Strengthening Investment Promotion Agencies:

The Role of the Private Sector

by
the Foreign Investment Advisory Service (FIAS)
March 1999

I. Introduction

Recognizing the importance foreign direct investment (FDI) for a country’s

industrial and economic growth, many governments around the world have established
Investment Promotion Agencies (IPAs). Their fundamental purpose is to act in the
national interest by helping to bring into the country needed capital, technology,
advanced managerial skills, and access to international markets. IPAs are therefore
expected to develop mechanisms designed to attract foreign investors and to facilitate
their setting-up business in the country.

But developing effective and efficient organizations that are capable of carrying
out this vital public function in a sustained manner is anything but easy. One of the
lessons of experience from countries that have successfully attracted large amounts of
foreign investment is that, to be effective, investment promotion activities must maintain
a high level of quality, and be conducted in a strategic manner over a sustained period.
Further, since many of the activities related to investment promotion are high-cost
activities, effective investment promotion agencies require significant levels of financial
and other resources. For example, the preparation of promotion materials, international
and electronic communication, and the organization of missions abroad are all expensive
activities. Since investment promotion agencies often compete with the private sector to
attract highly qualified, motivated and service-oriented staff, their employment costs tend
to be higher than those of other governmental agencies. At the same time, the benefits of
investment promotion activities are seldom seen in the short term, and a long-term
commitment of resources is necessary.

Access to the necessary financial resources frequently poses a problem for IPAs.
At the outset, agencies in developing and transition economies are frequently supported
by bilateral and multilateral donors. However, this type of funding is usually phased out
after a few years. After that, IPAs often are not given adequate budgetary support from
the central government. Besides general limitations on budget resources, governments
often limit their contributions, because of a perceived lack of short-term success or
because they take the existing effective performance for granted. Therefore, IPAs are
often confronted with serious concerns regarding the sustainability of their organization
and activities.
 To reduce these budgetary pressures, IPAs often consider the involvement of the
private sector as an additional or alternative source of funding. In some cases,
governments themselves encourage their agencies to obtain more funding from the
private sector to fill the gap left by declining donor and inadequate government support.
As IPAs tend to develop increasingly close contact with private investors through their
promotion activities, this seems to be a logical thing to do. For IPAs, however, seeking
private funding poses the dilemma of whether they are providing a private or a public
service. Moreover, they are unsure whether any of their services are sufficiently
attractive for private investors to elicit their direct financial support.

This note discusses the role of the private sector in the operation and especially in
the funding of IPAs. It is based on the international experience of the Foreign Investment
Advisory Service (FIAS) with IPAs worldwide. It tries to outline the role of the private
sector in the operations of an IPA as well as the experiences made by individual IPAs
with direct contributions from the private sector.

II. The Dual Role of an IPA

Conceptually, an IPA is established to serve the national interest and provide a

public good. The ultimate goal of attracting foreign direct investment is to support the
country’s economic development process by enlarging private sector activity, generating
foreign exchange through incoming investments, enhancing trade flows, and providing
additional business opportunities for domestic entrepreneurs. IPAs typically also have an
important policy function. They suggest improvements in relevant policies, laws,
procedures and institutions in order to improve the business environment for foreign and
domestic investors alike. This implies that governments will always play the central role
in supporting the establishment and operation of an IPA, independent of whether the
agency manages also attract support from the private sector.

At the operational level, however, an IPA also needs to provide valuable services
directly to the private sector. In fact, to fulfill its function of attracting investment, an
IPA needs to ensure that investors not only become interested, but that they also manage
to actually set up their businesses and start operations. This poses a challenge especially
for more mature IPAs. When trying to attract investors to the country, these agencies
quickly find out that they have to go beyond the simple image building functions,
designed to advertise the general attractiveness of the country as an investment location.
General information on the relevant legislation, taxation, incentive schemes, or labor and
product market conditions are standard requirements expected from any IPA. Depending
on the particular needs of an investor, IPA staff might need to provide concrete services
regarding project-specific tax and incentive issues, develop business contacts with
relevant local suppliers or financial institutions, assist in site selection or visa and
customs arrangements, down to providing advice on transportation requirements or
schooling for expatriate children. Any of these issues, if not resolved satisfactorily,
might result in an investor’s decision to locate his project in another country instead.

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 Hence, in fulfilling its public sector role, it also provides valuable services to the
private sector. In fact, for an IPA to be truly effective in attracting investors, it needs to
develop a keen and detailed understanding of investor needs and specific market
conditions in the various industries. This is also particularly relevant for an IPA’s policy
function. Because of its awareness of the details of the investment decision process, the
IPA becomes an invaluable source of information for the government. The agency
should be the first to know when slow administrative procedures unduly delay the
registration of a company, when delays in the connection to utility services jeopardize
operation start-ups, or when specific legislation, tax regulations, or customs requirements
result in investors turning away from the country.

At the operational level, it therefore is not always easy to categorize a true IPA
either as a public entity or a private service provider. In fact, the agency needs to be
both, and its effectiveness depends on this double role. Only when an IPA is close to the
government, with strong influence over the domestic policy environment, can it provide
the required services to the foreign investors. And only because it works closely with
these investors, can it attract FDI to the country as well as help the government to reform
the policy environment in order to improve the business environment. On the other hand,
an IPA would lose its effectiveness, should it get too close to either side. An IPA closely
resembling a government agency will lose credibility, as investors will question the
objectivity of the information and assistance provided. Similarly, a government will not
take any policy feedback and reform initiatives seriously if it believes the IPA is acting as
a representative of private investors only. Hence, at the operational level a truly effective
IPA needs to occupy the middle ground between the private and the public sector in order
to be able to assist both.

