Prepared by

D A C O  --  DAvies COnsulting GmbH

on behalf of an

 International Development Trust

(in formation)

15 August 1997

© Jack L. Davies  1997 & 2001

Table of Contents

1  Executive Summary

DACO proposes that the International Development Trust implement a set of inter-related projects defined here to achieve sustainable economic development on the Horn of Africa.

The long-term strategic goals are

• to create a concentration of high-tech companies on the Horn of Africa along the model of “Silicon Valley“ in California, that reaches a “critical mass” ready for spontaneous growth by itself within 5 years of starting, and

• to convert the Horn of Africa into an East-African “Tiger“, along the model of the East-Asian “Tigers” (Japan, Hong Kong, Taiwan, South Korea, Indonesia, Malaysia, and the Philippines) --

with rapid economic development starting with a “Silicon Valley”, but with a broader technological basis, that develops throughout the Horn of Africa in parallel with the more-concentrated “Silicon Valley”.

The short-term strategic goals are

• to develop infrastructure that is necessary for achieving the long-term strategic goals and

• to quickly create jobs at lower levels of technology that will stimulate the economy and contribute to stability for achieving the long-term strategic goals.

Pre-requisites in the areas of infrastructure must be met, before these two long-term strategic goals can be achieved, in the areas of

• health,

• education,

• financial services,

• computing and telecommunications,

• transportation, and

• energy.

Many other organizations are actively engaged in improving the health services on the Horn of Africa and therefore DACO proposes that the IDT leave this task to them.

DACO proposes to focus the investments and efforts of the IDT upon improving the level of education for a larger number of more-mobile professionals in the fields of high technology and management with highest priority.  It is also necessary to substantially increase the level of know-how and experience of these professionals in specific strategic areas.

In the area of financial services, DACO proposes that the IDT create a regional venture-capital company that provides not only venture capital, but also cooperates with other partners to develop regional mutual funds, a regional stock market, and a modest program of micro-lending to the very-poor people.  By providing venture capital, this company will take the initiative in promoting start-ups of new high-tech companies and well as infrastructure projects in the private sector.

DACO proposes that the IDT should make substantially-higher levels of computing and telecommunications capabilities available to a large number of students, government administrators, and private entrepreneurs.  This will include a large number of personal computers, together with telecommunications capabilities for high-speed ISDN communications, interconnections among computers via local intranets as well as to the international Internet and WWW (World-Wide Web).

DACO also proposes that the IDT consider some projects in the areas of transportation and energy in the private sector.  For transportation, we focus upon projects that quickly create a large number of jobs and promote large exports -- that also create local jobs and general economic development.  For energy, we focus upon projects that have a symbiotic relationship with other projects in the field of transportation as well as to decrease the pressures upon deforestation.

Most potential investors in developing countries are only willing to invest at levels of technology that have already been developed successfully in the given country -- or at lower levels.  We focus upon the difficult aspect of starting at the top at the leading edge in at least a few carefully-selected technologies, which is more difficult; but this automatically opens the doors for other investments to follow, without requiring assistance from the IDT, at levels of technology lower than those that the IDT will be implementing.

DACO has given careful though over several years in our selections of technological areas where we propose to quickly achieve excellence at the state-of-the-art on the Horn of Africa.  These choices, as well as our proposed methods for achieving these levels of excellence, are open to debate.  In such an innovative experiment, it is absolutely necessary to maintain complete flexibility to immediately

• create new projects when unique opportunities arise,

• expand successful projects, and

• reduce or cancel projects that are not successful.

This is the reason why DACO insists that the IDT implement these projects completely under the control of its own set of subsidiary private trusts and companies, that can apply modern methods of project management from the private sector.  This avoids the bureaucratic necessity of obtaining approvals from committees, governmental organizations, or international organizations.  To do otherwise, would immediately create inflexible new bureaucracies that are not needed and would lead to failure.

The approach at the beginning is admittedly dictatorial.  It is like the situation of two parents conceiving a child, over which they will have nearly dictatorial control as long as it is a small baby.  However, as the child matures, it will become increasingly independent and leaves the home of its parents.  The projects that the IDT arbitrarily launches will also mature, developing viability of their own, and hence independence as they mature.  As this set of projects matures and becomes viable, DACO proposes that control over the International Development Trust at the top, as well as the trusts and companies below it, be transferred to local ownership and control.  Commercially-successful projects should be spun-off of from their non-profit parents to become independent business enterprises owned by local citizens -- as soon as they are able to do so.  DACO has placed a strong focus upon recycling local “flight capital” as well as mobilizing free local capital to take over equity ownership of all companies that the IDT creates.

