"...Assistance to creation of the infrastructure to small business development..."
From the National Programme to Support Small Entrepreneurship Development in Ukraine
A fundamental issue facing any support mechanism for support of enterprise is how to fund it. In most instances there are typically two main sources of funds that may be available: internally generated revenues (from selling products and services to clients); and external funds (through grants, loans, subsidies etc. of governmental bodies or donor organizations).
An important principle underpinning much governmental or donor support is that organizations should evolve and move towards sustainability over time. A consequence of this is that the ratio between the proportion of overall funding contributed by internally- and externally generated funding will typically move towards an increasing reliance on self-generated internal sources of funding on the part of an enterprise support organization. Financing mechanisms therefore need to be designed to explicitly address this requirement. Activity Based Funding is one such method that can be used. It is a financing concept and mechanism that was developed for the Ukrainian Network of Agencies for Development of Enterprise (ADEs).
The development of the Ukrainian Network of Agencies for Development of Enterprise (ADEs) faced the problem of how new agencies could best be set up and financed as it sought to achieve a rapid geographic expansion. Whilst the first of the ADEs were traditional, fully donor funded business support centers, encouragement of small consultancy practices to join the network led to all its members, including the early business centers, becoming subject to a system of payment for activities undertaken - Activity Based Funding.
Instead of fully financing an Agency, ABF was linked directly to mutually agreed types and volumes of activities undertaken by each agency. Payment was made on the basis of the agreed level of activities being met (but not exceeded) given that all agreed activities (e.g. type of course, target group, planned output etc) were met.
The merits of this funding system are that activities and outputs are clearly linked. Further it is a system that allows for funding of external client delivery, as well as internal organizational development. One of the great advantages is that it offered great flexibility in funding activities in ADEs.
As the network matured it has developed a shared portfolio of services, with each individual agency securing its own SME customer base. Over time the ABF concept has been modified, eventually moving to Fixed Price Contracting.
CHOICE OF SOLUTION
In principle there were 3 different types of financing mechanisms used for ADEs
1. Full funding — by the funding donor — of me
activities of an ADE (usually for two — three
months in the very initial stages of the ADE).
2. Activity Based Funding (ABF), whereby the
funding donor guaranteed that it would fund a
certain amount of the activities proposed by
the ADEs. This being conditional on all agreed
activities (type of course, target group, planned
output and so forth) of project planning, are
fulfilled. In this funding form ADEs have a
decision making input.
3. Fixed Priced Contracting (FPC) basically
offered the ADEs a contract, which identified
network-wide core SME activities that should
be fulfilled in order to receive funding. FPC
gives little room for decision-making input.
The ABF overall objective is to further the economic growth in Ukraine through the continued support to the development of the SME sector and the vehicles for such support.
This Ukrainian SME best practice was funded by the European Union. The consultancy company implementing it was GFA Management of Germany. EU consultants were Philip Santens and Kevin Thorpe, the team leader was Bruce Harris.
The main purposes in implementing the ABF Model were to: