Strengthening Investment Promotion Agencies: The Role Of The Private Sector

Strengthening Investment Promotion Agencies: The Role of the Private Sector by the Foreign Investment Advisory Service (FIAS) March 1999

I.

Introduction

Recognizing the importance foreign direct investment (FDI) for a country’s industrial and economic growth, many governments around the world have established Investment Promotion Agencies (IPAs). Their fundamental purpose is to act in the national interest by helping to bring into the country needed capital, technology, advanced managerial skills, and access to international markets. IPAs are therefore expected to develop mechanisms designed to attract foreign investors and to facilitate their setting-up business in the country. But developing effective and efficient organizations that are capable of carrying out this vital public function in a sustained manner is anything but easy. One of the lessons of experience from countries that have successfully attracted large amounts of foreign investment is that, to be effective, investment promotion activities must maintain a high level of quality, and be conducted in a strategic manner over a sustained period. Further, since many of the activities related to investment promotion are high-cost activities, effective investment promotion agencies require significant levels of financial and other resources. For example, the preparation of promotion materials, international and electronic communication, and the organization of missions abroad are all expensive activities. Since investment promotion agencies often compete with the private sector to attract highly qualified, motivated and service-oriented staff, their employment costs tend to be higher than those of other governmental agencies. At the same time, the benefits of investment promotion activities are seldom seen in the short term, and a long-term commitment of resources is necessary. Access to the necessary financial resources frequently poses a problem for IPAs. At the outset, agencies in developing and transition economies are frequently supported by bilateral and multilateral donors. However, this type of funding is usually phased out after a few years. After that, IPAs often are not given adequate budgetary support from the central government. Besides general limitations on budget resources, governments often limit their contributions, because of a perceived lack of short-term success or because they take the existing effective performance for granted. Therefore, IPAs are often confronted with serious concerns regarding the sustainability of their organization and activities.

To reduce these budgetary pressures, IPAs often consider the involvement of the private sector as an additional or alternative source of funding. In some cases, governments themselves encourage their agencies to obtain more funding from the private sector to fill the gap left by declining donor and inadequate government support. As IPAs tend to develop increasingly close contact with private investors through their promotion activities, this seems to be a logical thing to do. For IPAs, however, seeking private funding poses the dilemma of whether they are providing a private or a public service. Moreover, they are unsure whether any of their services are sufficiently attractive for private investors to elicit their direct financial support. This note discusses the role of the private sector in the operation and especially in the funding of IPAs. It is based on the international experience of the Foreign Investment Advisory Service (FIAS) with IPAs worldwide. It tries to outline the role of the private sector in the operations of an IPA as well as the experiences made by individual IPAs with direct contributions from the private sector. II.

The Dual Role of an IPA

Conceptually, an IPA is established to serve the national interest and provide a public good. The ultimate goal of attracting foreign direct investment is to support the country’s economic development process by enlarging private sector activity, generating foreign exchange through incoming investments, enhancing trade flows, and providing additional business opportunities for domestic entrepreneurs. IPAs typically also have an important policy function. They suggest improvements in relevant policies, laws, procedures and institutions in order to improve the business environment for foreign and domestic investors alike. This implies that governments will always play the central role in supporting the establishment and operation of an IPA, independent of whether the agency manages also attract support from the private sector. At the operational level, however, an IPA also needs to provide valuable services directly to the private sector. In fact, to fulfill its function of attracting investment, an IPA needs to ensure that investors not only become interested, but that they also manage to actually set up their businesses and start operations. This poses a challenge especially for more mature IPAs. When trying to attract investors to the country, these agencies quickly find out that they have to go beyond the simple image building functions, designed to advertise the general attractiveness of the country as an investment location. General information on the relevant legislation, taxation, incentive schemes, or labor and product market conditions are standard requirements expected from any IPA. Depending on the particular needs of an investor, IPA staff might need to provide concrete services regarding project-specific tax and incentive issues, develop business contacts with relevant local suppliers or financial institutions, assist in site selection or visa and customs arrangements, down to providing advice on transportation requirements or schooling for expatriate children. Any of these issues, if not resolved satisfactorily, might result in an investor’s decision to locate his project in another country instead.

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Hence, in fulfilling its public sector role, it also provides valuable services to the private sector. In fact, for an IPA to be truly effective in attracting investors, it needs to develop a keen and detailed understanding of investor needs and specific market conditions in the various industries. This is also particularly relevant for an IPA’s policy function. Because of its awareness of the details of the investment decision process, the IPA becomes an invaluable source of information for the government. The agency should be the first to know when slow administrative procedures unduly delay the registration of a company, when delays in the connection to utility services jeopardize operation start-ups, or when specific legislation, tax regulations, or customs requirements result in investors turning away from the country. At the operational level, it therefore is not always easy to categorize a true IPA either as a public entity or a private service provider. In fact, the agency needs to be both, and its effectiveness depends on this double role. Only when an IPA is close to the government, with strong influence over the domestic policy environment, can it provide the required services to the foreign investors. And only because it works closely with these investors, can it attract FDI to the country as well as help the government to reform the policy environment in order to improve the business environment. On the other hand, an IPA would lose its effectiveness, should it get too close to either side. An IPA closely resembling a government agency will lose credibility, as investors will question the objectivity of the information and assistance provided. Similarly, a government will not take any policy feedback and reform initiatives seriously if it believes the IPA is acting as a representative of private investors only. Hence, at the operational level a truly effective IPA needs to occupy the middle ground between the private and the public sector in order to be able to assist both. III.