One goal is to quickly create as many new locally-owned private companies as possible, that will in turn be able to successfully grow within a functioning free-market economy.  It is definitely not a proposed goal to create a foreign empire “holding” most of the profitable companies on the Horn of Africa.

The set of projects proposed here are interrelated, with strong symbiotic effects, designed to create the pre-requisite conditions necessary for a “Silicon Valley” and then an East-African economic “Tiger” to evolve spontaneously. They are based upon intensive study over the past 10 years of the local political and economic situation together with the natural resources available.

The combined efforts of the World Bank, the United Nations, and bilateral foreign aid over the last several decades have generally failed to contribute significantly or efficiently to achieving such goals in Africa.  Particularly the World Bank has recognized this sad reality and has reacted constructively, by attempting several major reforms in its policies to improve its own performance.  It is extremely difficult however for any large bureaucratic organization, particularly one that was created politically, to design and implement truly innovative reforms.  Traditionally, true innovation usually comes from small organizations in the private sector, generating models and successful precedents that then can be integrated and implemented in the public sector.

The strategies and proposals presented here by DACO should not be seen as criticism of the past or competition with international efforts in the present. Rather, they should be seen as an example of how a small private organization can most effectively experiment innovatively to develop new models that may also be useful for international organizations later.

The projects presented here by DACO have been defined innovatively using new strategies. Therefore, this set of projects may be interpreted as an experiment with a new model for Africa -- or more generally for most developing regions of the World.  If this model is successful, it should be possible to copy it in other developing regions of the World.  If it fails, it must be discarded and other better models must be developed.

As examples of new strategies,  DACO has proposed a strong focus upon

• developing the basis for high-tech services that can be performed with moderate labor costs and exported electronically without local ecological damage, rather than low-level manufacturing based only upon low labor costs or simple exploitation of local mineral resources;

• engaging local personnel to implement all development projects, thereby creating local jobs that in turn create local stability for projects; and

• promoting projects that result in a broad base of local citizens becoming the ultimate owners of the projects and resulting companies in their homelands and countries.

DACO proposes that all of these projects be implemented by the IDT in the private sector using private funds through a set of subsidiary trusts and companies that it creates for this purpose.  The major trusts and companies, together with their roles, are shown in Figure 1 on page 8 and are listed here:

1. International Development Trust, registered off-shore -- will create and initially own the following trust and companies

2. Horn-of-Africa Education Trust, registered locally -- will provide scholarships, grants to schools, and support for curricula development

3. Horn-of-Africa Institute of Advanced Technology, registered locally -- will provide infrastructure of computers with interconnections via intranets and Internet, post-graduate scholarships abroad, and 10 “Departments” conducting research at high levels in selected strategic areas

4. Horn-of-Africa Venture-Capital Company, registered offshore with local subsidiaries -- will provide venture capital for high-tech start-ups, privatizations, and infrastructure projects as well as a modest program of micro-lending to the poor and cooperating with others to create area mutual funds and a regional stock market

5. Advanced-Technology Company, registered in the USA -- will invest in high-tech companies abroad that are strategically important as potential joint-venture partners for new high-tech companies on the Horn of Africa

6. East-African Transportation Company, registered off-shore with separate companies registered in each country where it has operations -- will invest in infrastructure projects mainly in the field of transportation and to a lesser extent in energy

7. Portfolio-Management Company, registered off-shore -- will invest all free funds of the International Development Trust in one portfolio and will pool all internal endowments for management in another portfolio

The scope of this proposal is generally open ended, concerning

• which of the proposed companies and trusts will be formed and when,

• which groups of projects will be financed and launched within each company or trust,

• which projects will be financed and launched within each group of projects, and

• at what level each individual project will be financed.

The minimum investment required for making a meaningful endeavor within this framework is about 10 million USD.  If all the projects are funded at the proposed levels, this would require a maximum investment of about 3 billion USD over 5 years.  There is considerable flexibility for an actual choice between these two extreme values.  The

• lower limits are defined by various requirements for meeting certain threshold levels to achieve efficient operations for individual projects,

• maximum limits are defined by the ability to create the necessary administrative capabilities and quickly expand these capacities for effectively managing a wide variety of different kinds of activities, and

• actual choices will be defined, between these two extremes,

by the funds that are actually available for this endeavor.

