Billions to Trillions & the Elusive Pipeline
Just a few month ago (May 23-25th), the Financing for Development group at the UN held their follow up event to the Third Conference on Financing Development that took place in Ethiopia during the month of July 2015.
For those that remember the Third Conference of 2015, the focus, or one of the promising new sources of innovative financing for development would be "Blended Finance". Well little to say that Blended Finance (still to be defined) is already showing success in several part of the world. A recent report "The State of Blended Finance" released by Convergence and the Business and Sustainable Development Commission (BSDC) points to a few key recommendations.
As highlighted on their website, the recommendations are "........the report finds that there is fragmentation and a lack of coordination across blended finance activities, and blended finance initiatives need to be better aligned and complementary. In addition to better coordination, stakeholders should also seek to scale their solutions, instead of pursuing new but smaller ones. The paper also finds that in order for private investors to participate in blended finance investment opportunities, the risk-return profile must be at market prices or better, so diversification through the pooling of assets and projects across countries and sectors will be required to achieve the required investment profile."
For this particular blog I do not really want to focus on the money side of development but instead, on that elusive pipeline. I originally wrote "illusive" but the definition is quite different - An elusive fairy is one you can't catch, but an illusive one was never really there at all. It was just an illusion! Although both words can apply to things you don't have, don't let the difference be elusive! You can't quite catch something elusive, but illusive things are just illusions. You can practice Elusiveness here - How to be elusive!!
The elusive pipeline refers to probably one of the most underfunded components of development - a continuous portfolio of projects that are bankable. The development community, including the UN, the World Bank, the OECD, and most multilateral organizations have focused on the cost of financing needs and opportunities instead of simultaneously looking at creating a mechanisms that feeds the pipeline of project...and this in the context that all funds have specific interest and appetite for risk!
What comes first ....finance or human capital? Are risks evaluated on access and preservation of non-financial resources? Does information asymmetry plays a role in risk assessment and decision making?...and this is where human capital can play a crucial role.
When it comes to finance maybe the last paragraph from this article published in the Stanford Social Innovation Review - Innovative Solutions for Climate Change Need More than Money offers food for thought when it comes to the investment discourse.
"......Money represents the easiest and lowest-stakes way to contribute to new ventures. But for entrepreneurs, the expertise, networking, and intellectual capital that incubators and foundations provide—the resources to take an idea from concept to commercialization—often accounts for equal or greater value. It’s time to build a more effective ecosystem of support and expand it as quickly as possible."
Another recent article by Paul Voutier - Business co-financing: an alternative approach to realise SDG1 also points to a similar conclusion that is being underfunded and/or overlooked!
".....Given the limited funds available from the businesses, it may be considered a waste of effort to pursue the contribution from the business. However, the benefits of a private sector partnership fortunately extend beyond the financial contribution. A significant avenue of benefit from eliciting the business’ contribution is information and ideas"
A group of individuals who have also participated at the development of Convergence are also involved in the Initiative for Smallholder Finance (ISF) - One of their most recent article, and I am sure I have missed many since then, came from this group that is doing tremendous work around financing agriculture. Thought financing I.T. was difficult? Try agriculture! The Initiative for Smallholder Finance recently wrote a good briefing note on financing agriculture - The fund manager perspective: Moving the needle on inclusive agribusiness.
This briefing note, one of many from this group, talks about the financing landscape but also brings up the issue of the missing pipeline. When it comes to Colombia (but not limited to Colombia), most fund manager raise the issue that there is an obvious lack of "bankable projects" and I am sure that most of the projects that are being presented could be "bankable" if supported in the development of their projects but who pays for this and who cares? Thanks to Chris Jarvis at RWI and Impact2030, who brought to my attention the Lucas Paradox "Why Doesn't Capital Flow from Rich to Poor Countries" also offers interesting thought and ideas for the concept of "Blending Capitals" - Blending Capitals meaning the integration of non-financial capitals in support of strategic and impactful investment.
From the ISF report mentioned above we bring to light this particular point that applies perfectly to Colombia and or other developed countries -- "....and managers use dramatically different approaches to develop and assess pipeline investment opportunities. Most fund managers spot opportunities the traditional way, through word of mouth and professional networks. More recently, savvy NGOs have onboarded investment teams or created their own fund vehicles to connect enterprises from their field work to investors....."
Development finance needs to be re-engineered in the way that investment in projects or initiatives should be the first step in generating co-investment in other sectors that would help increases impact. Let's take for example, the complexity associated with financing a post-conflict area - one of the most obvious observation that could be done is that most of the value that can be associated with social and human capital is weak and/or nonexistent. Colombia is host to a panoply of platforms that maps some type of investment from the private sector and public funds but none of these platform actually measure with similar indicators and it only provides a basic mapping of existing projects.
Investing in economic activities such as agriculture can only have impact if it's supported by similar investments in infrastructure, access to markets, technology, knowledge, education, and health.
Blended Finance would definitely benefit from a Blended Capital approach to development. Blending should be expanded to a community approach - where needs and opportunities are addressed by various service providers (FSPs).
I should not forget to mention the support and writing skills that David Clemmons is bringing to this initiative. Stay tuned for our upcoming release of a paper on this topic.