Involving the Private Sector in an IPA

Frequently, IPAs are established as public sector entities within the government with, at best, limited input by the private sector. They therefore tend to be particularly strong in providing general image-building functions, such as producing brochures, providing general statistics, and giving presentations. However, many of them find it difficult to help when approached by interested investors facing project-specific difficulties or problems. This is an indication that most IPAs have not yet managed to find an appropriate balance in their position relative to the private sector. In order to become more clientoriented with high-quality services needed by investors, such IPAs would be well-advised to develop closer working relationships with the private sector. Through such relationships IPAs can develop the necessary skills to provide investor-oriented services, as well as gauge the usefulness of their services as currently provided. Hence, developing a close working relationship with the private sector is essential for the effective operations of an IPA. One way of accomplishing such a strategic alliance is through the incorporation of senior representatives of the private sector on the Executive Board of an IPA. The 3

governance structure often excludes the private sector, with agencies either directly reporting to individual ministries or to an Executive Board consisting of various ministries and other public sector representatives. Hence, the experience with private sector involvement on IPA Boards is thin. An informal survey of the governance structure of 55 IPAs worldwide, where FIAS had practical experience, suggests that only about 13 percent have a board with private sector members. A more detailed survey of 25 IPAs in Central and Eastern Europe, conducted as background information for the 1997 Geneva Forum organized by FIAS and UNECE, revealed that six agencies had a governance structure including a joint public-private supervisory Board. Thus directly involving the private sector in the governance structure of promotion agencies is relatively rare. It can be useful, however, in order to formalize the agency’s dual role between the private and the public sector. Rather than simply proclaiming it as a working goal to establish closer relationships with the private sector in order to enhance an agency’s effectiveness, such an arrangement would institutionalize private sector participation in an IPA’s work. Second, the presence of private sector representatives in its supervisory body would provide an agency with immediate feedback regarding the effectiveness and usefulness of its work from the perspective of investors. It would also establish a direct flow of information, immediately alerting an agency of emerging difficulties and concerns. Thirdly, if appropriately used, the participation of the private sector can add to an agency’s perception by the government as a helpful and reliable source of information. The fact that an IPA is known to have a detailed understanding of the business environment from the perspective of private investors can add to its perceived objectivity and thus can enhance its impact on reform measures. Costa Rica’s Investment and Trade Development Board (CINDE), for example, exists as a private, non-profit organization, guided by an Executive Board that consists entirely of private sector representatives. Despite this private sector orientation, the agency generally has had very strong relationships with the government, and has been involved in a number of key policy reforms. But one of its strengths clearly lies in attracting foreign investors to the country. In 1997, for example, the agency managed to convince the US company Intel to establish a major production facility in Costa Rica despite strong competition from a number of other Latin American countries.1 As a key reason underlying this success, CINDE staff generally stress the flexibility and objectivity that the private status gives the agency: “It portrays us as an advisory body to the company wishing to invest, rather than an arm of the government. This has the important consequence of distancing us from any insinuation of ulterior motives and creating trust between ourselves and the investor.”2

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For more detail see “Attracting High Technology Investment: Intel’s Costa Rican Plant”, FIAS Occasional Paper 11, 1998.

2

CINDE’s Director of Investment Promotion in FIAS Newsletter FDINEWS, Vo.13.

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While there are many benefits, the participation of the private sector in an agency’s supervisory board also brings new challenges, and possibly new problems. Board members may be tempted to try to influence the day-to-day work of an agency in order to use it for their particular purposes. This already is often the case with pure public sector boards, where the dominant ministries sometimes use a strong “hands-on” approach in guiding the agency. Similarly, private sector board members might want to use their position to pursue their individual corporate concerns through the agency. Venezuela’s Council for Investment Promotion (CONAPRI), for example, has experienced such problems first-hand. The agency was founded in 1990 as a partnership between the private and the public sector. It currently has about 30 private companies as members to the agency, and an entirely private Executive Board consisting of 15 companies. On one occasion, the agency found itself under pressure to change its operations because of a conflict with the objectives and interests of one particular company. At one point, one Board member demanded that the agency suspend a particular promotion activity which was designed to attract more investment into the industry his company was active in. CONAPRI called for a Board meeting in which the members decided that the agency should continue its promotion activities. In response this particular company cancelled its membership and left CONAPRI. Such an abuse of a board member’s position can damage the agency’s reputation for objectivity and neutrality, severely limiting its capability of servicing both sides equally. To avoid such an outcome, the agency needs to make sure that its mandate is well defined through its statutes and founding documentation, and that all board members continuously have a clear understanding of the role of the agency. In the case of CONAPRI, the agency now tries to ensure a broad and balanced membership and board representation to avoid becoming dominated by specific private sector interests. IV.

