Nguriza_Nshore_RFI_Final.pdf

Statement of Objectives

Nguriza Nshore

1. Scope

This Statement of Objectives (SOO) describes the objective of the U.S. Agency for International

Development/Rwanda (USAID/Rwanda) for a five year activity called “Nguriza Nshore”. This activity will support the Rwandan National Agriculture Policy objective to “Promote on-and off-farm income diversification through fostering entrepreneurship” by increasing off-farm employment opportunities in

Rwanda. This SOO is provided in lieu of a U.S. Government written Statement of Work (SOW) and does not describe how the work will be accomplished, but rather provides potential offerors with the flexibility to develop their own cost-effective solutions and the opportunity to propose innovative approaches to meet the stated objective.

Based on this SOO, the Performance Work Statement (PWS) must describe the technical and programmatic approach to achieve the objectives as well as the economic impact of interventions, to include the extent to which value is generated and distributed across targeted populations (as appropriate).

The PWS must include clear, concise, and measurable performance standards and detail the method of assessing contractor performance against the performance standards.

2. Purpose

The purpose of Nguriza Nshore is to facilitate the emergence of a dynamic off-farm sector that can generate greater employment at a higher wage for the broad majority of Rwandans who are currently engaged in subsistence agriculture and other marginal economic activities. By alleviating constraints to entrepreneurship and increasing access to financing, off-farm businesses will be created and will grow to provide productive employment for rural populations in order to reduce poverty.

The purpose of this activity falls within USAID/Rwanda’s Country Development Cooperation Strategy

(CDCS), which aims to accelerate Rwanda’s progress to middle income status and better quality of life through sustained growth and the reduction of poverty, by achieving four development objectives (DOs).

The Feed the Future Rwanda Nguriza Nshore activity will contribute to the achievement of two CDCS

Development Objectives: DO 1 “Economic Opportunities Increased and Sustained” (specifically

Intermediate Result (IR) 1.2, “Enhanced Rwandan private sector competitiveness.”) and DO 4, “Increased opportunities for Rwandan children and youth to succeed in schooling and the modern workplace”

(specifically, IR 4.2 “Increased stable employment for vulnerable youth.”). Additionally, the activity will support USAID/Rwanda’s cross-cutting objectives including: a gender-sensitive approach to development, with particular focus on women, children and vulnerable populations; institutional capacity building; and minimizing the human effects of global climate change.

Following ILO, we define productive employment as employment yielding sufficient returns to labor to permit workers and their dependents to attain a level of consumption above the poverty line.

All interventions shall be designed with the end goal of creating and/or improving opportunities for productive, off-farm employment, specifically for those people who, at the outset of the intervention, both: 1) reside in Feed the Future Rwanda zones of influence, which includes all of Rwanda outside of the three districts of Kigali; and, 2) generate at least part of their current livelihood from any activity within the agriculture sector (as is the case for the majority of Rwandans). This activity does not intend to target beneficiaries with any further particularity, and it also does not target or prefer any particular sector or business, other than the non-agriculture sectors. Approaches which lead to the expansion of any off-farm sector in any geographic location within Rwanda may be supported – so long as they are expected to generate productive employment opportunities for the rural poor. This could also include migration of the rural poor to Kigali or other urban areas for jobs enabled by this activity.

3. Period and Place of Performance

(a) Period of Performance: USAID/Rwanda intends to support the reform efforts of the Government of Rwanda through the Nguriza Nshore activity. The period of performance is five years from the date of the contract award with a 3-year base period and one 2-year option period.

(b) Place of Performance: Nguriza Nshore will be implemented in Rwanda. Specific activity sites will be proposed in the PWS.

4. Background

Nguriza Nshore is positioned to support Rwanda’s transition to a middle income economy, in line with the Government of Rwanda’s Vision 2020 document and Priority 3 of its Economic Development and

Poverty Reduction Strategy (EDPRS 2).

The backdrop to achieve this goal is one of structural transformation – driving economic opportunities beyond agriculture which currently is the main activity for 70% of the Rwandan workforce. This is important as median non-agricultural wages are nearly twice that of median agricultural wages.

