Tuesday, May 27, 2008

Anfi Owosinu Ise kekeke

Enterprising Communities 3: Investing in Informal Sector Enterprises


This is the 3rd (ikeeta) of the Enterprising Communities series to be published by ALARAN DEVELOPMENT ENTERRISES. This series aims to assist African enterpreneurs in building business enterprises based on innovations in science, technology, engineering and medicine.

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ENTERPRISE COMMUNITY: A STRUCTURED APPROACH TO INFORMAL SECTOR INVESTMENT

Introduction:
Attempts to build stock exchanges, venture capital funds, and other 'sophisticated' investment structures are unlikely to mobilise the economies of less developed countries, until the informal business sector is empowered with professional business and financial management. An enterprise community reduces the risk of participating in informal businesses and offers a viable mechanism for funding and operating much-needed utility infrastructure.


Article:
The informal sector accounts for some 70pc – 90pc of productive capability in many national economies. Yet it can be difficult for informal sector enterprises [ISE] to access outside investment funds or management resources:

# Informality: ISE are not registered with the relevant jurispudence as limited liability companies. There is no separation between enterprise assets and personal assets. The persons who own or control an ISE are directly and jointly held responsible for its liabilities. The lack of separation between ownership and control makes it difficult for outside investors to sanction the activities of owner-managers.

# Restricted ownership: Many ISE are funded with investment participations of five or fewer persons, usually members of same family. The ability to raise investment is restricted to the financial means of family members and to internally generated revenues.

# Restricted professional management: It is difficult for ISE to source a full complement of professional management from the pool of owner-managers. Professional managers work best in enterprises with discernible career paths, meritocratic compensation systems, and support for continuous development of technical capabilities.

# Limited accountability: Many ISE lack sufficient organisational transparency. Where produced, financial records are used primarily as planning tools, rather than for control purposes. Financial accountability is mainly limited to internal stake-holders, who are unlikely to be self-censoring.

The predominance of ISE presents a problem for the provision of utility infrastructure in social economies that do are unable to support the hub fund investment model (see below). In particular, economies of many so-called 'less developing countries' may lack professional business or fund management, formal funds or enterprises, and sophisticated investors.

The Enterprise Community structure

An Enterprise Community is a structure for coordinating participation of interested persons and ISE in the business of infrastructure provision. Enterprise communities are not investment funds. Rather, an enterprise community is an association of ISE that contribute operational expertise to implementation of infrastructure projects. A technically competent enterprise sponsors an enterprise community principally as a means of subcontracting specific project activities to ISE with relevant expertise. The technical sponsor supplies professional management resources. In all other aspects, an enterprise community is organised similarly to the classic special project entity with its own revenues, liabilities and assets.

Funding

The technical sponsor owns the ordinary equity in an enterprise community. However, control of ordinary equity is exercised jointly, via holdings of one equal voting right each, by all the involved ISE, the technical sponsor, and any outside equity investors.

An enterprise community obtains funding by issue of equity or loan investment participations, and by customer prepayment financing. Participations are marketed to and held, under pre-agreed conditions, by the involved ISE, the technical sponsor, and other sophisticated persons such as financial services businesses. Participations carry no voting rights, but provide holders with distribution rights in profits or assets of the enterprise community.

The combination of voting rights and investment participation gives ISE and outside investors in enterprise communities a very high degree of public accountability, democratic control, and risk management flexibility. Depending on specifics of the enterprise community agreement, all holders of voting rights decide collectively for each proposed utility infrastructure: whether a project should be undertaken; which ISE should be involved in specific project tasks; the infrastructure usage and pricing levels; and what proportion of profits should be distributed or retained as reserves. The technical sponsor then coordinates the implementation process.

Even as they remain voting members of an enterprise community, ISE and investors have flexibility of deciding which infrastructure projects to contribute to. This is unlike HFIS that force investors to participate in any undertakings chosen by the fund manager, and force portfolio companies to accept money from any investor who happens to contribute to the managed fund.

Regulation and Compliance
An enterprise community is a wholly owned business division or subsidiary of its technical sponsor. The business of the technical sponsor is provision of infrastructure solutions, services or manufactured goods. The purpose of an enterprise community is sharing of business risks. The risks and rewards are undertaken collectively by all participants. Under pre-agreed terms, the entire enterprise community shares control of revenues, liabilities and assets. For these reasons, there is no need for external regulation of enterprise communities.

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The Hub Fund Investment structure

The hub fund investment structure [HFIS] centres around a collective investment fund. The fund has a manager, and a group of highly sophisticated investors who contribute money to the fund. The investors are required to leave their money in the fund under pre-agreed conditions. They are strongly informed of risk factors that may result in loss of all their invested funds and receive no guarantee of obtaining sufficient financial returns on investment. The money from different investors are pooled into a number of discrete funds, and professional fund managers invest the funds into a number of professionally managed portfolio enterprises. Depending on its mandate, the fund invests in ownership of entire-equity (the private equity model) or medium-long term ownership of partial equity (the investment fund model) or short-term trading of securities in quoted entities (the arbitrage fund model) or in loan issuances (the debt investment fund).

Customer relationship management is the responsibility of individual enterprises in which the fund has invested. The fund, itself, has little or no direct relationship with end-user customers. Control over financial resources of funds is heavily centralised with the manager. Investors, customers and businesses have little control over the deployment of fund money, even though some investors may be appointed as non-executive officers to oversee fund activities. Conversely, the fund manager has strong impact on deployment of fund monies.

HFIS are generally regulated as financial services providers. They need to be regulated because of the many degrees in separation of ownership and control involved in this highly differentiated business model. The funds are owned by investors but controlled by professional fund managers who receive compensation in performance bonuses and in percentages of funds under management.

The portfolio companies are owned by their shareholders, including HFIS, and controlled by professional business managers, who receive compensation in performance bonuses and in salaries.

Government-oriented regulation is imposed in order to protect the interests of investors and shareholders. These providers of funds are not always business or fund managers, and may lack ability to measure the performance or technical competency of either set of professional managers.

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Benefits to Informal Sector Enterprises

The enterprise community structure yields significant benefits to ISE businesses. Associating together increases the scale and scope of markets, funding, and professional skills available to each individual ISE. Increased integration and accountability that arises from project involvement also exposes ISE to the benefits of having professional management, clearly defined business models, and competitive trading practises. Syndicated funding or expertise makes larger utility infrastructure affordable close to the region where ISE are already based. In turn, affordable access to utility infrastructure can help make ISE businesses more cost-effective and competitive.


Remi-Niyi Alaran writes on enterprise and social capital.
ALARAN DEVELOPMENT ENTERPRISES. Enterprising Communities.

Copyright (c) ALARAN DEVELOPMENT ENTERPRISES, 2004
You may copy, transmit, or otherwise use this document provided the copyright notice is attached

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