The Private Sector as a Resource Provider for IPAs

The involvement of the private sector in an IPA’s activity does not necessarily have to end with a formal or informal inclusion in the agency’s executive boards. The direct contribution of financial and human resources also is a possibility, supporting individual activities and services, or the general business of the agency. This possibility certainly captures the attention of most IPAs who consistently feel the pressure of tied budgets and inadequate financial support from government and donor sources. The FIAS survey of Central and Eastern European IPAs showed that almost two-thirds of the reviewed agencies indicated that they would expect to receive at least part of their funding through the private sector in the future. In general, however, IPAs tend not to receive any significant financial support from the private sector. The Central and Eastern Europe survey revealed that only six of the 25 agencies included received any private sector support. Hence, while expectations might be high, the set of experiences is relatively limited. However, several agencies around the world have experimented with this concept. While some failed, others

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managed to finance a substantial part of their activities through the private sector. In general, support from the private sector can come in one of three forms: direct contributions to an agency’s capital base or budget, payment for specific services, or the provision of staff resources for the use by IPAs. IV.1

Direct Private Sector Contributions

The vast majority of IPAs in developing and transition countries receive their entire funding either through budgetary allocations directly from the government, or from bilateral and multilateral donors. Direct private sector involvement in the funding of an agency is rare. The main reason underlying this fact is that IPAs are typically set up to provide a public well, and they can therefore not be expected to operate at a financial profit. This basic fact makes it difficult to convince private firms to provide financial contributions. In developing countries, however, there is a particular role for IPAs that may be interesting to private firms and induce them even to contribute financially. The policy environment in these countries tends to be more volatile, with administrative and legal requirements changing more frequently, while governments tend to be more willing to undertake reforms in order to make the country more attractive for foreign investors. Hence, investors have the opportunity to play an active role in shaping their business environment, and the continued interaction with an IPA can prove most useful in shaping and dealing with the more frequent changes in the business environment. Under these circumstances, investors often find it particularly important to have a vehicle that can serve as an effective contact point with the government, allowing their concerns and opinions to be heard in an effective reform process. To have this opportunity might well be worth committing financial resources to the agency. In cases of IPAs, which have had experience with direct contributions from the private sector, investors typically form a club with membership fees, which are passed on to the agency to augment its annual budget. Besides large foreign investors, these clubs also tend to include larger domestic enterprises such as banks, which expect to benefit through increased business opportunities from successful investment promotion activities. In exchange, the investor club tends to receive a certain number of seats on the supervisory board, allowing it some control over the use of their funds and to influence the strategy and effectiveness of the agency. In the case of Venezuela’s CONAPRI, for example, the agency initially received half of its annual budget from the government, with the remainder coming from private companies. To become a member of the agency, companies were asked for a one-time contribution of $50,000 to the agency’s trust fund, followed by an annual $10,000 contribution to its budget. By 1999, the government’s share has fallen to 10 percent, with the majority of the budget being derived from these company contributions and the interest income from the trust fund.

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CONAPRI is unhappy with the low government contribution and wishes to increase it under the recently elected government. But the private sector contributions allowed it to survive tumultuous times. In 1994, a new and less investor-friendly government introduced a number of measures, which resulted in a massive deterioration of the business climate, including stringent foreign exchange controls. FDI inflows declined drastically and investor interest declined, also reflected in a drop of CONAPRI’s membership by a quarter. The agency responded by reducing its staff and re-orienting its activities to areas that most concerned investors, primarily policy reforms and serving investors already in the country. This allowed the agency to stay in place, and by end1999 it expects to increase its private sector membership to 34 companies. Colombia’s COINVERTIR pursued a similar strategy. The agency was established in 1992, following an initiative spearheaded by the country’s president who formed a committee consisting of the largest domestic and foreign companies active in the country to develop a strong investment promotion framework. As a result, 88 companies joined as members by agreeing to pay $2,000 per year over five years to support the agency’s budget. In exchange, the private sector received six of the 12 seats in the agency’s Executive Board evenly split between domestic and foreign companies. Over the same five-year period, the government promised to provide approximately US$3 million to COINVERTIR. However, budgetary pressures at the central government resulted in a shortfall. As the private membership payments did not contain an initial contribution to a trust fund as in the case of CONAPRI, the agency faced a serious financial crisis at the end of the five-year cycle, when private sector support stopped. The agency is now in the process of attracting new private sector members and hopes to convince the government to increase its annual contributions. Czechinvest in the Czech Republic has found a different way to obtain private sector contributions. The agency is run by a 12-member Steering Committee, which is dominated by public sector representatives, though representatives from large banks, industry associations, and the Chamber of Commerce also are represented. But affiliated to Czechinvest is an “Association of Foreign Direct Investment” which consists of about 30 Czech companies such as law firms, consulting groups, and engineering or construction companies. To become a member of this association, each company has to pay 75,000 korunas (approximately $2,200) per year. In exchange, Czechinvest provides foreign investors who require specific services with references from the memberlist of the association. While this amounts to only a minor contribution to the agency’s overall budget, it is usually sufficient to pay for its publications program. In addition, the agency benefits from the association as its members tend to assist Czechinvest free of charge in providing professional services to potential investors during the initial stages of the promotion efforts as well as by supporting the agency’s policy reform initiatives in the government. It is important to recognize that private contributions will not come for free, driven by some humanitarian ideal among investors. Instead they will want to see results in line with their expectations and needs. More so than in the case of board membership