Despite these national goals, while headline GDP growth rates have been reportedly high, the Rwandan economy has not made significant progress in fostering private sector off-farm growth and structural transformation away from subsistence agriculture. In the UNDP Project “Vision 2020” summary report

(2014) states:

One of Rwanda’s principal goals is to decrease the population’s dependence on agricultural activities from the current 72% in 2006 to 50% by the year 2020. Taking into account the current population growth, this would mean creating 2.2 million jobs in the http://minaffet.gov.rw/fileadmin/templates/Documents/Vision-2020.pdf and http://www.rdb.rw/uploads/tx_sbdownloader/EDPRS_2_Main_Document.pdf Page 60 of the EDPRS II says, “Vision 2020 aims for half of the Rwandese workforce to be working off-farm by 2020, up from just 28% today.

This is because off-farm workers are five times more productive than farm workers, and are 50% less likely to be in poverty. Reaching this goal will require creating an additional 200,000 off-farm jobs per year.”

http://documents.worldbank.org/curated/en/153581467991044283/pdf/96504-WP-P124629-PUBLIC-

Box393238B-Rwanda-Employment-and-Jobs-Study.pdf page 39 http://minaffet.gov.rw/fileadmin/templates/Documents/Vision-2020.pdf http://www.rdb.rw/uploads/tx_sbdownloader/EDPRS_2_Main_Document.pdf http://documents.worldbank.org/curated/en/153581467991044283/pdf/96504-WP-P124629-PUBLIC-Box393238B-Rwanda-Employment-and-Jobs-Study.pdf http://documents.worldbank.org/curated/en/153581467991044283/pdf/96504-WP-P124629-PUBLIC-Box393238B-Rwanda-Employment-and-Jobs-Study.pdf off-farm sector by 2020. The uninterrupted high economic growth that Rwanda has registered since 2000 has been a noteworthy achievement. However, the weak point of economic performance has been the limited shift from a low productivity, primary-based economy to a high-productivity economy based on industry and services. The majority of the jobs created have been in paid agriculture, most of which (over 60%) are poor jobs.

Analytical work by the World Bank using the 2014 Establishment Census found that a mere 6% of the workforce was employed in off-farm private sector firms. Of the 148,000 non-farm establishments, 65% were one person operations and another 28% were 2 or 3 person operations. Only .5% of firms were medium or large, employing 30 people or more. In the three years from the 2011 Establishment Census the number of large firms employing 100 people or more grew from 97 to 205. Of these only half are truly private, while the rest are linked in some way to government.

Further analysis by the World Bank found that nearly 70% of one person firms in 2011 were still one person firms in 2014.

Therefore it is unlikely to expect dramatic employment growth from micro firms.

While removing constraints to the growth of micro firms will lead to employment growth due to their sheer number, removing constraints to medium and large companies establishing and/or expanding will also drive a significant increase in off-farm employment opportunities. As foreign firms tend to bring technology and know-how and have access to foreign savings, an increase in their establishment is likely to be associated with increases in labor productivity and human capital accumulation. While growth in

Rwanda has been driven by high levels of public investment funded by foreign savings (see graphs below) this activity seeks to remove constraints to increased private investment, both domestic and foreign funded.

Statistics in this section come from “Business as Usual? The Evolution of Private Sector Firms and Employment in

Rwanda, 2011-2014”. World Bank.

“Which Firms Grow? Evidence from a Matched Firm Database in Rwanda.” World Bank.

Problem: The Finance Constraint

The PWS should propose creative intervention(s) that will lead to increased levels of private investment and off-farm job creation. USAID/Rwanda believes that access to finance is a major constraint on entrepreneurship. While overall levels of financial inclusion are high, both the World Bank Enterprise

Surveys and the World Economic Forum’s Global Competitiveness Report reveal that the self-reported, single biggest bottleneck facing firms is access to finance, followed by workforce skills and tax rates.

FinScope’s 2016 survey sheds further light on small business owners who also report access to finance -including a full range of services from sourcing, managing, borrowing, and investing money - as their biggest challenge, followed by sales and marketing.

The financial sector in Rwanda consists of banks, microfinance institutions, savings and credit cooperatives (SACCOs), insurance companies, and pension funds. The banking sector - comprised of 12 commercial banks, three microfinance banks, one development bank, and one cooperative bank -continues to dominate the financial sector with 67% of total financial sector assets.

