Wild-Card Prospecting: Vetting Private-Sector Partners When Familiar Norms Don’t Apply

This is the third blog in a series inspired by the four take-away messages from USAID’s primer on private-sector engagement in fragile and conflict-affected situations, and it focuses on vetting private-sector actors as potential development partners in places where a paucity of enterprise data, low standards for company operations, and an absence of familiar business norms make it difficult to apply a typical approach to partner prospecting. See the other entries in the series for more on social inclusion, environmental stewardship and conflict sensitivity as a third dimension to shared value; managing private-sector actors who are invested in a conflict-dominated, humanitarian system; and the importance of non-financial support to local businesses and new investors.

Businesses in the eastern DRC’s Ituri Province, where USAID’s Strengthening Livelihoods and Resilience (SLR) activity works, face an unfriendly environment. They have incentives to stay small and relatively informal, since the more they have on the books, the more the state can legally tax or illegally extort. With weak contract enforcement, they are loath to trust other companies unless they have a longstanding relationship, even when there is mutual benefit to be gained from a new partnership. With working capital in short supply, the people who start businesses are often those who happen to own assets, not necessarily those who have the knowledge, skills, or energy of a good entrepreneur. This leads to a small field of private-sector actors that a donor project can work with, and those few rarely measure up to traditional standards. It was uncommon for SLR to come across businesses that kept thorough records, used effective accounting and inventory procedures, or had the business skills and vocabulary private-sector engagement specialists are accustomed to. This same environment reinforces norms like avoidance of written contracts, pursuit of exploitative sales margins on one-off transactions, and an orientation to international donors’ implementing partners as clients—not Ituri’s people, businesses, and local organizations. SLR needed to adapt to those lower standards and irregular norms.

As USAID’s primer on private-sector engagement in these contexts points out, conflict mapping, strategic positioning, due diligence, and environmental and social risk management are important steps that can be taken up front to prepare a project to work with the right kind of private-sector actor based on the right shared values. However, when a project confronts norms and standards like the ones that prevail in Ituri, it becomes difficult to select and vet businesses for the simple reason that the information it needs to make decisions about whether and how to partner is absent, unintelligible, or sometimes even difficult to identify in the first place.

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Lowering the bar

After the Ituri peace process broke down during 2020, most of the large companies in the province withdrew or hibernated. When the SLR program was designed in 2019 and tendered in early 2020, for example, it counted on doing much of its livelihoods work via the large cocoa exporter ESCO Kivu, which phased out major purchasing in Ituri by 2021. Faced with this scarcity of partners, SLR radically simplified its partnership criteria to three questions:

• Does the potential partner have appropriate legal status?
• Do they have a presence in the geographic zone of interest?
• Do they do anything (anything at all) related to the livelihood strategy SLR and communities are investing in?

This bar, low as it is, still rules out many businesses. However, if one of them can answer ‘yes’ to all three questions, SLR invites it into the community co-creation process discussed in the previous post to refine ideas and roles. If incentives are aligned enough for a partnership, SLR enters negotiations in earnest, identifying what the partner is prepared to invest in terms of capital, credit, expertise, or manpower, and where SLR can deploy resources in a catalytic way (for a table outlining how the team thinks about using in-kind or technical assistance to partners according to good facilitation principles, see the last page of these workplan excerpts). SLR often compensated for the limited information available at the prospecting and vetting stage by shortening the initial engagement to a pilot initiative for a single agricultural season, during which it explored the partners’ weaknesses and confirmed that they shared the same values and incentives. After six months of working together, the SLR team, private-sector partners, and community members usually knew whether to scale up their efforts, try something else, or call off the partnership.

Wild cards: “Wait, what?”

Talking about “confirming shared values and incentives” through joint implementation of a low-stakes pilot harkens back to the last post in this series on ‘bad actors’ in the private sector. And creating a series of ‘doors’ (i.e., multi-phase partnerships) for partners to step through is indeed one way that SLR applies continuous self-selection and ensures ongoing monitoring to filter out partners who don’t share its values and objectives. However, this framing paints a portrait of disingenuous economic operators scheming to mislead SLR and its partner communities about their real intentions in order to exploit both. That may be an accurate picture in some cases, but sometimes the market system in Ituri is so distorted, and norms are so twisted away from the incentive structures of developed economies, that SLR can’t count on businesses to fully grasp their own interests and incentives—at least not when SLR is proposing a change to business as usual.

For example, to support community partners in Aru territory who were growing a high-performing variety of maize thanks to a partnership with a Ugandan seed company, in early 2023 SLR sought output buyers it could connect to the communities expecting to triple or quadruple their harvests that year. One such potential partner was a family business based in Ingbokolo that bought raw maize to mill into flour to sell into Aru’s economic centre of Ariwara and the mine-driven economy of Durba in neighboring Haut-Uélé province. The business struggled to source enough maize to keep their milling machines running efficiently and welcomed SLR’s networking with producers who could sell them more. Before the season began, it shared the good news that it had signed a large contract with a mine operator to purchase nearly all the estimated maize production. Usually the mine imported maize flour from Uganda to feed its workforce, but it was open to a less expensive local source. And as farmers sowed the maize seed, the family-owned company began relocating their maize mill closer to the zone of production to economize on transport costs.