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without financial contribution, an IPA might find itself hard-pressed to satisfy investor objectives. CONAPRI’s experience with one investor trying to impose his interests on the agency’s operations is telling. This makes it even more important for an IPA to continuously clarify and define its role as a public-private entity that needs to satisfy both partners in order to be effective. This makes it even more important for the government to stay involved with the IPA by remaining a key financial supporter to its efforts. IV.2

Charging Fees for Services

Many IPAs are also tempted to generate funds by charging directly for individual services provided to investors. In practice, however, this appears to be difficult. The FIAS survey of IPAs in Central and Eastern Europe revealed that only four of the 25 agencies are recording any form of fee income, and their contribution to overall funding tends to be marginal. Clearly not all services an IPA provides can be approached this way. In fact, most activities geared towards image building and promoting the country in general – such as brochures, advertisement, conferences or compilation of general statistical information – reflect much more the general public good of improving the perception of the country abroad, and individual investors generally are not willing to provide substantial amounts of funding for these purposes. A number of IPAs sell some of their larger publications, and in some cases funds can be obtained from individual companies or industry associations to support specific studies. But these funds are designed to cover some or all of the costs associated with individual publications, and do not contribute significantly to the overall budget. Regarding more specific services, IPAs tend to find themselves in a situation where the agencies themselves do not have the capacity or expertise to assist effectively, while private consulting companies are already specialized in these areas. In most cases, agencies therefore find it difficult to design a product in which they have a comparative advantage, which is sufficiently attractive for investors to be willing to pay, and which does not absorb an unsustainable amount of human resources, potentially distracting from the primary mandate of the agency. CONAPRI does provide some specific services to investors in exchange for fee income. But in order to avoid competing with private consulting firms, the agency limits these services to market studies and investment climate analysis in individual industries. As most of the relevant information is already easily accessible to its staff, such research can be conducted relatively efficiently. However, this fee income does not amount to a substantial contribution to the overall budget, and does not provide a reliable source of income, as demand for these services is difficult to forecast over time. Many IPAs have not had good experiences with their attempts to charge investors for services. El Salvador’s Fusades, for example, found itself in a difficult financial position, after USAID, which had been the main source of financing since the agency’s

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inception in 1985, withdrew its support in 1994. The agency’s investment promotion arm Pridex therefore tried to generate funding through the selling of various services. One idea for generating fee income was related to newly established free zones. The plan was that Pridex would find investors to locate in these free zones in exchange for a fee from the zone operators. In addition, the agency tried to generate export contracts for companies located in these zones in exchange for fees. However both activities were only marginally effective in generating income, generally not warranting the human resources expended in this effort. Pridex also tried to charge potential investors for the organization of site visits. However, many investors felt that these services did not deserve substantial payments, expecting them to be provided at no cost. Finally, similar to Czechinvest, Pridex also tried to generate fees by linking domestic service providers with foreign investors. However, it soon found itself engulfed in criticism from other companies who felt that they had not been given equal treatment in the agency’s recommendations. Eventually Pridex abandoned all these fee-for-service attempts. The agency now exists on a much smaller budget which primarily depends on negotiating an annual support contract with the Ministry of Economy for research, events and other promotion activities in exchange for budgetary support. SNAZIR in the Slovak Republic also appears to be not particularly successful in generating fee income. In order to supplement the funds it receives from the government and the European Union, the agency tries to generate income by selling services to investors. SNAZIR would usually try to charge investors for such services as the organization of site visits, help in obtaining licenses and permits, and providing specific information. While this apparently added little to the agency’s annual income, it seems to have created a very bad impression among a large number of investors. The general perception appears to be that the agency tries to charge for everything without providing much quality or value-added through its services. For example, one Belgian company was looking for a sizable plot of land for its investment and asked SNAZIR for assistance. But the company apparently felt pressured to take certain plots over others, and it openly wondered whether there were any commercial interests behind SNAZIR’s assistance. In fact, the agency appears to have made an arrangement with a local real estate developer who would use the agency to become involved with new investors entering the country very early on in the process. Overall, IPAs have had only very limited success in generating fee income. Even agencies that have managed to develop some services for which investors are willing to pay, typically have found that the income generated is not significant while the resources required are substantial. More importantly though, several IPAs found themselves caught in a situation where they were perceived not as a promotion agency, but rather as a

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private company with commercial interests. Such damage to an agency’s image is frequently difficult to repair. IV.3