Rwanda’s financial sector is sound, growing (in terms of assets, liabilities, and profits), and has more than adequate liquidity.

Despite this financial stability, long-term structural bottlenecks include: concentrated lending by sector

(public works and restaurant/hotel commerce account for 70% bank lending, 65% MFI lending), banks’ high dependence on short-term deposits (about 45% for banks, 75% for MFIs), and high interest rate spreads.

Additionally, there is less competition within the banking sector than one might expect with 12

We examine general constraints here, with an inclusive consideration of SME and rural finance, though findings should be relevant to all firms.

Followed by 17% for pensions, 9% insurance, and 7% MFIs, including SACCOs

Commercial bank NPLs have averaged around 6% per year over the past five years, and 7.7% for MFIs

The interest rate spread is the difference between the average yield a financial institution receives from loans it http://www.investopedia.com/terms/f/financialinstitution.asp banks, given that three of them control about half the market (in terms of assets, deposits, and loans).

While Rwanda domestic savings are low, limiting locally available loanable fund, Rwandan banks hold a surprisingly high level of reserve capital with a minimum capital adequacy ratio (CAR) of 15%; which is above the Basel minimum requirement, and most banks stay well above the minimum with an average of

24% over the past five years. Similarly, the liquidity ratio of the banking sector averaged 47% over the past five years, well above the prudential limit of 20%. The microfinance sector has even higher ratios, with average (2013-16) CAR at 33% and average liquidity ratio of 85.7%, well above regulatory minimums of 15% and 30%, respectively.

The Inclusive Growth Diagnostic by the Department for International Development (DFID) identified lack of affordable financial products that meet business needs as a key constraint to growth. Products and services on offer in Rwanda are generally not suitable for those with irregular income streams, non-financial assets, and small amounts of savings (such as SMEs and rural businesses) and come with high collateral requirements that these firms tend to be unable to meet. Rwandan firms report average collateral needed to be 272% of the requested loan amount, with small firms facing higher requirements

(281% compared to 227% for large firms).

It is therefore no surprise that only 8% of small firms report receiving bank finance for their investments.

Intervention parameters

The essential role that the market plays in growth and development is to let entrepreneurs discover the most profitable opportunities. The PWS therefore should not propose interventions which steer the economy towards “preferred” sectors and actors. Instead, Nguriza Nshore seeks to remove constraints and distortions to the efficient functioning of the private sector— in this case the entrepreneurship ecosystem, particularly the market for finance— and then let the market drive the economy. We believe the best proposals will dovetail with Government of Rwanda initiatives or require participation of government actors, but are open to innovative solutions that diverge from this approach.

We anticipate interventions under four areas of opportunity in order to unlock private investment and off-farm job creation. All four areas need to be addressed in the PWS:

A. Expanding the capacity of the financial sector to accurately assess risk and return.

B. Increasing the reach of entrepreneurship support organizations.

issues and the average rate it pays on deposits and its own borrowings. It is a key determinant of a financial institution's profitability (or lack thereof), and spreads in Rwanda are currently around 10% and 16% among banks and MFIs, respectively. This is comparable to Uganda but 3-4 percentage points higher than others in East Africa.

BNR, Annual Financial Stability Report, 20014-15

World Bank Enterprise Surveys, 2011

World Bank Enterprise Surveys, 2011

C. Increasing the capacity of firms to attract and use finance.

D. Reducing barriers to entry for new financial institutions and investment flows.

Intervention A is focused on financial institution constraints, in particular, the ability of financial institutions to accurately assess risk and return. This ability is especially crucial to allow lending to new sectors, which drive the structural transformation of the economy. While experience should provide lenders with accurate information about existing sectors, the ability to model risk and return in new sectors is a critical skill needed for Rwanda to continue to grow and diversify. It is important to remember that banks have a fiduciary responsibility to their depositors and should not be expected or encouraged to make risky lending decisions. Rather, the activity seeks to assist banks in conducting accurate analysis and gain the analytical ability to explore new sectors. Technical assistance can help financial institutions on a pre-investment basis to address capacity issues, to improve technical knowledge of market opportunities and financing prospects.

