product was
  previously subsidized)

11
Addressing Regional Decline

• In the instances where there have been no buyers,
  the company is often liquidated, leading to an
  increase in poverty within the region

Privatization
Liquidation
GovernmentRepurchase
Further Regional Decline
Subsidizing of SOE
12
One Company Town RehabilitationDevelopment
Through Private Sector-Led Growth
Bank Strategy for Rehabilitation

• Khaled F. Sherif
• ECSPF
• February 9, 2004

13
Bank Strategy for Rehabilitation

• The Bank strategy focuses on fostering
  private-sector led growth, through a series of
  key interventions, to rejuvenate the region and
  reestablish a sustainable economic and social
  framework
• The strategy targets both
• Regions which still maintain an uncompetitive,
  heavily subsidized state-owned enterprise which
  supports the inhabitants by generating artificial
  employment
• Regions in which the focal enterprise has been
  liquidated, and whose inhabitants are unemployed,
  and living in severe poverty
• These towns and regions are abundant in number,
  and are present throughout the ECA region

14
Bank Strategy for Rehabilitation

• The Bank would undertake a four-pronged approach
  that focuses on

EnvironmentalRestoration
Private sector-led growth
Education
Infrastructure
15
Private Sector-Led Growth

• Private sector development initiatives will focus
  on implementing a Push/Pull mechanism by
• Emphasizing local SME development (Push)
• Building a business environment which encourages
  domestic and foreign direct investment (Pull)

FDI
Business Environment Strengthening
SME Development
16
Private Sector-Led Growth Strategy
Donors EU Phare / IBRD TA / IFC Trust Funds / Local Government (in-kind)
Capacity Building
Enterprise Cycle
Financing
Donors EU Phare TA Grants / IBRD Loans / IFC (Equity, Mezzanine, Debt)
Hands-on training Prototype business
ideas Advisory services for business planning
Business Incubators Advisory services/More
specialized training Office space and services
Specialized training Advisory services Business
Linkages
Growth
Development
Startup
Pre-start
Startup Equity Fund

Growth Equity Fund
Bond Bank
Business Enabling Environment
17
PSD Initial Measures

• Facilitation of non-core activity spin-offs,
  where possible (particularly in the case of
  industrial companies)
• Private provision of certain municipal services,
  e.g. housing maintenance, trash and snow removal,
  etc.
• Requirement for local subcontracting and/or local
  hiring commitment of infrastructure contractors
•  

18
PSD Creating a Business Enabling Environment 

• Radical simplification of business entry and
  operations (e.g., easy registration, licensing,
  land and premises allocation)
• Tax incentives for local start-ups and investors
  re-locating their business
• Establishment and capacity building of Local
  Development Agency (one-stop-shop for business
  purposes)
• Encouragement and support for establishment of
  local business association
•  

19
PSD Building Local Capacity for Entrepreneurship
And Facilitating Job Opportunities

• Practical hands-on training on basics of
  entrepreneurship, structured in modules that
  reflect business planning process
• Exposure to prototype business ideas
• Establishment of a business incubator aimed at
  nourishing start ups and providing training and
  advisory services for a broader business
  community
• Facilitation of business linkages / clusters
  development

20
One Company Town RehabilitationDevelopment
Through Private Sector-Led Growth
Private Sector Development Three-Phased
Approach for Facilitation of Access to Financing

• Khaled F. Sherif
• ECSPF
• February 9, 2004

21
Phase I Pre-start and Startup

• Facilitation of microlending development
  incentives for reputable MFIs or microfinance
  banks to open a branch in the town
• Facilitation of microleasing for financing of
  equipment purchase (acquired asset will be used
  as a collateral)
• Offering the opportunity for the receipt of
  lump-sum unemployment benefits which can be used
  as a start up capital

22
Phase II Development

• Financing needs
• Equity
• Occasional debt
• Financing vehicle
• Early Stage Private Equity Fund
• Fund Characteristics
• Closed-end
• Target IRR 25
• Exit 3-5 years
• Professional venture capital fund manager
• Local project sponsor share ownership scheme

23
Phase II Fund Capital Structure

• Liabilities
• Equity
• Private sponsor and institutional investors
  (domestic, foreign)
• IFIs
• EU Phare Grant (local project sponsors ownership
  scheme)
• Leverage
• Mezzanine debt IFIs
• Senior debt IFIs
• Assets
• Controlling equity shares in local start-ups (up
  to 100)
• Occasional debt (max 15 of fund portfolio)

24
Phase II Local Sponsors Ownership Scheme

Equity Investments from EU Phare Grant in
Start-ups
Shares for Local Project Sponsors
25
Phase III Growth