Leveraging Resources

Obtaining financial support from the private sector is not the only alternative available to IPAs to enhance their limited resources. Some IPAs have found creative and innovative ways to access additional resources by collaborating with private sector entities. For example, cooperating with a range of individual companies, Chambers of Commerce, or industrial associations often has proven helpful in the preparation of specific promotion materials or the organization of specific events. In most cases, the private sector partners assign some of their staff to assist in the actual work, and they might also take on some of the related expenses such as printing or conference facilities. One interesting case has been the experience by the Western Cape Investment and Trade Promotion Agency (WESGRO) in South Africa. One particularly effective program for this agency turned out to be partnership arrangements with chambers of commerce in specific cities and regions abroad, designed to strengthen the linkages and relationships between businesses from these areas. Typically, donor agencies from the countries of these chambers paid for WESGRO staff appointed for this particular work for a limited time period. In addition, logistical support from the partner agencies facilitated many promotional activities undertaken by WESGRO in these countries. Another alternative could be to have individual companies or associations assign staff to the agency for a specified period of time. This can be particularly helpful to IPAs, which frequently struggle to attract staff with a strong private sector background. The Scottish IPA “Locate in Scotland”, for example, has managed for several years now to have large multinational companies located in Scotland to second some of their staff to work with the agency for a limited period of time. Companies tend to find this arrangement attractive as their staff receive training in the business environment in the country, while they contribute to the development of industry-specific new products and promotion strategies with the IPA. But again, an IPA has to manage these arrangements with care so as not lose its balance. If staff and resources from particular companies are used excessively, competitors might become alienated, fearing that the agency might become biased in favor of specific companies, and might therefore not in the position to represent the private sector as a whole. Hence, a sound balance and a careful, even-handed approach is necessary. V.

Conclusion

Many IPAs worldwide are tempted to work more closely with the private sector to find additional sources of funds to enhance their own limited resources. But more importantly, the desire to reach out to the private sector goes beyond the simple quest for funds. It cuts to the core of an IPA mandate, namely: the effectiveness of the agency in 10

attracting additional investment. The specialized skills and information needed to fulfill this mandate require close cooperation with, and preferably even a direct involvement of investors in the activities of an IPA. The global experience with such private sector involvement in IPAs is quite limited, and it is even scarcer with respect to cases of resource-contributions to IPAs. The creation of investor membership clubs can have potential to contribute substantially to an IPA’s financing. Especially in environments where policy reform is important to investors, it can make sense for private firms to become stakeholders in such an exclusive club that can initiate a reform process and have direct access to senior levels of government. Income generation through the charging of fees for specific services, on the other hand, has hardly ever been successful, and does not seem to present an attractive and workable option for a true promotion agency. While additional resources from the private sector would be most welcome, promotion agencies have to be aware of the fact that these additional funds do not come for free, without any strings attached. Investors and private sector representatives clearly will want to see benefits from their contributions, and they have specific concerns they would like to see addressed. To a large extent, these concerns should also be concerns of the IPA. Therefore the incorporation of private sector interests would only help to move the agency closer to the middle between the public and the private sector. However, with private sector participation and financial contributions, the agencies will need to watch even more carefully that their mission is not being distorted, and that they continue to focus on the public interest of general investment attraction. It is certain that private sector financial contributions cannot be used to replace government support. Strong financial and substantive involvement by the government is key to the effective functioning of an IPA. Being forced to rely on private sector income carries the danger that agencies, which were designed to provide the public good of investment promotion to attract FDI to the country, will turn into consulting companies where commercial interests overshadow the public good.

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APPENDIX: AGENCY EXAMPLES

I.

COINVERTIR - Colombia

COINVERTIR was established in November 1992 based on the desire by the newly elected government to increase Colombia’s attractiveness for foreign direct investment. The president himself formed a committee with the largest domestic and foreign investors in the country to develop an institutional framework for investment promotion in the country. As a result of this effort by the public and the private sector, COINVERTIR was established with joint funding. A total of 88 companies agreed to provide US$2,000 per year for a period of five years. The government was supposed to provide at least US$3 million. The agency is governed by a 12-member Executive Board, half of which come from the private sector, evenly split between domestic and foreign investors. However, the financing arrangement did not work as well as anticipated. On the private sector side, the vast majority of companies fulfilled their commitments as planned. Only about five or six companies left the agency at some point during the five years and did not provide the full US$10,000. But the government commitments came only through partially and with substantial delays. Substantial budgetary pressures apparently made it impossible for the government to maintain its support to COINVERTIR at the intended level. After the first five years, therefore, the agency faced a financial crisis. Private sector contributions reached their end, while government support diminished. The agency managed to build up a trust fund of about US$2 million from contributions in previous years, and can rely on interest income for parts of its operations. However, this clearly is insufficient to maintain it. The agency therefore negotiates with the National Planning Department, which has the overall responsibility for FDI policies within the government, for an annual investment promotion program in support of the Department’s FDI activities. To strengthen its financial position, the agency intends to pursue a new group of investors to generate a second round of private sector contributions. During the last six months of 1998, COINVERTIR managed to attract seven new companies, but significantly more effort will be required to generate a significant income stream from this source. At the same time, the agency recognizes the need to strengthen government support to the promotion activity and put the agency in a financially sustainable position. At present, COINVERTIR has not charged fees for any of its services with the exception of minor cost-recovery activities for publications.

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II.