Interventions B and C focus on relieving borrower-side or demand-side constraints. Entrepreneurs and firms are constrained both by the actual profitability of their business model as well as their ability to provide necessary evidence for the profitability of their business model. Pillar B is particularly important to the success of Nguriza Nshore. What Rwanda and all economies need is a vibrant business development support industry, which helps hundreds and thousands of firms, at all stages of their development, over decades. USAID program cycles of three to five years are simply inadequate to provide the long-term support to businesses that they need. Noting that in Rwanda 60% of small businesses failed and turned over in the last three years; a native business development support industry is needed to help bring new ventures into being and sustained growth. With this in mind, Pillar B aims not to help individual firms, but to help create an ‘entrepreneurship ecosystem’ that helps firms establish and expand. Support to existing and new entrepreneurship support organizations will allow them to thrive, so that they can provide permanent support to new and growing ventures. Care must be taken not to crowd out existing entrepreneurship support organizations. As firms develop promising business models under

Intervention B, Intervention C will help those firms use their initial promise and success to attract finance.

While the Rwandan financial sector continues to deepen year after year, further deepening of the financial sector will provide more opportunities for investment lending and drive down lending rates. As such, Area of Opportunity D will remove constraints to entry in the financial sector, with a particular focus on non-deposit investors such as angel-investors and venture capital funds. Proposed interventions should lead to deepening of the financial system with new actors, products, and services.

5. Performance Objectives

The overarching objective of Nguriza Nshore is to increase off-farm employment opportunities for rural

Rwandans.

In pursuit of this overarching objective, USAID has identified four performance objectives:

Objective 1: Capacity of the financial sector to accurately assess risk and return expanded.

Objective 2: The reach of entrepreneurship support organizations increased.

Objective 3: The capacity of firms to attract and use finance increased.

Objective 4: Barriers to entry for new financial institutions and investment flows reduced.

The Offeror’s PWS must propose interventions that will: 1) meet each of the four performance objectives, and 2) achieve the overarching objective. The PWS may propose any interventions considered best able to contribute to meeting each of the four specific objectives within the operating constraints and the contract period and budget.

The PWS will build upon USAID’s analysis to propose a fully supported, tailored, and technically sound approach. These targets must be clear and measurable (in terms of quality, quantity, and timeliness) and must describe the method of assessing performance. The PWS should include specific, achievable targets for end of Year 3 as well as for the following two-year option period. The following is an illustrative list of targets:

Enhanced private sector competitiveness by:

- Value of new private sector investment in agriculture sector or food chain increased by 5%.

- Number of program participants engaged in self-sustaining private enterprise increased by 1,000 individuals per year.

USAID expects the PWS will address priorities within the entrepreneurship ecosystem that achieve results effectively and efficiently within the time and budget constraints of this activity.

6. Operating Constraints

In addition to addressing the development challenges and achieving performance objectives, the performance work statement must address and integrate each of the following cross-cutting requirements throughout:

Limiting transaction costs for private sector partners and beneficiaries: The transaction costs associated with private sector partners/beneficiaries to engage USAID through activities like this one must not exceed the benefit received in order to follow the principle of do no harm (that is this activity should not cause any free enterprise market distortion or provide unfair advantage).

Constraints other than access to finance: It is important to note that this activity is positioned to resolve access to finance constraints to investment following the four performance objectives; however, there are no limits on the types of interventions (that is, in addition to the four performance objectives) that can be proposed as long as they are intended to ultimately lead to more off-farm job creation. Priority will be given to interventions that engage with recent literature on effectiveness.

Sources may include evidence aggregators such as JPAL, IPA and 3ie. Interventions that have been proven to be effective in similar contexts to Rwanda or have been found to be effective in a wide variety of contexts are likely better guides than a single impact evaluation finding in a less comparable context. A single study does not usually

Gender: This activity will ensure that women and men are equally eligible for technical assistance, training and other benefits provided under the activity. In the performance management plan, data will be disaggregated by sex, and gender standard or custom indicators will be used where appropriate. While this activity does not seek to bias investment or support to women at the expense of men, the PWS must include a gender integration plan to ensure equality of access and opportunity to activity interventions.

Addressing key constraints that limit women’s full participation and access to the private sector is a potential entry point for this activity.

