Port Hope Berbera

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Port Hope Berbera

Somalia
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Port Hope, a public-private partnership (PPP) with the Somaliland Government, includes an Incubator, SME Fund, and a Development Company for redeveloping and operating the Port. It seeks to provide a new commercial foundation in Somalia’s historic industry: trade via the sea. An open, efficient port means an opening of hope.

About Project

Solution: What is the proposed solution? Please be specific!

Port Hope is unique in its timing to be a starting point in addressing the challenges in Somalia systematically, not a triage to the symptoms. The solution is innovative in the following ways: 1. Systematic -- Port Hope couples multiple financing tools with long-term management and development activities. 2. Support – The previous administration in Somaliland including President Riyale and now has the support of President Silaanyo support a public-private partnership solution and would partner with us to manage this. 3. Fit – The solution focuses on the unique attributes of Somalia: i. Leverages a strategic resource – one of the only natural deep water harbors in East Africa and adjacent to the Gulf of Aden, one of most important sea channels in the world ii. Builds on historic tradition – for centuries the Port at Berbera provided the optimal transaction point for goods out-bound from the interior especially Ethiopia and in-bound from the Persian Gulf, the Arabian Peninsula, and the Mediterranean via Egypt; iii. Leverages existing skill-sets – Somalis have been accomplished seamen, traders, and fisherman. The aptitude has been demonstrated, although negatively in their willingness to engage in piracy from the coastline in Puntland and South-Central Somalia. We wish to apply the skills in a positive context.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

We believe that we can directly benefit between 18-27 businesses. Our strategy of coupling small, targeted equity investments to create a maritime-related portfolio with larger Mushakara agreements where the partnered Mushakara capital is required to be spent with the portfolio companies will create good jobs and invigorate the port. Concurrently, we plan to work with foreign governments through the Development Company to ask for aid specifically benefitting the port, including the drudging of the Harbor, investments in the Coast Guard to provide security on the seas, and joint-training for Somalia senior officials and coast guard personnel. The infrastructure and government-to-government elements will also create new jobs and new companies, all driven by Port Hope which acts a catalyst. As we advance through the process of the G-20 Changemakers competition, we will be able to model the social impact and share it with you.
About You
Organization:
Frontier Markets Partners, LLC
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About You
First Name

Joe Lee

Last Name

Frank

Your Organization

Frontier Markets Partners, LLC

Country
About Your Organization
Organization Name

Frontier Markets Partners, LLC

Organization Phone

(1) 540 751 0945

Organization Address

1914 Windham Lane, Silver Spring, MD 20902

Organization Country
Organization Type

Private Institution

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million.

Average turnover in USD of your target firm

60% <$250,000. 40% $2.5M-$3M

Number of employees in your target firms

Fewer than 5, 5-24.

Average number of employees of your target firm

60% 4-5, 40% 15-20

Specify the size, average and range of expected loans or investments in each target firm

The SME Fund would use both traditional equity and a shari’ah-compliant facility – Mushakara – in the place of western-style debt or convertible-debt funding.

Equity – 60%. 15-20 investments between $250,000 - $750,000.
Musharaka – 40%. 5-7 agreements between $500,000 - $1M.

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Public intervention provides a foundation and the first loss money to formalize an operation.

For the past three years, we have been working to make Port Hope a reality. A missing ingredient has been the start-up financing. Without a grant, it has not been possible to formalize operations, and as a result, many of the positive efforts made could not be sustained.

Other forms of capital were considered, but investors found the first money to be too risky. Many stated that if there was an on-going operation, they would consider participation in the port development and related investments.

With a grant of $7.5M, we have the ability to plan. A grant provides stability to this initiative and enables efforts to be sustained and dedicated, which can lead to results. With operational stability, we have the assurance that the operation will have a future.

If a pilot SME Fund of $15-$20M can also be put together, providing limited partners with a standard venture product and return characteristics, we have a high degree of confidence that we can make substantive change.

With these dual financing facilities, we believe that we will achieve be able to:
1. Generate cash returns for investors concurrent to draw-downs of capital, mitigating some financial exposure;
2. Develop a comprehensive port development plan;
3. Engage global aid agencies, providing insights from the ground in Berbera and working to make their efforts in Somalia more productive.

If these three achievements can be met, we will have created a focal point for outside groups – private investors, global companies, governments – to contribute and see progress.