CINDE – Costa Rica

Costa Rica’s Investment and Trade Development Board (CINDE) was founded in 1982 through an initiative by USAID as an investment and trade promotion agency and development think tank. Different from most IPAs, CINDE was originally designed not to be part of the government, but instead be constituted as a non-governmental organization. Initially, CINDE was a large organization with several hundred employees. But with changes in US policy, USAID had to withdraw its support from the agency, and the danger existed that CINDE would disappear altogether. A restructuring plan was worked out which left CINDE with a significantly smaller staff, a narrower business strategy focussed on promotion and policy reform activities, and a small trust fund established with the remaining funds from USAID. Today CINDE has a staff of about 40 with an annual budget of approximately $2.5 million. CINDE tends to be highly respected in the country by the private sector as well as the government, and it is generally recognized as the key agency for investment promotion activities regarding Costa Rica. In November of 1996, the agency celebrated a major success when Intel announced its intention to undertake a US$300 million investment in the country. CINDE was instrumental in this particular promotion effort. At the same time, the agency also publishes accounts of “lost opportunities”, openly analyzing the reasons why specific investments did not materialize. CINDE therefore tends to be recognized as an objective broker. CINDE’s staff generally believes that the agency can fulfill this role only because of its neutral status and political independence. As CINDE’s Director of Investment Promotion put it in an interview for a recent FIAS Newsletter (FDINEWS Vol.13), being asked about major achievements of CINDE: “I suppose it cannot really be called a specific achievement, but one of our positive traits is our private sector status. Since we are a private institution, this gives us greater flexibility. It portrays us as an advisory body to the company wishing to invest, rather than an arm of the government. This has the important consequence of distancing us from any insinuation of ulterior motives and creating trust between ourselves and the investor. The relationship between CINDE and the company is crucial and we always seek to develop the advisory role even after the company has decided to invest.” The agency is guided by an Executive Board which consists entirely of private sector individuals. None of them represents an individual company or industry association, with all Board positions considered to be honorary for the selected persons. The only limitation CINDE imposes during the selection process is to ensure political balance. As proximity to and acceptability for the government is crucial for the agency, it is careful in maintaining a balance of the major political parties in its Board. The government has no formal involvement in CINDE. However, indirectly the agency always managed to maintain close ties with the government. Its annual work

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program and strategy is coordinated with Costa Rica’s Minister of Trade to coordinate promotion efforts, ensure that CINDE’s promotion work is in line with the government’s policies, and that its sectoral focus matches the interests of the government. Indications are that CINDE has very effective links with the government. During its efforts to attract Intel, for example, the agency consistently managed to involve senior government officials, including ministers and the President himself, throughout the process. Also, during the last election, the two combating parties jointly asked CINDE to take the lead in developing a new legal framework for private concessions in the country’s infrastructure sectors. CINDE also does not receive any direct funding from the central government. Its main source of income stems from a trust fund which generates about 30 percent of its annual budget. But the main contributor to the agency’s annual budget – providing about half of the annual funds – is a foundation called Crusa which was established as a joint agency by the US and the Costa Rican governments to support sustainable development in the country. As FDI promotion is one component of this program, CINDE can tap these funds to finance its own operations. The remaining 20 percent of CINDE’s annual funds come from donor agencies, regional agencies or private companies in support of specific projects the agency wants to carry out each year. In the past, CINDE did generate some of its income through fees for specific services. Until a few years ago, CINDE was given the responsibility over locating firms in Costa Rica’s free zones. For each successful location, the agency received a success fee. In addition, until the end of 1998, CINDE also assisted Costa Rican companies in locating attractive export markets for their products in exchange for a fee. However, both activities have now been transferred to the country’s trade promotion agency Procomer, and CINDE is no longer active in this area. While CINDE is still interested in possibly developing certain services for fee generation, no activities are currently ongoing. The withdrawal from the free zone and the export promotion activities also did not pose a major loss of income, but allows the agency to focus more on its core business of investment promotion.

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III.

CZECHINVEST – Czech Republic

Czechinvest is considered the official investment promotion agency of the Czech Republic. All its services are provided for free to investors, and are generally understood as a service by the public sector. The agency receives its annual budget directly from the government each year through the Ministry of Industry and Trade plus support from the EU Phare program. But at the same time, the agency has very close relations with the private sector. Its 12-member Board or Steering Committee is dominated by representatives from the public sector, but also includes representatives from the country’s major banks, industry associations, and the Chamber of Commerce, as well as the chairman of the “Association for Foreign Direct Investment”. This last association is a particularly interesting arrangement between an IPA and the private sector. “The Association for Foreign Direct Investment” includes about 30 Czech companies who can provide services to foreign investors in such areas as engineering, construction, legal services, or real estate. To become a member of this association, each company has to pay 75,000 korunas (or about $2,200) annually to Czechinvest. In exchange, Czechinvest provides foreign investors who are looking for specialized services with contacts from companies of the association. While these funds do not constitute a sizable share of its budget, they typically suffice to finance Czechinvest’s publications program. But Czechinvest derives more benefits from this arrangement than just funding. The agency can typically rely on the association members to assist them with services free of charge during the initial contacts with foreign investors interested in locating in the Czech Republic. This allows the agency to provide more professional services to new investors, while it establishes first contacts for the Czech companies with a potential new client. The association members also typically assist the agency during policy reform initiatives. Again these companies provide their services for free, supporting the improvement of the business climate for foreign investment.

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IV.