III. Involving the Private Sector in an IPA

Frequently, IPAs are established as public sector entities within the government
with, at best, limited input by the private sector. They therefore tend to be particularly
strong in providing general image-building functions, such as producing brochures,
providing general statistics, and giving presentations. However, many of them find it
difficult to help when approached by interested investors facing project-specific
difficulties or problems.

This is an indication that most IPAs have not yet managed to find an appropriate
balance in their position relative to the private sector. In order to become more client-
oriented with high-quality services needed by investors, such IPAs would be well-advised
to develop closer working relationships with the private sector. Through such
relationships IPAs can develop the necessary skills to provide investor-oriented services,
as well as gauge the usefulness of their services as currently provided. Hence,
developing a close working relationship with the private sector is essential for the
effective operations of an IPA.

One way of accomplishing such a strategic alliance is through the incorporation of

senior representatives of the private sector on the Executive Board of an IPA. The

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governance structure often excludes the private sector, with agencies either directly
reporting to individual ministries or to an Executive Board consisting of various
ministries and other public sector representatives. Hence, the experience with private
sector involvement on IPA Boards is thin. An informal survey of the governance
structure of 55 IPAs worldwide, where FIAS had practical experience, suggests that only
about 13 percent have a board with private sector members. A more detailed survey of
25 IPAs in Central and Eastern Europe, conducted as background information for the
1997 Geneva Forum organized by FIAS and UNECE, revealed that six agencies had a
governance structure including a joint public-private supervisory Board.

Thus directly involving the private sector in the governance structure of

promotion agencies is relatively rare. It can be useful, however, in order to formalize the
agency’s dual role between the private and the public sector. Rather than simply
proclaiming it as a working goal to establish closer relationships with the private sector in
order to enhance an agency’s effectiveness, such an arrangement would institutionalize
private sector participation in an IPA’s work. Second, the presence of private sector
representatives in its supervisory body would provide an agency with immediate
feedback regarding the effectiveness and usefulness of its work from the perspective of
investors. It would also establish a direct flow of information, immediately alerting an
agency of emerging difficulties and concerns. Thirdly, if appropriately used, the
participation of the private sector can add to an agency’s perception by the government as
a helpful and reliable source of information. The fact that an IPA is known to have a
detailed understanding of the business environment from the perspective of private
investors can add to its perceived objectivity and thus can enhance its impact on reform
measures.

Costa Rica’s Investment and Trade Development Board (CINDE), for example,
exists as a private, non-profit organization, guided by an Executive Board that consists
entirely of private sector representatives. Despite this private sector orientation, the
agency generally has had very strong relationships with the government, and has been
involved in a number of key policy reforms. But one of its strengths clearly lies in
attracting foreign investors to the country. In 1997, for example, the agency managed to
convince the US company Intel to establish a major production facility in Costa Rica
despite strong competition from a number of other Latin American countries.1 As a key
reason underlying this success, CINDE staff generally stress the flexibility and
objectivity that the private status gives the agency:

“It portrays us as an advisory body to the company wishing to invest, rather

than an arm of the government. This has the important consequence of
distancing us from any insinuation of ulterior motives and creating trust
between ourselves and the investor.”2

1
For more detail see “Attracting High Technology Investment: Intel’s Costa Rican Plant”, FIAS
Occasional Paper 11, 1998.
2
CINDE’s Director of Investment Promotion in FIAS Newsletter FDINEWS, Vo.13.

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 While there are many benefits, the participation of the private sector in an
agency’s supervisory board also brings new challenges, and possibly new problems.
Board members may be tempted to try to influence the day-to-day work of an agency in
order to use it for their particular purposes. This already is often the case with pure
public sector boards, where the dominant ministries sometimes use a strong “hands-on”
approach in guiding the agency. Similarly, private sector board members might want to
use their position to pursue their individual corporate concerns through the agency.

Venezuela’s Council for Investment Promotion (CONAPRI), for example, has

experienced such problems first-hand. The agency was founded in 1990 as a partnership
between the private and the public sector. It currently has about 30 private companies as
members to the agency, and an entirely private Executive Board consisting of 15
companies. On one occasion, the agency found itself under pressure to change its
operations because of a conflict with the objectives and interests of one particular
company. At one point, one Board member demanded that the agency suspend a
particular promotion activity which was designed to attract more investment into the
industry his company was active in. CONAPRI called for a Board meeting in which the
members decided that the agency should continue its promotion activities. In response
this particular company cancelled its membership and left CONAPRI.

Such an abuse of a board member’s position can damage the agency’s reputation
for objectivity and neutrality, severely limiting its capability of servicing both sides
equally. To avoid such an outcome, the agency needs to make sure that its mandate is
well defined through its statutes and founding documentation, and that all board members
continuously have a clear understanding of the role of the agency. In the case of
CONAPRI, the agency now tries to ensure a broad and balanced membership and board
representation to avoid becoming dominated by specific private sector interests.

