According to AllAfrica’s Executive Chairman, Amadou Mahtar Ba, the world is more than halfway through the 2030 United Nations Sustainable Development Goals deadline, but for the first time in decades the United Nations (UN) is reporting that development progress is reversing due to the combined impacts of climate disasters, conflict, economic downturn, and lingering effects of the novel coronavirus pandemic.
Ba said this at the U.S-Africa Business Summit session held in Gaborone, Botswana, while being a part of a discussion on Driving Sustainable Development through Innovative Financing. Ba, and the panel of experts, explored the potential of innovative financing mechanisms such as impact funding, and development impact bonds in driving sustainable development.
The 17 Sustainable Development Goals (SDGs), agreed upon in 2015 by UN member states are an urgent call for action to end poverty which will help improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve oceans and forests.
Many countries in Africa are facing challenges in development and for decades have welcomed outside aid including philanthropic organisations to tackle some of their challenges. These experts agreed that to tackle these challenges the continent needs innovative ways to leverage philanthropic capital to attract market resources…
Frannie Léautier, Senior Partner and CEO of SouthBridge describes philanthropy as having three characteristics that make it unique as a source of capital to deal with social and climate-related problems.
“First, because it is patient, philanthropy capital can be there for years and years, I have an example in the case of Zambia, where philanthropic capital from, in this case, the Rockefeller Foundation supported for more than 20 years, the idea that you could develop mini-grids that could receive renewable energy from distributed sources and then be plugged into the transmission network to be used across multiple countries,” said Léautier. A solution she describes as critical as the world moves to do a significant energy transition.
“The other one is flexibility. I’m always quite amazed at how you can use philanthropic capital, depending on which country it’s coming from and how the structure of that capital was originally designed to actually fit in different levels of the capital stack that you need to get massive, complex development projects off the ground,” she added.
Léautier said many examples exist but made reference to the recent decision by the Bezos Earth Fund, and Rockefeller Foundation to put their money towards the goal of getting energy solutions across the world.
The three organisations partnered and invested U.S.$10 billion to form the Global Energy Alliance for People and Planet (GEAPP) which brings together governments, investors, innovators, power companies, and philanthropies to ensure access to electricity for all people, via low-carbon technologies, and with the economic wellbeing of communities taken into account.
“The third characteristic, and I think this one is also quite critical is how philanthropic capital actually can come in at different stages of the development problem, whether it’s the early stages of visibility, capacity, building, skills, development, and so on, or whether it’s the de-risking phase where you want to then crowd in other investors. And this flexibility of coming in at different points, I think makes it a very unique source of capital,” she said.
An example of this is the Bill & Melinda Gates Foundation’s commitment to eradicate polio, so whatever it takes to eradicate polio, the funding will be available, or you take the GAVI for vaccines or the HIV/AIDS, Tuberculosis, and Malaria through the Global Fund.
Ambassador John Simon of Total Impact Capital agrees with Léautier but sums up this kind of funding as blended finance.
“Blended finance is really the concept of taking a whole spectrum of capital sources all the way from pure grants, almost commercial capital, and even in some cases, purely commercial capital, and putting them together so that the whole is greater than the sum of the parts. And so that what you get as a result of blending, the various sources of finance is a level of leverage that mobilises a lot more capital than what you would get if all you did is do a grant, or all you did is to do an impact investment, if what you did is do a loan . And one thing to think about is that there’s now a greater and greater pool of capital that’s out there looking for impact as well as financial returns, that’s available to be leveraged with philanthropic capital,” Simon said.
Aline Varre, Director of Strategy and Business Development, Foundation for Partnership Initiatives in the Niger Delta (PIND) describes philanthropic funding as an oxymoron because it is usually limited, and with limited funding, there is usually limited development.
“The oxymoron that is sustainable development with traditional philanthropic funding is the fact that philanthropic funding is limited in terms of time, you get a grant, you have it for a period of time, you report back on it, and then it ends. So whatever efforts are being done during that window are not sustainable, which is why for me, it’s an oxymoron. What happens with blended finance opportunities is that the operating regenerated capital that comes into the sectors in development projects actually causes continuity,” said Varre.
Varre also listed the turnaround time it takes from application for a grant to when the grant is approved as a limitation under philanthropic traditional funding which causes stagnation in actual programme development.
“Once that has happened, then there is the uncertainty of continuity. So you’re looking at philanthropic organisations that are functioning over a period of time on grant funding on or grant contributions but beyond their programmes, they’re looking at their overhead, their operations, and the possibility of having to shut down because of gaps between contributions. The aid agencies or government agencies around the world, due to Covid-19 and other situations, their funding now has decreased immensely. So leaning on that can only stagnate the efforts in philanthropic programming, and looking and switching to blended finance, you’re looking at opportunities to actually pick up the ecosystem, bring regenerative capital into the regions, and actually start sustainable development because the capital set starts to build on itself and it starts to reproduce and that’s something that we have to leverage,” she said.