FUSADES/PRIDEX – El Salvador

In 1985, Fusades was established with support from USAID as a non-profit development think tank to carry out a number of development activities for El Salvador. One of the programs under Fusades was an investment promotion effort, called Pridex. Funding for this agency came primarily from USAID, but also included some private sector contributions. The agency was founded with the help of about 300 private-sector companies who had to a small, nominal fee to become founding members of the organization. But as the agency had a wide mandate across all areas of development with investment promotion just being one aspect, these funds alone certainly were not sufficient to support the agency as a whole, nor could a significant promotion effort be sustained based on these contributions. In 1994, the USAID support to Fusades ended, leaving the agency in dire financial straits. The agency had to undergo a major reorganization and chose to shift its focus primarily on its research activities. This resulted in a major shortage of funds for investment promotion activities. The government, as it had not been directly involved at the outset in the agency, could not be convinced to take a stronger role in investment promotion activities and to provide some financing. Pridex therefore tried to find alternative sources of funds, especially contributions from the private sector. One way to generate private sector funding was based on fees generated in relation to newly established free zones in El Salvador. The idea was that Pridex would find investors to locate in these free zones in exchange for a fee. In addition, Pridex tried to generate fees by helping “maquilas” operating in the free zones to develop export markets and to bring in specific contracts for the export of merchandise. However, these activities were only marginally effective, and the level of fee income generated did not warrant the efforts required to complete such transactions. Secondly, Pridex also tried to charge fees for services provided to potential foreign investors. Concretely, the agency tried to charge for the organization of site visits. This, however, often resulted in criticism from investors who felt that this service should be provided for free by a promotion agency. Many also felt that these efforts were not sufficiently result-oriented as they were typically exploratory in nature, and would therefore not warrant major payments to the agency. Finally, Pridex also tried to generate fees by generating business for local companies such as law firms, consulting groups, or engineering and construction companies who would assist new foreign investors. But the agency quickly found itself to be criticized by some local firms who felt that they were not treated fairly or had been left out. Despite the fact that Pridex did not refer investors to individual companies, but rather several potential providers of the same service, the criticism led Pridex to abandon these activities.

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In retrospect, all these various efforts to attract private funding were not successful, and never generated sufficient revenue to maintain the agency. At present, Pridex still exists as part of Fusades, but has to rely primarily on government funds to support its activities. On an annual basis, Pridex agrees with the Ministry of Economy on a program of research and promotion activities which are then charged to the ministry. In addition, Pridex receives funds from the European Union, but mainly geared towards trade promotion activities.

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V.

PROGUAT - Guatemala

The Government of Guatemala is currently in the process of establishing the national investment promotion agency PROGUAT. One of the central features of this new agency will be its organization as a mixed, public-private entity. In May of 1997, the agency was established informally with the goal of formalizing the agency through the passing of appropriate legislation. To guide the development of a corporate plan and strategy, the agency has established an informal Executive Board which consists to about 60 percent of private sector representatives. In its initial stage, this initiative has received support from the Inter-American Development Bank, but this funding is meant as seed money for the upcoming months only, until the agency has been formally established. For the funding of the actual operations, PROGUAT expects to require annual resources in the range of $600,000700,000. To ensure the sustainability of the agency with the ability of attracting and keeping high-quality staff, these funds need to be available over the long-run. The agency therefore does not want to rely on annual budgetary allocations, but rather wants to build a trust fund in the range of US$ 10 million, which would generate the majority of the annual resources for the agency. PROGUAT expects the government to contribute around US$1-2 million to the fund, with the remainder coming from private sector sources. Based on its current interactions with the private sector, the agency hopes to attract about 100-150 companies to contribute to the trust fund. The largest contributions are expected to come from organizations such as industry associations and chambers of commerce. PROGUAT also intends to generate some income from specialized services to individual investors. However, the development of detailed proposals for the specific services still need to be developed. However, the agency intends to keep a focus on general investor services, and does not want these fee-generating activities to distract staff from the overarching public good of investment attraction. PROGUAT therefore does not have any great expectations regarding fee income to become a major contributor to the agency’s budget in the foreseeable future.

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VI.