• Financing needs
• Debt
• Some equity
• Financing vehicles
• Second Stage Private Equity Fund
• Bond Bank backed by Partial Credit Guarantee
  Facility with IFI

26
Phase III Second Stage Private Equity Fund

• Investment Strategy
• Buy-out from Early Stage Fund
• Mixed portfolio
• Investments in listed securities
• Long-term equity positions in local corporations
  (10 years )
• Exit through sales to strategic investors or IPOs
• Fund Characteristics
• Open-end
• Target IRR 15
• Professional second-stage fund manager

27
Phase III Fund Capital Structure

• Liabilities
• Equity
• Private sponsor and institutional investors
  (domestic, foreign)
• IFIs
• Leverage
• Mezzanine debt IFIs, institutional investors
• Senior debt IFIs, institutional investors
• Assets
• Listed securities (70)
• Controlling equity shares in local corporations
  (30)

28
Phase III Bond Bank

• Buys bonds issued by local corporations
• Pools local corporation bonds and sells
  asset-backed securities to institutional
  investors through Special Purpose Vehicle (SPV)
• SPV bonds backed by Partial Credit Guarantee
  Facility with IFI

29
Phase III Partial Credit Guarantee Facility
30
Strategic Benefits

• Bridge between experienced venture capital fund
  manager and local project sponsors
• Interest of local project sponsors in uplift
• Bridge between institutional investors (pension
  funds, insurance, mutual funds) and local
  start-ups
• Lowering the cost of borrowing for growing
  companies in the region

31
Education Investments in Human Capital

• The educational component involves two key areas
• Education and
• Retraining
• The strategy will emphasize implementing
  well-conceived, government-led reforms and
  policies to support the establishment of a sound
  educational system for the younger generation

32
Education for the Future

• An emphasis would be made on general education,
  and possibly life-long learning
• In addition to this, strengthening of
  institutions outside the normal education system
  would target
• Technology centers and
• Knowledge sharing among business associations
• Education through retraining of the highly
  specialized workforce (or the providing them with
  specialized training in an additional field which
  has potential for growth)

33
Infrastructure

• Improvements in infrastructure will contribute
  meaningfully to long-term economic growth by
• easing physical access to the region
• ensuring quality utilities and establishment
• opening the economy to outside regions to
  facilitate trade
• improving livability through improved public
  services, transportation and housing

34
Infrastructure

• The approach should be oriented towards
  establishing a development strategy that supports
  an improved infrastructure, and not merely to the
  restoration of the infrastructure to its previous
  state
• An analysis would be made of the most pressing
  needs within each community and the development
  strategy would be completed accordingly

35
Environmental Restoration

• In the majority of instances, the natural
  environment within the targeted regions is
  severely damaged as a result of over-exploitation
  of natural resources and excessive pollution
  arising from industrialization
• Reclamation and rehabilitation needs would be
  prioritized and corrective investments made

36
Environmental Restoration

• The Bank could assist local authorities and lead
  development agencies through technical needs
  assessments and prioritizations as well as
  through co-financing of environmental clean-up
  efforts

37
Key Elements of the Bank Strategy
Private Sector-Led Growth
Education and Retraining
One-Company TownRehabilitation
EnvironmentalRestoration
InfrastructureRehabilitation
38
One Company Town RehabilitationDevelopment
Through Private Sector-Led Growth
The One Company Town Model- Pilot ProjectThe
Jiu Valley Region, Romania

• Khaled F. Sherif
• ECSPF
• February 9, 2004

39
The Case for Jiu Valley

• The Jiu Valley Region (JVR) has long-operated
  under a mono-industrial structure, with the
  coal-mining industry driving the regions
  economic development
• In spite of its significant decline, the industry
  continues to account for
• Over half of the total wages and
• One third of the total value-added creation in
  the region
• In total, over three quarters of the regions
  population is financially dependent on the sector

40
The Case for Jiu Valley Decline of the CNH

• The National Hard Coal Company (CNH), operating
  out of Jiu Valley, maintains a near monopoly of
  the Romanian domestic hard coal market, with a
  market share of 95
• The CNHs poor productivity in recent years has
  led to decline in profitability and
  competitiveness of the firm and industry at large
• The regions decline has been compounded by the
  fact that the reliance on the CNH has left
• the business environment, infrastructure and
  culture underdeveloped
• management and financial resources scarce

41
Government Intervention

• The regions substantial decline led authorities
  to implement unsustainable policy interventions,
  injecting resources into the area, which
  effectively maintained an unprofitable industry
• In turn, this has created an environment of
• Higher-than-average levels of pay for those
  participating in the industry
• Dependent behavior of the community and
  supporting businesses as a result of ineffective
  policies
• Lack of competitive pressure, stemming from a
  reliance on Government subsidies
• Elimination of local community involvement as a
  result of the paternalistic approach which has
  bee undertaken
• These factors, combined with falsely-elevated
  wage rates and the regions geographic
  constraints, new industries and educational and
  business associations to support them have failed
  to emerge.