IV. The Private Sector as a Resource Provider for IPAs

The involvement of the private sector in an IPA’s activity does not necessarily
have to end with a formal or informal inclusion in the agency’s executive boards. The
direct contribution of financial and human resources also is a possibility, supporting
individual activities and services, or the general business of the agency. This possibility
certainly captures the attention of most IPAs who consistently feel the pressure of tied
budgets and inadequate financial support from government and donor sources. The FIAS
survey of Central and Eastern European IPAs showed that almost two-thirds of the
reviewed agencies indicated that they would expect to receive at least part of their
funding through the private sector in the future.

In general, however, IPAs tend not to receive any significant financial support
from the private sector. The Central and Eastern Europe survey revealed that only six of
the 25 agencies included received any private sector support. Hence, while expectations
might be high, the set of experiences is relatively limited. However, several agencies
around the world have experimented with this concept. While some failed, others

5
managed to finance a substantial part of their activities through the private sector. In
general, support from the private sector can come in one of three forms: direct
contributions to an agency’s capital base or budget, payment for specific services, or the
provision of staff resources for the use by IPAs.

IV.1 Direct Private Sector Contributions

The vast majority of IPAs in developing and transition countries receive their
entire funding either through budgetary allocations directly from the government, or from
bilateral and multilateral donors. Direct private sector involvement in the funding of an
agency is rare. The main reason underlying this fact is that IPAs are typically set up to
provide a public well, and they can therefore not be expected to operate at a financial
profit. This basic fact makes it difficult to convince private firms to provide financial
contributions.

In developing countries, however, there is a particular role for IPAs that may be
interesting to private firms and induce them even to contribute financially. The policy
environment in these countries tends to be more volatile, with administrative and legal
requirements changing more frequently, while governments tend to be more willing to
undertake reforms in order to make the country more attractive for foreign investors.
Hence, investors have the opportunity to play an active role in shaping their business
environment, and the continued interaction with an IPA can prove most useful in shaping
and dealing with the more frequent changes in the business environment. Under these
circumstances, investors often find it particularly important to have a vehicle that can
serve as an effective contact point with the government, allowing their concerns and
opinions to be heard in an effective reform process.

To have this opportunity might well be worth committing financial resources to

the agency. In cases of IPAs, which have had experience with direct contributions from
the private sector, investors typically form a club with membership fees, which are
passed on to the agency to augment its annual budget. Besides large foreign investors,
these clubs also tend to include larger domestic enterprises such as banks, which expect
to benefit through increased business opportunities from successful investment promotion
activities. In exchange, the investor club tends to receive a certain number of seats on the
supervisory board, allowing it some control over the use of their funds and to influence
the strategy and effectiveness of the agency.

In the case of Venezuela’s CONAPRI, for example, the agency initially received
half of its annual budget from the government, with the remainder coming from private
companies. To become a member of the agency, companies were asked for a one-time
contribution of $50,000 to the agency’s trust fund, followed by an annual $10,000
contribution to its budget. By 1999, the government’s share has fallen to 10 percent, with
the majority of the budget being derived from these company contributions and the
interest income from the trust fund.

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 CONAPRI is unhappy with the low government contribution and wishes to
increase it under the recently elected government. But the private sector contributions
allowed it to survive tumultuous times. In 1994, a new and less investor-friendly
government introduced a number of measures, which resulted in a massive deterioration
of the business climate, including stringent foreign exchange controls. FDI inflows
declined drastically and investor interest declined, also reflected in a drop of CONAPRI’s
membership by a quarter. The agency responded by reducing its staff and re-orienting its
activities to areas that most concerned investors, primarily policy reforms and serving
investors already in the country. This allowed the agency to stay in place, and by end-
1999 it expects to increase its private sector membership to 34 companies.

Colombia’s COINVERTIR pursued a similar strategy. The agency was

established in 1992, following an initiative spearheaded by the country’s president who
formed a committee consisting of the largest domestic and foreign companies active in
the country to develop a strong investment promotion framework. As a result, 88
companies joined as members by agreeing to pay $2,000 per year over five years to
support the agency’s budget. In exchange, the private sector received six of the 12 seats
in the agency’s Executive Board evenly split between domestic and foreign companies.

Over the same five-year period, the government promised to provide

approximately US$3 million to COINVERTIR. However, budgetary pressures at the
central government resulted in a shortfall. As the private membership payments did not
contain an initial contribution to a trust fund as in the case of CONAPRI, the agency
faced a serious financial crisis at the end of the five-year cycle, when private sector
support stopped. The agency is now in the process of attracting new private sector
members and hopes to convince the government to increase its annual contributions.

Czechinvest in the Czech Republic has found a different way to obtain private
sector contributions. The agency is run by a 12-member Steering Committee, which is
dominated by public sector representatives, though representatives from large banks,
industry associations, and the Chamber of Commerce also are represented. But affiliated
to Czechinvest is an “Association of Foreign Direct Investment” which consists of about
30 Czech companies such as law firms, consulting groups, and engineering or
construction companies. To become a member of this association, each company has to
pay 75,000 korunas (approximately $2,200) per year. In exchange, Czechinvest provides
foreign investors who require specific services with references from the memberlist of the
association. While this amounts to only a minor contribution to the agency’s overall
budget, it is usually sufficient to pay for its publications program. In addition, the agency
benefits from the association as its members tend to assist Czechinvest free of charge in
providing professional services to potential investors during the initial stages of the
promotion efforts as well as by supporting the agency’s policy reform initiatives in the
government.

