Jennifer Prillaman | Palladium - Dec 13 2018
Fixing Macedonia's Fractured Business Ecosystem

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Development resources and donor funding to Macedonia are dwindling due to the country's economic progress over the past decade. The country's business ecosystem—the network of organisations delivering products or services to the private sector, especially its micro, small, and medium enterprises (MSMEs)—needs to generate and channel private investment in place of external donor resources. MSMEs are the engines of Macedonia’s growth and job creation. Unemployment continues to be a significant challenge in Macedonia, especially among youth, with the official unemployment rate in 2017 at 25%. Among youth, the rate was over 50%—one of the highest in the world. Moreover, working-age women remain underrepresented in the labor force, with low rates of participation (around 50%, compared to 78% for working age men), depriving the economy of productive capacity.

Macedonia is close to self-reliance, but its business ecosystem is not yet able to replace the many services made possible by over two decades of donor funding. Services for MSMEs remain underdeveloped, disconnected from the real needs of the market, dependent on donor support, and are not provided by self-sustaining organisations. Business service organisations (BSOs), such as industry associations, who might step up to provide services to MSMEs who are members or based on a fee-for-service model themselves need extensive capacity building to develop a member services (rather than donor grantee) mentality, develop targeted offerings, and demonstrate their value to their members—all steps on the way to financial self-sufficiency. Meanwhile, MSMEs have, for years, received services for free from donors or donor-supported BSOs, and are often unwilling to pay for those services. It is a cycle that is hard to break.

And yet there is a market opportunity to seize: there are and always will be MSMEs that need external expertise to develop basic business skills, access new markets, comply with industry standards, improve marketing, and advocate for policy change. If BSOs can provide such services commercially, and if companies can see the value in paying for them, Macedonia will move a step closer to economic self-reliance.

For over 10 years, Palladium has been supporting innovative private sector competitiveness and sustainability programming in Macedonia. Currently, under USAID's Business Ecosystem Project (BEP) and the recently launched Swiss-funded Improving Market Employability 2 (IME 2) Project, Palladium is working to make this a reality, strengthening the country's business ecosystem in two ways: 1) supporting the development and commercialisation of in-demand business services; and 2) incentivising strategic private sector investment into supply chain and workforce development. Both projects are working in synergy to transform the competitiveness of MSMEs in Macedonia by strengthening business services, finance, and market linkages to catalyse a significant increase in MSME growth, productivity, and employment.

Private Sector Investments
Through BEP and IME, Palladium is supporting a range of BSOs—chambers, professional and industry groups, incubators and accelerators, and NGOs—in developing and marketing different services that MSMEs need. Simultaneously, Palladium is leveraging resources from large companies (lead firms) to further enhance local supply chains and train the workforce with the skillsets that are in demand by the labour market. In close cooperation with USAID, Palladium has refined its approach to private sector engagement in Macedonia and is co-investing with lead firms to incentivise external investments, with the goal of scaling and replicating the most successful initiatives.

The two projects are targeting industries that have significant growth potential but face external constraints that are best tackled by lead firm investments in private sector supply chains, workforce development, and local economic development. One such example is apparel company Kulitex. Company owner Aleksandar Marinovski explained why his company decided to co-invest with BEP:

"My company's management realized that a small investment in equipment for our subcontractors can result in a substantial productivity gain and increased revenue both for them and for my own business. Together with the Business Ecosystem Project, we co-invested into these companies and provided them with adequate equipment and know-how for increasing their production capacities and productivity. The suppliers now are capacitated to work on the excess orders and I have hence increased my export capacity."

Between the two projects, we're targeting high-value agribusiness, light manufacturing, adventure tourism, dairy, and apparel industries.

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Over the last 20 years, Macedonia has made great strides in its journey to economic self-reliance, but still lacks dynamic private sector growth and employment.

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New Incentives
Palladium is also working to change the incentives that drive both BSOs and MSMEs to offer value and pay for services. When supporting BSOs in providing adequate services, Palladium focuses both on financial consultants and on membership-based BSOs, such as trade associations and chambers.
To support financial consultants, Palladium pays a success fee based on their performance in helping their MSME clients to access capital for business expansion. As few MSMEs are prepared to pay the full market price for consulting services, mostly due to their skepticism concerning the value such consultants add, the discounted prices enable them to 'try before they buy' while also giving the consultants space to demonstrate their usefulness.

Consultant Anastas Dzurovski explained how BEP's support helped him grow his business:

"The consultancy market in Macedonia is big on potential but underserved, with MSMEs reluctant to engage a consultant. The Project developed a success fee structure that decreased both the price and risk of engaging a consultant thus encouraging MSMEs to engage a consultant. My company had a 30% increase in its client base, especially with clients from rural areas. The assistance provided to rural areas is very important, as these areas are underdeveloped and are in dire need of assistance. As for us as consultants, we are incentivized to continue serving the MSMEs because though the Project promotional activities, we expand our market and increase the sustainability of our business. After the companies engage for a reduced price and then see the value added of consultancy, they are no longer reluctant to hire us on a purely commercial basis."

To incentivise a gradual transition towards fully commercial services, Palladium decreases the success fee annually as financial facilitators demonstrate their value to the firms and financial institutions they assist. In parallel, we are educating the financial consultants on and connecting them to financing sources that are suitable for MSMEs, but with which theconsultants may not have previously worked. This helps the consultants increase their success rates in facilitating financing, improving the value they provide to their existing clientele. As the consultants' capacity, clientele and revenues rise, they become less dependent on receiving a success fee from a donor project for facilitating financing. They integrate seamlessly into a new market ecosystem we have helped to catalyse.

Vocational Education
Another major piece of the business ecosystem puzzle has to do with developing a qualified workforce that can fill existing job openings across multiple sectors. Although workforce issues vary by sector, the overarching problem is that Macedonia's formal and informal education system is not producing enough qualified workers with vocational education to keep up with the growth of the labour market. Welders, electricians, hairstylists, logisticians and many other positions are in short supply across the country.

The quality of state-funded vocational schools has been falling for over a decade, which has made vocational high schools the last resort for elementary school graduates who failed to enroll elsewhere. While the private sector has an urgent need for workers with vocational skillsets, the underfunded system of formal vocational education is not up to date or meeting the needs of the market. Out of necessity, larger companies do their best to fund their own training programs, but they are understandably not a replacement for the underperforming vocational education system. Equally critical is the need to improve the public perception of vocational education and employment; the perception problem contributes significantly to the large number of jobs that are currently going unfilled.

Both BEP and IME are working to improve the quality of vocational education and public perceptions of vocational professions. To make this possible, Palladium is leveraging resources from the public, private, and civil society sectors, supporting BSOs to launch sustainable vocational training programs, partnering with lead firms to fund these programs, and leading a multi-stakeholder publicity campaign to improve the public image of vocational professions. The projects also work with MSMEs to improve their recruitment and human capital management to create more promising opportunities for women and youth.

Achieving Transformational Results
While Macedonia's business ecosystem has challenges that could take a decade to fully resolve, even modest successes in the next few years will remove a major constraint to the growth of many Macedonian companies. Palladium’s innovative approaches with IME and BEP are on target to achieve significant results. We're creating 7,750 jobs (5,750 under BEP and 2,000 under IME) and leveraging over $140 million in financing for the private sector. Palladium will bring transformative, dynamic change to Macedonia’s business ecosystem at scale under BEP and IME, paving the way for Macedonia’s market system to continue to function sustainably after the projects have concluded.

 

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