As success generates additional success, we have a high degree of confidence that we can generate:
1) Subsequent SME and other private equity funds focusing on Somalia specifically and East Africa generally (Private funds);
2) Partnerships and funding sources in phases to build out the port at Berbera (private funds);
3) Identify infrastructure projects best suited to aid from governments. For example, the dredging of the harbor to remove wreckage from previous conflicts (Public and Private funds).

For any of this to occur, there has to be cornerstone funding to enable dedicated actions over time and we hope that you will enable us to make lasting change.

What barriers does your proposed solution address?

Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

I believe that the barriers are demonstrated in the other answers submitted.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

At this time, we can only prove what the current inefficient port negatively contributes to the environment.

Eventually, we believe that the payoff is in all the many different businesses which will benefit from the improved port and the jobs that will be generated in fishing, coastal trade, cross Gulf trade including Somaliland livestock that could be shipped live to the Arabian Peninsula for Hailel, i.e. slaughter. Port inefficiencies add to the loss of livestock and reduced trade.

The lack of a functional port negates coastal defense, creates opportunities for the smuggling of humans and contraband and reduces ship and boat repair capabilities, leaving the livelihood of fisherman wrecked on beaches.

How many firms do you expect to reach?

We can directly impact 18-27 SME businesses.

We expect to invest in and create a portfolio of 15-20 firms. We expect to provide credit to 3-7 firms who can use the portfolio companies to meet a strategic need be that a service or product.

What is the volume of private SME finance you aim to catalyze?

We seek $7.5M in grant money to finance operations of Port Hope for three years.

We seek $15M-$20M in investment funds for Fund I from:
• Limited Partners – The grant funding would eliminate a management fee and profits would be split 70/30 with Port Hope.
• Debt-Financing with low-interest loans.

What time frame will be required to reach these targets?

The investment funds would be deployed over three years and the grant financing would last three years.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

Our solution seeks to enable systematic change in a place where borders have disintegrated, the former independent country of Somaliland separated in 1991, and the world has yet to advance a new solution to the problem of Somalia.

Last year, the Secretary-General of the UN, Ban Ki Moon stated that each of the three governments in Somalia should be managed independently as a pragmatic approach to progress would be required.

If this submission and the greater intent of helping the Somali people remains encumbered by the politics of recognition, no change can be made. We respect that there need to be global standards for recognition and that it is a process. We also have seen that the lack of recognition has created a vacuum. That vacuum allows corruption, piracy, and insurgents to fill the void.

Respectfully, if our solution is bound up into the question of recognition before acting, it can not be achieved.

We hope you will help us to operate in advance of the political conclusions and by our efforts, provide hope to outside parties that there is a reason to be active for the cause of the Somali people regardless of a change in government structure in what had been, but no longer is, a single country.

Sustainability
List all the funding sources that are required for the sustainability of this solution

We seek two kinds of funders initially:
1) Governments or Foundations to provide first loss capital for three years of operations for Port Hope;
2) Public or private investors to become Limited Partners to provide high-risk investment dollars into our pilot SME fund.

Once we have the cornerstone operation in place, we can plan for the future of Port Hope. Sustainability is determined by success in achieving the fundamental milestones, delivering results, and evangelizing the double bottom-line nature of our endeavors. How well we execute and how well we manage externalities, which are sure to occur, will dictate whether we can sustain the solution.

We start out with hope and a clear expectation of the considerable amount of work we are requesting to undertake by asking you to support us.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Port Hope seeks operations funding for three years. A grant or other first loss capital provides the operating funding for an incubator, the management costs associated with the pilot SME program, and a Port Development Company.

The Development Company within the public-private partnership is key to gaining independence from public financing. That Development Company will draw fees and participate as a manager in the port development, generating independent revenue. In 2008, large international parties we brought to review the port considered investing. In a similar situation after the establishment of Port Hope, third party investment would generate fees for on-going operations.

Likewise, a follow-up SME Fund (II or even III), whose viability and existence would indicate success in providing returns for investors, would include a standard management fee component. The pilot SME does not. It removes the management fee so as to keep the real cost to the first limited partners low. The management fee for the pilot SME fund is covered by the public-private partnership’s grant. Once the pilot is proven, the management fee on subsequent funds will generate the revenue to maintain operations.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

After an initial funding of operations and a pilot SME Fund, Port Hope will have the strength to manage in times of uncertainty.