It is important to recognize that private contributions will not come for free,
driven by some humanitarian ideal among investors. Instead they will want to see results
in line with their expectations and needs. More so than in the case of board membership

7
without financial contribution, an IPA might find itself hard-pressed to satisfy investor
objectives. CONAPRI’s experience with one investor trying to impose his interests on the
agency’s operations is telling. This makes it even more important for an IPA to
continuously clarify and define its role as a public-private entity that needs to satisfy both
partners in order to be effective. This makes it even more important for the government
to stay involved with the IPA by remaining a key financial supporter to its efforts.

IV.2 Charging Fees for Services

Many IPAs are also tempted to generate funds by charging directly for individual
services provided to investors. In practice, however, this appears to be difficult. The
FIAS survey of IPAs in Central and Eastern Europe revealed that only four of the 25
agencies are recording any form of fee income, and their contribution to overall funding
tends to be marginal.

Clearly not all services an IPA provides can be approached this way. In fact,
most activities geared towards image building and promoting the country in general –
such as brochures, advertisement, conferences or compilation of general statistical
information – reflect much more the general public good of improving the perception of
the country abroad, and individual investors generally are not willing to provide
substantial amounts of funding for these purposes. A number of IPAs sell some of their
larger publications, and in some cases funds can be obtained from individual companies
or industry associations to support specific studies. But these funds are designed to cover
some or all of the costs associated with individual publications, and do not contribute
significantly to the overall budget.

Regarding more specific services, IPAs tend to find themselves in a situation

where the agencies themselves do not have the capacity or expertise to assist effectively,
while private consulting companies are already specialized in these areas. In most cases,
agencies therefore find it difficult to design a product in which they have a comparative
advantage, which is sufficiently attractive for investors to be willing to pay, and which
does not absorb an unsustainable amount of human resources, potentially distracting from
the primary mandate of the agency.

CONAPRI does provide some specific services to investors in exchange for fee
income. But in order to avoid competing with private consulting firms, the agency limits
these services to market studies and investment climate analysis in individual industries.
As most of the relevant information is already easily accessible to its staff, such research
can be conducted relatively efficiently. However, this fee income does not amount to a
substantial contribution to the overall budget, and does not provide a reliable source of
income, as demand for these services is difficult to forecast over time.

Many IPAs have not had good experiences with their attempts to charge investors
for services. El Salvador’s Fusades, for example, found itself in a difficult financial
position, after USAID, which had been the main source of financing since the agency’s

8
inception in 1985, withdrew its support in 1994. The agency’s investment promotion arm
Pridex therefore tried to generate funding through the selling of various services.

One idea for generating fee income was related to newly established free zones.
The plan was that Pridex would find investors to locate in these free zones in exchange
for a fee from the zone operators. In addition, the agency tried to generate export
contracts for companies located in these zones in exchange for fees. However both
activities were only marginally effective in generating income, generally not warranting
the human resources expended in this effort.

Pridex also tried to charge potential investors for the organization of site visits.
However, many investors felt that these services did not deserve substantial payments,
expecting them to be provided at no cost. Finally, similar to Czechinvest, Pridex also
tried to generate fees by linking domestic service providers with foreign investors.
However, it soon found itself engulfed in criticism from other companies who felt that
they had not been given equal treatment in the agency’s recommendations.

Eventually Pridex abandoned all these fee-for-service attempts. The agency now
exists on a much smaller budget which primarily depends on negotiating an annual
support contract with the Ministry of Economy for research, events and other promotion
activities in exchange for budgetary support.

SNAZIR in the Slovak Republic also appears to be not particularly successful in

generating fee income. In order to supplement the funds it receives from the government
and the European Union, the agency tries to generate income by selling services to
investors. SNAZIR would usually try to charge investors for such services as the
organization of site visits, help in obtaining licenses and permits, and providing specific
information. While this apparently added little to the agency’s annual income, it seems to
have created a very bad impression among a large number of investors. The general
perception appears to be that the agency tries to charge for everything without providing
much quality or value-added through its services.

For example, one Belgian company was looking for a sizable plot of land for its
investment and asked SNAZIR for assistance. But the company apparently felt pressured
to take certain plots over others, and it openly wondered whether there were any
commercial interests behind SNAZIR’s assistance. In fact, the agency appears to have
made an arrangement with a local real estate developer who would use the agency to
become involved with new investors entering the country very early on in the process.

Overall, IPAs have had only very limited success in generating fee income. Even
agencies that have managed to develop some services for which investors are willing to
pay, typically have found that the income generated is not significant while the resources
required are substantial. More importantly though, several IPAs found themselves caught
in a situation where they were perceived not as a promotion agency, but rather as a

9
private company with commercial interests. Such damage to an agency’s image is
frequently difficult to repair.

IV.3 Leveraging Resources

Obtaining financial support from the private sector is not the only alternative
available to IPAs to enhance their limited resources. Some IPAs have found creative and
innovative ways to access additional resources by collaborating with private sector
entities. For example, cooperating with a range of individual companies, Chambers of
Commerce, or industrial associations often has proven helpful in the preparation of
specific promotion materials or the organization of specific events. In most cases, the
private sector partners assign some of their staff to assist in the actual work, and they
might also take on some of the related expenses such as printing or conference facilities.