SNAZIR – Slovak Republic

With the velvet revolution and the break-up of Czechoslovakia, the Bratislava office of Czechinvest became an independent agency. However, it found itself in a political environment that showed little interest in foreign direct investment, with a government unwilling to pay for investment promotion activities. A deal was finally struck, where SNAZIR was converted into a joint stock company, fully owned by the Fund of National Property (FNP), which serves as a holding company for state-owned enterprises that have not gone through the privatization process. SNAZIR presently receives annual financial support from the FNP that covers the basic operational costs such as salaries for the 13 staff members. In addition, the EU Phare program provides financial assistance for promotion activities such as publications, technical assistance, and sectoral studies. However, these funds are not sufficient to maintain a strong promotion effort. In addition, the EU program is limited in time, while the FNP appears to face increasing budgetary pressures. For these reasons, SNAZIR has been under constant pressure to generate additional income. The agency therefore tried to introduce a policy where charges would be levied for all services. In the past, the agency managed to arrange for annual agreements with the Ministry of Economy for an annual assistance program, including conferences, publications, research and speeches, in exchange for a lump-sum contribution. Regarding foreign investors, the agency would usually charge for activities such as organizing site visits, helping in obtaining permits and licenses, or providing country- and sector-specific information. SNAZIR also tried to conduct more company-specific research, but was apparently constrained by the limited human and financial resources available. Overall, however, these attempts of income generation through fees seem not to have worked particularly well. While it is hard to determine how much fees contributed to the agency’s budget (EU Phare appears particularly concerned about a lack of transparent accounting), the amounts involved seem to have been minor. More importantly, investors generally tend to be very unhappy with the services provided, complaining about the agency’s tendency to try to charge for everything without providing much quality. For example, one Belgian company was looking for a sizable plot of land for its investment and contacted SNAZIR. However, it apparently felt pressured by the agency to accept certain plots of land over others, openly wondering whether there were any commercial interests behind SNAZIR’s assistance. Not surprisingly, the agency in fact appears to have an arrangement with a local real estate developer to become involved with new investors entering the country very early on in the process. Examples like these certainly hurt the image of the agency, and many investors appear to just stay away from it. The agency apparently plans now to stop this practice of

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charging for all types of services, limiting it to specialized and “value-added”-type services. At the same time, the agency also has no particularly close relations with the government. Its Executive Board consists entirely of members of the FNP, not including other government agencies. This indicates that the agency also had no particular impact on changing the policy environment in the country. This lack of strong government relations might also create difficulties regarding the agency’s future. The newly elected government is visibly interested in attracting FDI to the country and might actually be interested in developing a strong policy reform and investment promotion program. But there apparently no indication that the government might want to rely on SNAZIR for these purposes.

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VII.

CONAPRI - Venezuela

The Venezuelan Council for Investment Promotion (CONAPRI) was founded in 1990 as a partnership between the public and the private sector with the primary goal of attracting foreign investment to the country. It provides general services such as investment information, statistics, and legal information, as well as specific advisory assistance for investors. CONAPRI’s Board of Directors is entirely private, composed of the chief executives from 15 member companies. The government is represented in the agency through nine different ministries and public sector entities, and the Minister of Industry and Commerce traditionally presides over the agency’s annual meeting. The funding of the agency is very much driven by the private sector. Initially, the agency received half of its annual budget from the government, with the remainder coming from private companies. To become a member of CONAPRI, private companies are asked for a one-time contribution of $50,000 to the agency’s trust fund, followed by an annual budget contribution of $10,000. By 1999, the public sector share has fallen to about 10 percent, with the majority of the agency’s budget coming from private sector contributions, interest income from the trust fund, and income generated through charges for specific services provided. The agency currently has 30 member companies, expecting to increase this number to 34 during 1999, representing large multinational and domestic companies across a variety of industries. 1994 proved to be a watershed for the agency. Starting that year, the investment climate in Venezuela deteriorated rapidly with the election of a new government which proved to be significantly less investor-friendly than its predecessor. This government introduced various measures that negatively affected the private sector, culminating in stringent foreign exchange controls in mid-1994. This resulted in a significant decline in FDI inflows and waning investor interest. For CONAPRI this spelt a short-term financial crisis. Private sector membership fell by a quarter, governmental budgetary allocations dropped rapidly, and staff size had to be reduced by half. The agency decided to strengthen its links with private sector members, and by 1998 membership was back to the original number of 30. Through this strategy, CONAPRI managed to develop a more stable funding situation, not being dependent on just the government as the main provider of resources. To achieve this stronger private sector support, the agency had to reorient its operational practices by improving the usefulness of its services to the private sector. It shifted its human and financial resources primarily towards working on policy reforms and providing investor services, and away from image building abroad. Promotion abroad now primarily relies on electronic communications and publication mailings, rather than expensive investment fairs and conference participations. The agency also increased its capabilities of providing detailed sector analyses for individual clients on a fee basis to generate additional income. CONAPRI does not intend to compete with private consulting firms, limiting its services to market studies and investment climate

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analyses in individual industries, rather than project-specific feasibility studies. At present, these services generate about 15 percent of the agency’s annual budget. To counter the dangers of losing political effectiveness by being perceived as being too close to the private sector, the agency stepped up its efforts to maintain close contacts with the political establishment. CONAPRI apparently always had strong relationships with the key ministries and continued to become involved in major policy reform issues. Frequently, the government would call upon CONAPRI directly to provide comments on new draft legislation from the investor’s perspective. In addition, through a variety of committees, the agency prepares individual reform initiatives which often result in presentations to the Congress on individual policy issues. CONAPRI itself believes that they are presently perceived as neither a private nor a public sector organization, but rather as a non-governmental organization that tries to balance public and private interests. At times, this balance is being challenged and threatened by individual interests. At one point, one private board member demanded that the agency suspend a particular promotion activity that was designed to attract more investment in the same industry his company was active in. The agency called for a quorum at the board, resulting in the decision to pursue the activity. In response this particular company canceled its membership and left the agency. CONAPRI learned from this that a balanced composition of the board is crucial, and that agency membership also needs to be sufficiently broad, to avoid that its activities might become overly dependent on the particular business interests of individual members.

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