The budget estimates given here for individual projects or groups of projects are usually for the maximum levels of funding that are currently considered to be desirable and manageable.  The minimum requirements for starting a given company or trust, as well as individual groups of projects or groups of projects, are also given when appropriate.

This set of projects was designed for maximum symbiotic interactions within the whole set, whereby these positive interactions may not all be obvious at first glance.  Therefore, in selecting a subset of projects for actual implementation at any given time, these symbiotic interactions should be carefully considered.

From the financial perspective, two types of funding are proposed:

• one-time grants from the capital resources of the International Development Trust, at the top of the hierarchy of companies and trusts, and

• sustaining grants on a yearly basis from separate internal endowments managed for each project or group of projects.

As an example, consider the case of creating one “Department” for a specific academic discipline within the Horn-of-Africa Institute of Technology.  One-time grants will be made by the International Development Trust to the HoA IAT to establish office facilities, to equip these facilities, to buy laboratory equipment, etc. to get this new Department started.

It will not make sense to pay salaries and other normal yearly operating expenses with such one-time grants, depending upon the availability of funds each year to do so.  Rather, if and when a Department is founded, a matching internal endowment will be created, with capital for the endowment reserved on a one-time basis by the International Development Trust.  The yearly profits from this endowment will be relatively steady and will be used to pay salaries and normal operating costs.  In this way, when a Department is launched, the basis will also be established for maintaining operations at a given level for many years without additional capital being provided from the International Development Trust.

It is administratively not advisable to create many different independent internal endowments, one for each group of projects of the International Development Trust.  Some of these endowments would be lucky, make large profits, and allow their projects to expand quickly.  Others would be less fortunate, not earn adequate profits to maintain current operations, and therefore force their supported projects to scale down or even cease operations.  The relative levels of operations for different projects and groups of projects should be managed according to other criteria than just the accidental successes or failures of individual small endowments.

This is the reason  for creating an off-shore Portfolio Management Company under the International Development Trust -- as a wholly-owned subsidiary company.  All of the available capital of the Trust will be transferred to this company for management.  This company will professionally manage one large portfolio of investments for all internal endowments under the International Development Trust, with each endowment assigned a specific fraction of the capital in this portfolio and the resulting income.  This portfolio will be optimized for steady income over many years as well as distribution of risks, so that the beneficiaries of each of its endowments can count upon a steady flow of income for financing their normal yearly expenses.  The risks will be diversified over

• different kinds of investments, such as generally preferring bonds over stocks for steady income in this case,

• different regions of the World, and

• different economic sectors.

The Portfolio Management Company will also manage one or more other portfolios for the International Development Trust, with specific goals for increasing the capital available to the Trust.  This will consist of at least two separate portfolios of investments:

• one aimed at maximum profits for quickly expanding the working capital of the International Development Trust and

• the other aimed at more modest profits, but with lower risks in order to assure at least modest growth every year in the working capital of the Trust.

Initially, the International Development Trust will make substantial equity investments in normal profit-making companies -- both on the Horn of Africa and abroad.  It will do so in order to launch such companies that are strategically important for its objectives and to establish relationships with key potential joint-venture partners abroad for its new companies on the Horn of Africa.  However, within about 5 years, it will be feasible for the International Development Trust to start selling off most of these equity positions in various companies -- and use these funds for additional endowments to provide additional sustained income for its non-profit activities and projects.

When a company (normal or non-profit) is founded in Ethiopia, it is necessary to start out with equity capital of at least 500,000 USD in order to qualify for important exemptions from taxes and customs duties.  Half of this sum must be transferred in cash to the Ethiopian National Bank when the company is registered and the other half can be paid in later, such as by making purchases abroad for equipment and supplies paid for in USD and then imported into Ethiopia for use by the company.  In these cases, one should not try to form such a local company unless at least 250,000 USD is available for immediate transfer and at least an additional 250,000 USD will be available outside of Ethiopia within a few months.  This technical requirement is independent of the funds that the company actually needs to launch operations and it defines a lower minimum amount of funding required at the beginning to launch a new company properly.

To start these operations, the first step will consist of founding the International Development Trust (offshore).  Then, the other companies of Figure 1 can be formed in any order according to current priorities as minimum amounts of funds are available to justify forming them.  The International Development Trust will then be at least the initial owner of these other companies.

   Table of Contents & Chapter 1 >

Printed Version 15 Aug 1997 -- Web Version 22 Apr 2001

© Jack L. Davies 1997 & 2001

[Note for writers: Bookmarks are installed at the beginning of each section, i.e. 1, 2, & 2.1]