Link with other USAID/Rwanda activities: Nguriza Nshore will work closely with the Feed the Future

Rwanda Hinga Weze activity, Access to Finance Rwanda, and the Private Sector Driven Agricultural

Growth (PSDAG) activity to ensure the integration and sustainability of USAID-funded activities. Hinga

Weze will help disseminate and scale agriculture production best practices among farmer groups in order to increase sustainable agricultural productivity and link farmers to domestic markets. PSDAG aims to increase private investment within agricultural value chains by: upgrading agricultural value chains by identifying market opportunities and linking producers and suppliers to them; and assisting the GOR with agricultural investment promotion efforts. Additionally, USAID/Rwanda supports Access to Finance

Rwanda (AFR), a donor-funded organization which works to stimulate a deeper and more inclusive financial sector (institutional focus) that supports the livelihoods and well-being of low income people in

Rwanda.

Nguriza Nshore is therefore strategically positioned to support the rural economy more broadly, with its focus on generating productive off-farm employment opportunities. To put it another way, Hinga Weze and PSDAG are closely aligned with the availability and direct access pillars of food security in that they focus on the supply of food with emphasis on food production and on-farm sectors. Nguriza Nshore is positioned to complement these activities by focusing on the economic access pillar of food security, in which a household accesses food through the market rather than own production. While AFR is focused on access to finance for the individual, Nguriza Nshore is positioned to focus on firm-level access to finance. In this way, these activities should be mutually reinforcing in generating rural economic growth for poverty reduction. Possible linkages with Huguka Dukore, for example, is working with employers of small and medium-size enterprises to provide demand-driven and gender-responsive skills within agriculture-and food-related manufacturing and services sectors.

Local Capacity/Sustainability: USAID emphasizes the importance of the utilization of local systems.

Emphasis must be placed on the human and institutional capacity development of local non-governmental institutions by taking a facilitation role and delivering the majority of assistance through existing local financial and business associations, business service providers, financial sector service providers, education institutions, and academia. Partnerships with local and/or regional institutions and advisors must be used to the greatest extent possible. Sustainability must be considered a top priority.

Collaborating, Learning and Adapting: The PWS must incorporate a collaborating, learning and adapting constitute convincing global evidence. Non-experimental evidence and analysis, particularly when focused on

Rwanda, will also be useful in formulated interventions.

approach that: a) generates, captures, shares, and applies information and knowledge to support and improve development outcomes; b) promotes collaborative learning and exchanges with relevant institutions, stakeholders, and development partners; c) uses information to improve the cost-effectiveness of interventions over the life of the activity.

Information Resources

The following is a partial list of resources that may be useful in preparing the performance work statement:

“Access to Finance and Job Growth: Firm Level Evidence Across Developing Countries”. World Bank

Policy Research Working Paper 7604.

“Financial Regulations for Improving Financial Inclusion”. Center for Global Development. March 2016.

http://www.cgdev.org/publication/ft/financial-regulations-improving-financial-inclusion-brief

“Identification of Remaining Gaps for Implementation of the Export Growth Facility”. Coffey. June

2016. Prepared for DFID Rwanda.

“The Impact of Business Support Services for Small and Medium Enterprises and Frim Performance in

Low and Middle-Income Countries: A Systematic Review”. The Campbell Collaboration. January 2016.

https://www.campbellcollaboration.org/library/business-support-services-for-sme-low-and-middle-income-countries.html

“Is Small Beautiful? Small Enterprise, Aid and Employment in Africa”. Brookings / UNU-WIDER.

2012.

“Rwanda Diagnostic Review of Consumer Protection and Financial Literacy”. World Bank. November

2013.

“Rwanda at Work: Rwanda Economic Update #9”. World Bank. February 2016.

“Small and Medium Enterprise Program: Five Years in Review, 2011-2016”. Innovations for Poverty

Action. https://www.poverty-action.org/sites/default/files/publications/SME-Report-2011-2016.pdf https://www.campbellcollaboration.org/library/business-support-services-for-sme-low-and-middle-income-countries.html https://www.campbellcollaboration.org/library/business-support-services-for-sme-low-and-middle-income-countries.html https://www.poverty-action.org/sites/default/files/publications/SME-Report-2011-2016.pdf https://www.poverty-action.org/sites/default/files/publications/SME-Report-2011-2016.pdf