One interesting case has been the experience by the Western Cape Investment and
Trade Promotion Agency (WESGRO) in South Africa. One particularly effective
program for this agency turned out to be partnership arrangements with chambers of
commerce in specific cities and regions abroad, designed to strengthen the linkages and
relationships between businesses from these areas. Typically, donor agencies from the
countries of these chambers paid for WESGRO staff appointed for this particular work
for a limited time period. In addition, logistical support from the partner agencies
facilitated many promotional activities undertaken by WESGRO in these countries.

Another alternative could be to have individual companies or associations assign

staff to the agency for a specified period of time. This can be particularly helpful to IPAs,
which frequently struggle to attract staff with a strong private sector background. The
Scottish IPA “Locate in Scotland”, for example, has managed for several years now to
have large multinational companies located in Scotland to second some of their staff to
work with the agency for a limited period of time. Companies tend to find this
arrangement attractive as their staff receive training in the business environment in the
country, while they contribute to the development of industry-specific new products and
promotion strategies with the IPA.

But again, an IPA has to manage these arrangements with care so as not lose its
balance. If staff and resources from particular companies are used excessively,
competitors might become alienated, fearing that the agency might become biased in
favor of specific companies, and might therefore not in the position to represent the
private sector as a whole. Hence, a sound balance and a careful, even-handed approach is
necessary.

V. Conclusion

Many IPAs worldwide are tempted to work more closely with the private sector to
find additional sources of funds to enhance their own limited resources. But more
importantly, the desire to reach out to the private sector goes beyond the simple quest for
funds. It cuts to the core of an IPA mandate, namely: the effectiveness of the agency in

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attracting additional investment. The specialized skills and information needed to fulfill
this mandate require close cooperation with, and preferably even a direct involvement of
investors in the activities of an IPA.

The global experience with such private sector involvement in IPAs is quite
limited, and it is even scarcer with respect to cases of resource-contributions to IPAs.
The creation of investor membership clubs can have potential to contribute substantially
to an IPA’s financing. Especially in environments where policy reform is important to
investors, it can make sense for private firms to become stakeholders in such an exclusive
club that can initiate a reform process and have direct access to senior levels of
government. Income generation through the charging of fees for specific services, on the
other hand, has hardly ever been successful, and does not seem to present an attractive
and workable option for a true promotion agency.

While additional resources from the private sector would be most welcome,
promotion agencies have to be aware of the fact that these additional funds do not come
for free, without any strings attached. Investors and private sector representatives clearly
will want to see benefits from their contributions, and they have specific concerns they
would like to see addressed. To a large extent, these concerns should also be concerns of
the IPA. Therefore the incorporation of private sector interests would only help to move
the agency closer to the middle between the public and the private sector. However, with
private sector participation and financial contributions, the agencies will need to watch
even more carefully that their mission is not being distorted, and that they continue to
focus on the public interest of general investment attraction.

It is certain that private sector financial contributions cannot be used to replace

government support. Strong financial and substantive involvement by the government is
key to the effective functioning of an IPA. Being forced to rely on private sector income
carries the danger that agencies, which were designed to provide the public good of
investment promotion to attract FDI to the country, will turn into consulting companies
where commercial interests overshadow the public good.

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 APPENDIX: AGENCY EXAMPLES

I. COINVERTIR - Colombia

COINVERTIR was established in November 1992 based on the desire by the

newly elected government to increase Colombia’s attractiveness for foreign direct
investment. The president himself formed a committee with the largest domestic and
foreign investors in the country to develop an institutional framework for investment
promotion in the country.

As a result of this effort by the public and the private sector, COINVERTIR was
established with joint funding. A total of 88 companies agreed to provide US$2,000 per
year for a period of five years. The government was supposed to provide at least US$3
million. The agency is governed by a 12-member Executive Board, half of which come
from the private sector, evenly split between domestic and foreign investors.

However, the financing arrangement did not work as well as anticipated. On the
private sector side, the vast majority of companies fulfilled their commitments as
planned. Only about five or six companies left the agency at some point during the five
years and did not provide the full US$10,000. But the government commitments came
only through partially and with substantial delays. Substantial budgetary pressures
apparently made it impossible for the government to maintain its support to
COINVERTIR at the intended level.

After the first five years, therefore, the agency faced a financial crisis. Private
sector contributions reached their end, while government support diminished. The
agency managed to build up a trust fund of about US$2 million from contributions in
previous years, and can rely on interest income for parts of its operations. However, this
clearly is insufficient to maintain it. The agency therefore negotiates with the National
Planning Department, which has the overall responsibility for FDI policies within the
government, for an annual investment promotion program in support of the Department’s
FDI activities.

To strengthen its financial position, the agency intends to pursue a new group of
investors to generate a second round of private sector contributions. During the last six
months of 1998, COINVERTIR managed to attract seven new companies, but
significantly more effort will be required to generate a significant income stream from
this source. At the same time, the agency recognizes the need to strengthen government
support to the promotion activity and put the agency in a financially sustainable position.
At present, COINVERTIR has not charged fees for any of its services with the exception
of minor cost-recovery activities for publications.

A-1
II. CINDE – Costa Rica

Costa Rica’s Investment and Trade Development Board (CINDE) was founded in
1982 through an initiative by USAID as an investment and trade promotion agency and
development think tank. Different from most IPAs, CINDE was originally designed not
to be part of the government, but instead be constituted as a non-governmental
organization. Initially, CINDE was a large organization with several hundred employees.
But with changes in US policy, USAID had to withdraw its support from the agency, and
the danger existed that CINDE would disappear altogether. A restructuring plan was
worked out which left CINDE with a significantly smaller staff, a narrower business
strategy focussed on promotion and policy reform activities, and a small trust fund
established with the remaining funds from USAID. Today CINDE has a staff of about 40
with an annual budget of approximately $2.5 million.

CINDE tends to be highly respected in the country by the private sector as well as
the government, and it is generally recognized as the key agency for investment
promotion activities regarding Costa Rica. In November of 1996, the agency celebrated a
major success when Intel announced its intention to undertake a US$300 million
investment in the country. CINDE was instrumental in this particular promotion effort.
At the same time, the agency also publishes accounts of “lost opportunities”, openly
analyzing the reasons why specific investments did not materialize. CINDE therefore
tends to be recognized as an objective broker. CINDE’s staff generally believes that the
agency can fulfill this role only because of its neutral status and political independence.
As CINDE’s Director of Investment Promotion put it in an interview for a recent FIAS
Newsletter (FDINEWS Vol.13), being asked about major achievements of CINDE:

“I suppose it cannot really be called a specific achievement, but one of

our positive traits is our private sector status. Since we are a private
institution, this gives us greater flexibility. It portrays us as an advisory
body to the company wishing to invest, rather than an arm of the
government. This has the important consequence of distancing us from
any insinuation of ulterior motives and creating trust between ourselves
and the investor. The relationship between CINDE and the company is
crucial and we always seek to develop the advisory role even after the
company has decided to invest.”

The agency is guided by an Executive Board which consists entirely of private

sector individuals. None of them represents an individual company or industry
association, with all Board positions considered to be honorary for the selected persons.
The only limitation CINDE imposes during the selection process is to ensure political
balance. As proximity to and acceptability for the government is crucial for the agency,
it is careful in maintaining a balance of the major political parties in its Board.

The government has no formal involvement in CINDE. However, indirectly the

agency always managed to maintain close ties with the government. Its annual work

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program and strategy is coordinated with Costa Rica’s Minister of Trade to coordinate
promotion efforts, ensure that CINDE’s promotion work is in line with the government’s
policies, and that its sectoral focus matches the interests of the government. Indications
are that CINDE has very effective links with the government. During its efforts to attract
Intel, for example, the agency consistently managed to involve senior government
officials, including ministers and the President himself, throughout the process. Also,
during the last election, the two combating parties jointly asked CINDE to take the lead
in developing a new legal framework for private concessions in the country’s
infrastructure sectors.

CINDE also does not receive any direct funding from the central government. Its
main source of income stems from a trust fund which generates about 30 percent of its
annual budget. But the main contributor to the agency’s annual budget – providing about
half of the annual funds – is a foundation called Crusa which was established as a joint
agency by the US and the Costa Rican governments to support sustainable development
in the country. As FDI promotion is one component of this program, CINDE can tap
these funds to finance its own operations. The remaining 20 percent of CINDE’s annual
funds come from donor agencies, regional agencies or private companies in support of
specific projects the agency wants to carry out each year.

In the past, CINDE did generate some of its income through fees for specific
services. Until a few years ago, CINDE was given the responsibility over locating firms
in Costa Rica’s free zones. For each successful location, the agency received a success
fee. In addition, until the end of 1998, CINDE also assisted Costa Rican companies in
locating attractive export markets for their products in exchange for a fee. However, both
activities have now been transferred to the country’s trade promotion agency Procomer,
and CINDE is no longer active in this area.

While CINDE is still interested in possibly developing certain services for fee
generation, no activities are currently ongoing. The withdrawal from the free zone and
the export promotion activities also did not pose a major loss of income, but allows the
agency to focus more on its core business of investment promotion.

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III. CZECHINVEST – Czech Republic

Czechinvest is considered the official investment promotion agency of the Czech

Republic. All its services are provided for free to investors, and are generally understood
as a service by the public sector. The agency receives its annual budget directly from the
government each year through the Ministry of Industry and Trade plus support from the
EU Phare program.

But at the same time, the agency has very close relations with the private sector.
Its 12-member Board or Steering Committee is dominated by representatives from the
public sector, but also includes representatives from the country’s major banks, industry
associations, and the Chamber of Commerce, as well as the chairman of the “Association
for Foreign Direct Investment”. This last association is a particularly interesting
arrangement between an IPA and the private sector.

“The Association for Foreign Direct Investment” includes about 30 Czech

companies who can provide services to foreign investors in such areas as engineering,
construction, legal services, or real estate. To become a member of this association, each
company has to pay 75,000 korunas (or about $2,200) annually to Czechinvest. In
exchange, Czechinvest provides foreign investors who are looking for specialized
services with contacts from companies of the association. While these funds do not
constitute a sizable share of its budget, they typically suffice to finance Czechinvest’s
publications program.

But Czechinvest derives more benefits from this arrangement than just funding.
The agency can typically rely on the association members to assist them with services
free of charge during the initial contacts with foreign investors interested in locating in
the Czech Republic. This allows the agency to provide more professional services to new
investors, while it establishes first contacts for the Czech companies with a potential new
client. The association members also typically assist the agency during policy reform
initiatives. Again these companies provide their services for free, supporting the
improvement of the business climate for foreign investment.