Then things got weird. Late in the season, the same off-taker informed SLR’s activity manager that it wouldn’t be able to take the whole harvest after all—in fact, it didn’t have a single buyer lined up. “Did the mine operator renege on the contract?” SLR staff asked suspiciously. No—the purchase order was never executed in the first place, it turned out. The team was baffled: it would be disappointing but understandable if the milling business had lied about landing a large client in order to get funding to set up shop in a new locale, but in this case deceit didn’t make sense. SLR support was never conditional on the commitment of a large buyer, and the partner had invested financially and reputationally much more than SLR had: he had relocated tens of thousands of dollars of equipment a hundred kilometres away and built up the security and electricity infrastructure to support it. More importantly, he had publicly promised all his new neighbors that at the end of the season he would buy all of their production at a high price. SLR, on the other hand, had merely facilitated introductions and chipped in a few thousand dollars to help with the transport costs—a gesture at de-risking the new commercial relationship. Did the mill operator think that when the purchase order “fell through” SLR would swoop in to bail everyone out? The project had been explicit about this from the beginning: taking some gentle liberties with AIDAR 752.225, they had explained to anyone who would listen that SLR was categorically prohibited from buying seeds or agricultural outputs, even if it wanted to. And the partner never requested that SLR buy the outputs; he just dejectedly began looking for new, smaller-scale buyers closer to home (and SLR did its best to help him network). So if not deceit, what had gone wrong?

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Hanlon’s razor

The SLR team and its community and government contacts asked around, and the most convincing explanation they could find was that the company’s paterfamilias did not delegate much responsibility to his children, and they had no professional accountant or sales manager. When he suffered a bout of health problems near the beginning of the season, he had asked one of his sons to handle the negotiations with the mine operator but didn’t think to verify that the draft purchase order had actually been countersigned—he usually sold flour in smaller tranches to semi-formal or informal operators, and he had not developed habits around written contracts. SLR thought it was practicing good private-sector engagement and respecting the partner’s privacy by not insisting on reviewing the supposed contract: after all, the team reasoned, they were at the very beginning of their relationship and profit margins are sensitive in rural Aru, where distrust of the private sector is high. Besides, the milling business was taking on far more risk than SLR in the venture: why would it do anything to undermine it?  SLR’s instinct was partially correct. The partner’s co-investment was indeed an adequate gesture of commitment… but in its prospecting and vetting efforts, SLR had failed to account for the partner’s self-knowledge of its own ability to deliver on that good-faith promise.

This hapless mill operator is managing to purchase most of the promised harvest anyway, but in smaller tranches and at a lower unit price than originally promised. His story is just the most egregious example of the breakdown of demand and cashflow in the output market last year that cast a pale on this otherwise successful seed-credit pilot: in other parts of Aru, mills found buyers but didn’t negotiate advance payment terms, so they arrived in the village without the cash on hand to pay farmers and the maize harvest is moving up the value chain slower than expected. Despite some disappointment, the seed company, most of the farmers, and most of the off-takers are still interested in continuing their partnership next season, albeit with tempered expectations.

“How was I supposed to know to ask that?”

For its part, SLR realized that in an environment like Ituri’s, it cannot always anticipate all the questions it should ask a potential partner. Standards are uniformly low, but business capacity varies in unpredictable ways. Norms the team isn’t even aware of taking for granted can undermine an otherwise solid partnership. The best it can do is to spend more time shoulder to shoulder with its partners during the vetting phase and early in partnership implementation, and with eyes and ears open. In hindsight, all that would have been needed to avert the Ingbokolo milling company’s error would have been to notice how sick the boss had been and, when he was back at work, pose some friendly but pointed questions: “So, did you finalize the deal with the mine?” “But did you see the contract?” “Yes, but is it signed?”  In more stable and developed markets with more predictable norms and stronger partners, that degree of close observation and epistemic logic may be unnecessary, but in the most fragile and conflict-affected settings, it is essential.

Even in a best-case scenario with a stronger partner, Ituri’s business climate posed challenges when SLR staff asked the most obvious questions. One of SLR’s most promising partners produces low-grade red palm oil for soap in Aru territory. SLR is coinvesting in a press that will both increase production and refine oil to a higher quality for human consumption. It is also advising the company on how to reduce its waste by arranging with another business to collect the palm husks and turn them into building material, and transforming the palm kernel into a meal for fish food (to that end, SLR connected them to fish farms SLR is supporting as part of its nutrition programming). When it comes to harvesting and processing palm oil, the company has all the technical competencies it needed, asking little from SLR other than one-time financial support to accelerate their expansion and diversification. However, even this company languished in partnership negotiations with SLR for over six months because it is not standard practice to track annual turnover and other basic business information. When it could not even arrive at a ballpark figure for its chiffre d’affaires on its own, SLR decided to build traction by starting the partnership with non-financial support to develop a business plan first. 

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Keeping an open mind in spite of everything

Economies at their lowest also have the greatest potential to climb, and stupefyingly complex systems feature an unpredictability that can lead to surprises, good and bad. The observation that flexibility and open-mindedness are necessary for partnering in thin market systems is doubly true for a fragile, conflict-affected one like Ituri, so SLR is open to compromise when its partners do not measure up. By some estimates, three-quarters of the food consumed in the eastern DRC flows through informal channels, and for SLR to meaningfully strengthen the resilience of poor households in Ituri, it needs to engage with the part of the food system that remains hidden to donor-funded projects with more rigid views about what market actors make suitable partners. However, when SLR does compromise at the vetting stage, it designs the subsequent private-sector partnerships to go beyond routine funding: it offers training, coaching, networking, and other technical assistance for its partners to help them reach for a higher standard, begin to change prevailing norms… and make Ituri a little bit easier to do business in. The next and final post in this series provides examples of this non-financial support.

Dan Langfitt is a Principal Specialist in DAI’s Resilience & Stability practice. He was the Director of Partnerships and Operations for the DRC SLR Activity until April 2023. SLR’s Jaël Mbale and Gédéon Wanadi made major contributions to this piece.