For the pilot SME fund, we want private investors. Having worked in private equity and with familiarity of closing documents for venture capital and private equity funds, we recognize that private investors, or their attorneys, may want broad force majeure language in the Limited Partner Agreements to mitigate their risk.

Risk mitigation is important. Funds would be kept off-shore and investments would include specific, time-based, small infusions. As Somaliland has embraced mobile money transfer, much of the invested funding could be distributed through a mobile money platform, which also adds transparency and accountability. In the event of force majeure events, flows would cease as required. These systems should help manage risk and provide assurances to investors.

Pointing out the obvious though, private investors willing to participate understand the inherent risks and by becoming a limited partner have accepted the atypical scenario. This kind of investor has already made a commitment, and based on that obvious analysis, I would find it unusual that a committed investor would pull out in the course of the pilot fund’s 10 year life, not to mention that there would be legal documentation requiring investors to meet their obligations.

So long as the proposed solution had the first loss money to continue operations, the loss of an investor would only limit the portfolio’s growth, not cause the SME fund to default to existing portfolio companies. The solution would continue then albeit on a slightly smaller scale.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Our effort could benefit from multiple partnerships. The two most important:

1) Partnership with a Microfinance Institution – Our solution attempts to make larger investments. Because we have focused on a single – but critical – slice of infrastructure, many small businesses will not be included. We would gladly offer free space in our offices and support services to a microfinance institution that could use our infrastructure, area knowledge, and relationships to expand the impact on SME businesses.

2) Partnership with a Port Operations Company – Our solution leverages the experience of Captain Joe Lee Frank (USN-retired), CEO of Frontier Markets Partners and a 1968 graduate of the US Naval Academy. Captain Frank has a cadre of senior military personnel, active and retired, to assist in development of the Port. Eventually, a third-party partner will be helpful and necessary. If that partnership is developed earlier, Captain Frank will have greater support in the process.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

Everyone knows Somalia’s plight. As pointed out in the 2010 Rankings of Failed States, Somalia is the world’s #1 Failed State. It is:

1. A delegitimized State –
a. Somaliland has not been recognized though it meets the criteria as defined by Hans Morgenthau;
b. Puntland has sought to be classified as an autonomous state, not independent, for fear of civil war with clans from the South
c. South-Central Somalia has remained in chaos and subject to feuding warlords for 20 years

2. A failed security apparatus – a vicious cycle of warlord ascension, lack of government assertion, lack of state revenues, and lack of recognition has left South-Central Somalia to be dominated by private armies while Puntland and Somaliland to maintain limited security without foreign aid or foreign military support.

3. The lack of legitimacy, revenue, and security has led to large populations of internally displaced refugees, an economy based on remittances, and the rise of piracy.

But as these conditions already exist and as Somalia is already considered the World’s #1 Failed State, the situation can do nothing but improve.

The following phrase has been attributed to Einstein: “Insanity is doing the same thing over and over again and expecting different results.”

With all that has gone wrong, we seek to try something new and are committed to doing it. Many things could stop our progress, but we believe as Margaret Mead did: “Never doubt that a small group of thoughtful, committed [people] can change the world. Indeed, it is the only thing that ever has.”

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Port Hope attempts to utilize three principal tools.
1) An incubator providing services and training for SME portfolio companies.
2) A fund to make investments in 15-20 SME businesses and 5-7 Mushakara agreements with larger local businesses that would spend the Mushakara capital with the portfolio companies.
3) A Development and Management Company for the Port that would establish strategic partnerships and secure private investments in Port Hope.

The incubator could expand to provide training to SME businesses not a part of the portfolio companies and become a hub for programs to specific sectors.

The fund could scale over 10 years. The expectation is that Fund I would launch in 2011 with $15-$20M in capital. By 2013, Frontier Markers Partners would have shown initial results and would be in the process of raising a larger venture capital fund. By 2017, Fund III would be in development.

The Development and Management Company shows the greatest promise for scaling quickly. In 2008 our group worked to cultivate international investors, particularly for Port development. Without a cornerstone operation, our time was strained between our hearts’ work and what we needed to do financially to support our own families. With a funded, cornerstone operation, we believe that we could re-engage with global parties interested in participating in the development of the Port and the related geographic areas around the Port. By being funded, our focus could be maintained, and we are confident that we could close larger development deals, providing longer-term capital and greater development resources for the area.

Port Hope is a catalyst.