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IV. FUSADES/PRIDEX – El Salvador

In 1985, Fusades was established with support from USAID as a non-profit

development think tank to carry out a number of development activities for El Salvador.
One of the programs under Fusades was an investment promotion effort, called Pridex.
Funding for this agency came primarily from USAID, but also included some private
sector contributions. The agency was founded with the help of about 300 private-sector
companies who had to a small, nominal fee to become founding members of the
organization. But as the agency had a wide mandate across all areas of development with
investment promotion just being one aspect, these funds alone certainly were not
sufficient to support the agency as a whole, nor could a significant promotion effort be
sustained based on these contributions.

In 1994, the USAID support to Fusades ended, leaving the agency in dire
financial straits. The agency had to undergo a major reorganization and chose to shift its
focus primarily on its research activities. This resulted in a major shortage of funds for
investment promotion activities. The government, as it had not been directly involved at
the outset in the agency, could not be convinced to take a stronger role in investment
promotion activities and to provide some financing. Pridex therefore tried to find
alternative sources of funds, especially contributions from the private sector.

One way to generate private sector funding was based on fees generated in
relation to newly established free zones in El Salvador. The idea was that Pridex would
find investors to locate in these free zones in exchange for a fee. In addition, Pridex tried
to generate fees by helping “maquilas” operating in the free zones to develop export
markets and to bring in specific contracts for the export of merchandise. However, these
activities were only marginally effective, and the level of fee income generated did not
warrant the efforts required to complete such transactions.

Secondly, Pridex also tried to charge fees for services provided to potential
foreign investors. Concretely, the agency tried to charge for the organization of site
visits. This, however, often resulted in criticism from investors who felt that this service
should be provided for free by a promotion agency. Many also felt that these efforts were
not sufficiently result-oriented as they were typically exploratory in nature, and would
therefore not warrant major payments to the agency.

Finally, Pridex also tried to generate fees by generating business for local
companies such as law firms, consulting groups, or engineering and construction
companies who would assist new foreign investors. But the agency quickly found itself
to be criticized by some local firms who felt that they were not treated fairly or had been
left out. Despite the fact that Pridex did not refer investors to individual companies, but
rather several potential providers of the same service, the criticism led Pridex to abandon
these activities.

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 In retrospect, all these various efforts to attract private funding were not
successful, and never generated sufficient revenue to maintain the agency. At present,
Pridex still exists as part of Fusades, but has to rely primarily on government funds to
support its activities. On an annual basis, Pridex agrees with the Ministry of Economy on
a program of research and promotion activities which are then charged to the ministry. In
addition, Pridex receives funds from the European Union, but mainly geared towards
trade promotion activities.

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V. PROGUAT - Guatemala

The Government of Guatemala is currently in the process of establishing the

national investment promotion agency PROGUAT. One of the central features of this
new agency will be its organization as a mixed, public-private entity. In May of 1997,
the agency was established informally with the goal of formalizing the agency through
the passing of appropriate legislation. To guide the development of a corporate plan and
strategy, the agency has established an informal Executive Board which consists to about
60 percent of private sector representatives.

In its initial stage, this initiative has received support from the Inter-American
Development Bank, but this funding is meant as seed money for the upcoming months
only, until the agency has been formally established. For the funding of the actual
operations, PROGUAT expects to require annual resources in the range of $600,000-
700,000. To ensure the sustainability of the agency with the ability of attracting and
keeping high-quality staff, these funds need to be available over the long-run.

The agency therefore does not want to rely on annual budgetary allocations, but
rather wants to build a trust fund in the range of US$ 10 million, which would generate
the majority of the annual resources for the agency. PROGUAT expects the government
to contribute around US$1-2 million to the fund, with the remainder coming from private
sector sources. Based on its current interactions with the private sector, the agency hopes
to attract about 100-150 companies to contribute to the trust fund. The largest
contributions are expected to come from organizations such as industry associations and
chambers of commerce.

PROGUAT also intends to generate some income from specialized services to

individual investors. However, the development of detailed proposals for the specific
services still need to be developed. However, the agency intends to keep a focus on
general investor services, and does not want these fee-generating activities to distract
staff from the overarching public good of investment attraction. PROGUAT therefore
does not have any great expectations regarding fee income to become a major contributor
to the agency’s budget in the foreseeable future.

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VI. SNAZIR – Slovak Republic

With the velvet revolution and the break-up of Czechoslovakia, the Bratislava
office of Czechinvest became an independent agency. However, it found itself in a
political environment that showed little interest in foreign direct investment, with a
government unwilling to pay for investment promotion activities. A deal was finally
struck, where SNAZIR was converted into a joint stock company, fully owned by the
Fund of National Property (FNP), which serves as a holding company for state-owned
enterprises that have not gone through the privatization process.

SNAZIR presently receives annual financial support from the FNP that covers the
basic operational costs such as salaries for the 13 staff members. In addition, the EU
Phare program provides financial assistance for promotion activities such as publications,
technical assistance, and sectoral studies. However, these funds are not sufficient to
maintain a strong promotion effort. In addition, the EU program is limited in time, while
the FNP appears to face increasing budgetary pressures. For these reasons, SNAZIR has
been under constant pressure to generate additional income.