Across the African continent, entrepreneurs face many hurdles that impede their access to capital for both social impact and profit gain. For Ovidiu Bujorean, Technical Director, of Partnerships and Investments ACDI/VOCA these challenges are not only unique to Africa.
“Our organisation is working in 25 countries, 15 of which are in Africa. And we build a hybrid model where ACDI/VOCA provides the technical capacity building in the agriculture field, AV Ventures is the for-profit subsidiary that provides the impact investing capital. And we have built, the functional model where we find synergies at the local level, to connect the opportunities that are identified through the technical capacity building with the capital,” he said.
ACDI/VOCA is based in the U.S. and its primary goal is to promote economic opportunities for cooperatives, enterprises, and communities through the innovative application of sound business practice.
Bujorean says there is available capital, but the key is how to unlock it, address the missing middle, and figure out how to build a more coherent stream of scalable ventures that will create a large number of jobs.
“What we do with our family of funds, is we have one focused on West Africa in Ghana, one focused on Kenya, and one in Central Asia. We provide financing for the missing middle between U.S.$250,000 and U.S.$1 million. We are also actively engaged to do two things, one is to provide innovative financing through revenue-based loans, and second, through the comprehensive market linkages that we generate with ACDI/VOCA projects, we connect them to partners, clients, to other financing opportunities with other investment firms. So we are looking for a system. And we are seeking to partner with all the actors in the market to see how we can work together because this missing middle is everyone’s opportunity,” he said.
Speaking on unique challenges and opportunities in adopting innovative financing models to address these development issues like poverty, infrastructure development, access to clean energy, healthcare, education, job creation, and many more, Efe Braimah, Managing Director, Head of Nigeria Advisory at CrossBoundary said financing SMEs is key if we are to reach the SDG goals. Braimah lists a number of challenges with adopting innovative financing for sustainable development.
“What you have is this conflict between what concessional capital intended to do, and financing sort of the early stage, nonreturn generating entities, and what commercial capital traditionally intended to do. And that creates that missing middle. This is an opportunity for leveraging concessionary finance for derisking in the form of guarantees, in the form of first-loss capital, and in the form of technical assistance to really mobilise that commercial capital that can help us achieve scale,” Braimah said.
The second challenge she listed is the limited availability of bankable projects, essentially this lends itself to technical assistance as an opportunity, using grand capital and concessionary capital, to provide technical assistance to SME entrepreneurs, that have innovative business models and innovative ideas.
“The final point I was going to hit on is a lack of internal capacity or I would say institutional constraints for the investors. So when I think about purely philanthropic organisations, a lot of them don’t have the private sector or the investment specialists that can look at these transactions from a commercial lens, because you still need that sustainability. Or when I think about, asset managers or institutional investors, a lot of them don’t have the technical skill set to diligence, these innovative business models,” she said.
Braimah said she has worked with several commercial banks, and asset managers that didn’t understand how to diligence, a renewable energy opportunity, or a mini-grid. So she emphasises the importance of working with them to build capacity, share benchmarks with them and get them comfortable with this space to be able to deploy capital.
“And I think both for investors, donors, as well as for the SMEs, there’s a strong need for that capacity building and technical assistance, that concessional capital can really help unlock and, thereby mobilising commercial capital,” she said.
On the role of impact investing in driving innovation, and sustainability in peace, and security and how it contributes to inclusive growth and poverty reduction, while at the same time fostering sustainable economic practices on the continent, Ambassador Simon said there is an opportunity to put that impact capital to work in ways that help advance the world achieve the SDGs.
“One premise that we have at Total Impact Capital is that we are unabashedly an impact-first firm. In other words, we look to maximise impact with sustainable returns, not to maximise returns with sustainable impacts because there’s a whole class of opportunities that produce viable returns, but not necessarily the returns that are attractive to purely commercial investors. And that for capitalists interested in impact there is the opportunity to put that capital to work in ways that hit the SDGs that deliver health care, deliver water, deliver food, and yet aren’t necessarily going to hit the 20-plus percent returns or the 10x multiples that many commercial investors are looking for. And just because something doesn’t reach that level of expected return doesn’t make it not worthwhile doing. And part of my view of impact investment is, it’s about broadening the aperture of what you see as reasonable opportunities to include those that provide real value to society, and the sustainable return, not necessarily the best return that you can find out there. And over time, those returns as you’re able to prove out the model may, in fact, look better and better,” Simon said.
For entrepreneurs at the grassroots level across 80 countries, West Africa, East Africa, Asia, and all around the world, Bujorean thinks the problem is similar. He said most security problems in most countries are driven by the economy and so conversations should take place around how to support entrepreneurs as the driving force at the local level, start building that level of coherence, and provide solutions that would actually leapfrog change just like the way M-PESA in Kenya transform the mobile payment sector.
“How can we put our minds together to organise a supporting structure, bringing the patient capital together with the government support and with smart capital that is able to identify those scalable opportunities in different sectors, healthcare, agriculture, education, all of them”, he said.