42
The Case for Jiu Valley Current Situation

• In addition to the severe state of economic
  affairs and widespread poverty within the region
  has been accompanied by a substantial decline and
  deterioration in
• The Local Private Sector
• The Financing Market
• The Natural Environment
• Infrastructure
• The Business Environment
• Labor Market Resources
• The Housing Sector
• This has been of great concern to local and
  international policy makers and is compounded by
  the mining regions high political visibility

43
Strategy for Bank Intervention in the Region
Bank Objectives
Identifying and implementing key reform issues
for the development of a long-term sustainable
framework for efficient policy formulation
Establishing and implementing a comprehensive
framework for long-term sustainable growth in
the region
Bank Role
Aiding in the design of a detailed development
strategy and accompanying action plans in line
with the Governments broader national strategic
aims
Co-financing elements of program and attracting
additional resources to support the project
objectives
Providing technical assistance and the employment
of best practices to facilitate capacity building
and plan execution in the region
Closely monitoring implementation to ensure
successful achievement of development aims and to
lay the foundation for implementing similar
project in other One Company Town Regions
throughout ECA
44
World Bank Development Strategy

• The Bank will undertake a four-pronged approach,
  grounded in core objectives to remove barriers to
  growth and establish, or re-establish,
  institutions and resources necessary for growth
• The strategy will incorporate the following
  components, which will take place simultaneously
  through a staged approach

Strengthening the Business Environment and Human
Capital
Restoration of the Natural Environment
Competitive Growth in New Industries
Reform of Public Sector Management
Investing in Infrastructure
45
World Bank Development Strategy

• Strengthening of the business environment to
• Endure the restructuring of the existing hard
  coal industry
• Identify and encourage growth among new
  industries
• Remove current barriers to entry for new firms
  and
• Mobilize human capital toward new industries
• Reform of public sector management to
• Ensure strong leadership for a complex,
  coordinated, multi-sector strategy
• Guide public relations to drive intra-regional
  support for development agenda and to improve
  image of Jiu Valley
• Improve spatial development and land use through
  effective urban planning and management and,
• Offer poverty alleviation and social assistance
  during time of significant transition

46
World Bank Development Strategy

• Restoration of the natural environment for
• Promotion of potential growth in tourism
• Limitation of liability to encourage investment
  by private enterprise and
• Improving the quality of life of people
• Investing in infrastructure to
• Foster the growth of new industries
• Open the JVR to outside regions and economies
• Improve livability and
• Demonstrate immediate improvements to bolster
  support for he development program

47
Key Elements of Bank Strategy

• Involvement of multiple sector units in ECA
• Private and Financial Sector
• Infrastructure
• Environment
• Mining
• Human development
• Education
• Pursuing related TA assignments, cutting across
  various sectors, as opposed to a single complex
  programmatic operation
• Promoting private-public sector partnerships

48
Project Implementation Priorities
Communicating locally, regionally, and
internationally, challenges and plans for Jiu
Valley regional development and presenting Jiu
Valley as a priority for EU regional funds
Building and improving the necessary
infrastructure
Implementing participatory approaches to define
and shape the development plan and future of the
valley
Accelerating reform of the hard coal industry
Leveraging more advanced areas in the country
(e.g., Cluj or Timisoara), and communities of
origination of Jiu Valley residents
Identifying champion industries to enhance the
prospects of, and accelerate, strategic reforms
(e.g. tourism, IT)
49
Project Implementation Priorities
Training local government, business, academia and
the citizenry for purposes of community building,
skill transfer, and lowering dependency levels
Providing incentives to youth to enhance their
educational skills, and providing linkages and
opportunities for application of such skills
within Jiu Valley region
Employing active labor schemes toward the
refurbishment of housing and the local
infrastructure
Providing social services, (e.g., health,
pension, and heating subsidies), but with direct
line of support to local institutions, as opposed
to redistribution by CNH
Resolving land ownership issues following
original expropriation
Reclaiming environmentally damaged areas released
by the mine for purposes of advancing tourism and
other champion industries
50
Critical Success Factors

• Design and ownership of the development strategy,
  as well leadership responsibility, must reside
  with regional authorities and designated lead
  development agencies
• Coordination and cooperation of Government,
  business houses, educational institutions, civil
  society and donor agencies

51
Critical Success Factors

Effective Management and Coordination
Ensuring that the Program is Sustainable and
Enduring
Establishing a Highly Visible Program
Advancing Small Success Programs
Ensuring Consistency of Actions and Messages
Preventing the Disruption of Development Efforts
Minimizing Social Discontent