The agency therefore tried to introduce a policy where charges would be levied
for all services. In the past, the agency managed to arrange for annual agreements with
the Ministry of Economy for an annual assistance program, including conferences,
publications, research and speeches, in exchange for a lump-sum contribution. Regarding
foreign investors, the agency would usually charge for activities such as organizing site
visits, helping in obtaining permits and licenses, or providing country- and sector-specific
information. SNAZIR also tried to conduct more company-specific research, but was
apparently constrained by the limited human and financial resources available.

Overall, however, these attempts of income generation through fees seem not to
have worked particularly well. While it is hard to determine how much fees contributed
to the agency’s budget (EU Phare appears particularly concerned about a lack of
transparent accounting), the amounts involved seem to have been minor. More
importantly, investors generally tend to be very unhappy with the services provided,
complaining about the agency’s tendency to try to charge for everything without
providing much quality.

For example, one Belgian company was looking for a sizable plot of land for its
investment and contacted SNAZIR. However, it apparently felt pressured by the agency
to accept certain plots of land over others, openly wondering whether there were any
commercial interests behind SNAZIR’s assistance. Not surprisingly, the agency in fact
appears to have an arrangement with a local real estate developer to become involved
with new investors entering the country very early on in the process.

Examples like these certainly hurt the image of the agency, and many investors
appear to just stay away from it. The agency apparently plans now to stop this practice of

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charging for all types of services, limiting it to specialized and “value-added”-type
services.

At the same time, the agency also has no particularly close relations with the
government. Its Executive Board consists entirely of members of the FNP, not including
other government agencies. This indicates that the agency also had no particular impact
on changing the policy environment in the country. This lack of strong government
relations might also create difficulties regarding the agency’s future. The newly elected
government is visibly interested in attracting FDI to the country and might actually be
interested in developing a strong policy reform and investment promotion program. But
there apparently no indication that the government might want to rely on SNAZIR for
these purposes.

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VII. CONAPRI - Venezuela

The Venezuelan Council for Investment Promotion (CONAPRI) was founded in

1990 as a partnership between the public and the private sector with the primary goal of
attracting foreign investment to the country. It provides general services such as
investment information, statistics, and legal information, as well as specific advisory
assistance for investors. CONAPRI’s Board of Directors is entirely private, composed of
the chief executives from 15 member companies. The government is represented in the
agency through nine different ministries and public sector entities, and the Minister of
Industry and Commerce traditionally presides over the agency’s annual meeting.

The funding of the agency is very much driven by the private sector. Initially, the
agency received half of its annual budget from the government, with the remainder
coming from private companies. To become a member of CONAPRI, private companies
are asked for a one-time contribution of $50,000 to the agency’s trust fund, followed by
an annual budget contribution of $10,000. By 1999, the public sector share has fallen to
about 10 percent, with the majority of the agency’s budget coming from private sector
contributions, interest income from the trust fund, and income generated through charges
for specific services provided. The agency currently has 30 member companies,
expecting to increase this number to 34 during 1999, representing large multinational and
domestic companies across a variety of industries.

1994 proved to be a watershed for the agency. Starting that year, the investment
climate in Venezuela deteriorated rapidly with the election of a new government which
proved to be significantly less investor-friendly than its predecessor. This government
introduced various measures that negatively affected the private sector, culminating in
stringent foreign exchange controls in mid-1994. This resulted in a significant decline in
FDI inflows and waning investor interest. For CONAPRI this spelt a short-term financial
crisis. Private sector membership fell by a quarter, governmental budgetary allocations
dropped rapidly, and staff size had to be reduced by half. The agency decided to
strengthen its links with private sector members, and by 1998 membership was back to
the original number of 30. Through this strategy, CONAPRI managed to develop a more
stable funding situation, not being dependent on just the government as the main provider
of resources.

To achieve this stronger private sector support, the agency had to reorient its
operational practices by improving the usefulness of its services to the private sector. It
shifted its human and financial resources primarily towards working on policy reforms
and providing investor services, and away from image building abroad. Promotion
abroad now primarily relies on electronic communications and publication mailings,
rather than expensive investment fairs and conference participations. The agency also
increased its capabilities of providing detailed sector analyses for individual clients on a
fee basis to generate additional income. CONAPRI does not intend to compete with
private consulting firms, limiting its services to market studies and investment climate

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analyses in individual industries, rather than project-specific feasibility studies. At
present, these services generate about 15 percent of the agency’s annual budget.

To counter the dangers of losing political effectiveness by being perceived as

being too close to the private sector, the agency stepped up its efforts to maintain close
contacts with the political establishment. CONAPRI apparently always had strong
relationships with the key ministries and continued to become involved in major policy
reform issues. Frequently, the government would call upon CONAPRI directly to
provide comments on new draft legislation from the investor’s perspective. In addition,
through a variety of committees, the agency prepares individual reform initiatives which
often result in presentations to the Congress on individual policy issues. CONAPRI itself
believes that they are presently perceived as neither a private nor a public sector
organization, but rather as a non-governmental organization that tries to balance public
and private interests.

At times, this balance is being challenged and threatened by individual interests.

At one point, one private board member demanded that the agency suspend a particular
promotion activity that was designed to attract more investment in the same industry his
company was active in. The agency called for a quorum at the board, resulting in the
decision to pursue the activity. In response this particular company canceled its
membership and left the agency. CONAPRI learned from this that a balanced
composition of the board is crucial, and that agency membership also needs to be
sufficiently broad, to avoid that its activities might become overly dependent on the
particular business interests of individual members.

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