Scaling up PPPs by engaging impact investing charities and foundations

Unfortunately, once due diligence is under way, it becomes apparent that the lifecycle costs of some highly beneficial infrastructure public private partnerships (PPPs) in developing countries are simply too high or returns too low or uncertain (vis-à-vis project risk) to attract enough capital from private investors and lenders.

When I first joined the International Finance Corporation (IFC), projects needing concessional grants or funding to bring down their construction or operating costs or support their revenues were strongly discouraged, primarily because the implicit subsidies were considered to distort the market. Investments in which philanthropic entities were prepared to invest alongside IFC and its affiliates but take on more risk (for example, be subordinated to other investors’ investments) or require lower or later returns than other investors were also rare—and considered suspect. There was a legitimate concern that IFC not be subsidized by donors and other investors.

One energy PPP project I worked on in Tajikistan involved sovereign concessional loans and sovereign grant funding to support a “lifeline” tariff for users who could not afford the cost of the power. Yet, these kinds of projects were one-off and required significant soul searching and time for IFC to pursue and implement. They also often drew criticism for their not-fully commercial structures.

Concerns over market distortions remain legitimate. They can be a cause of projects not being able to be pursued on a fully commercial basis, or the result of projects done with concessional funds. And there are other concerns in countries striving to host thriving private sector economies such as transparency, access to information and concessional support, and governance.

Fortunately, over the last two decades, the international development community has recognized the power of mobilizing the considerable concessional resources dedicated to alleviating poverty and boosting prosperity in markets that do not enjoy a perfect competitive environment. IFC has become a leader in evaluating the issues relevant to blending concessional and private commercial capital.

How does blended finance work?

Blended finance is a structuring approach, rather than an investment approach, instrument, or solution. Organizations invest alongside each other while achieving their own objectives (whether financial return, social impact, or a blend). In general, blended finance involves the use of capital from public or philanthropic sources to catalyze private sector investment to bridge the gap necessary to achieve sustainable development. 

A recent report describes the evolution of IFC’s thinking and highlights its principles for governing the use of concessional funds with partners’ commercial capital. IFC has an independently governed blended finance department to ensure each project intending to include concessional funding meets these principles. Results so far are impressive: between 2010 and 2020, IFC deployed $1.6 billion of concessional donor funds to support 266 projects in over 50 countries, leveraging $5.8 billion in IFC financing and more than $6.8 billion from other private sources.

Providers of the concessional piece have primarily been sovereign donors or their agencies, large corporations, and non-profit foundations. IFC and these partners have focused on the thematic areas of climate change, agribusiness and food security, gender and SMEs, human capital, low income and fragile economies, and refugees.

The role of impact investors

In parallel, impact investors have also become an important source of capital for highly developmental projects. Impact investing is an approach that involves the intention to generate positive environmental, social, and developmental impact, alongside financial returns.  These investments are not grants or donations. They can be structured in many ways, including as returnable or first loss capital or risk-sharing instruments. Impact investors too are usually willing to expect lower returns or wait for return of their capital and/or returns until after other investors have earned expected returns.

Global and regional charitable organizations are among the growing number of impact investors. If consistent with their charters and tax-exempt status, they have made contributions to private sector ventures directly or through impact investment funds. In several cases, some charitable organizations have taken the lead on structuring projects that they believe will eventually be profitable but need heavy up-front concessional funds to prove the business model. These organizations are sufficiently certain of the viability of the business venture that their traditional donors are willing to invest in the project vehicles, funds, and platforms they form.

While IFC’s investments have always aimed to achieve sustainable development, it’s now sharpened the focus to address relevant Sustainable Development Goals, and led the development of impact investing principles, which in turn has helped standardize the impact investing market more generally. The Operating Principles for Impact Management have been signed by 137 investors in 33 countries so far. Here too, the main players in this space are similar to those in blended finance investments—sovereigns, large corporations, and non-profit foundations.

"Yet, the PPP, blended finance, and impact investing worlds seem to operate in silos, overlapping only exceptionally. Are we missing an opportunity to bring significant investment, technical resources, and boots on the ground into a high-quality pipeline of infrastructure projects?"
 

The benefits of partnering with charities and foundations in the PPP space

Reputable global and regional charities beyond the pool of traditional DFI development partners have extensive local networks and a valuable view of underserved markets for products and services  such as logistics, water and sanitation, electricity, and healthcare. These organizations often have the resolve to be involved over the long term. While not generally staffed with bankers and investment analysts, they have valuable insights into the viability of businesses in their fields of expertise.

The DFI community has enormous technical, financial, and analytical expertise and a global track record of investment in PPPs, as well as vast global public and private sector networks.  It also has well-established means for attracting and processing projects using concessional grants and funding.

There are several impact investments involving both DFIs and development partners, institutional investors and funds, with a few charitable organizations as sponsors or investors. These tend, however, to be complex, ad hoc, and involve large, repeat corporate and foundation partners. As the world battles global and regional challenges such as COVID-19, now is the moment for DFIs to more systematically partner as co-investors with a larger universe of charities and foundations in the broader PPP space , and to scale up these partnerships using more standardized impact investment structures.

This means expanding their blended finance approach to include other global and regional charities that meet rigorous standards and have a strong track record of direct impact. It could also mean DFIs taking on riskier positions in PPP projects along the lines taken by impact investors and, more generally, to expand the blended finance pipeline to PPPs and even to other types of projects that incorporate private sector principles.

Here’s an idea to get us there: for high-impact projects or platforms that meet a DFI’s strategic objectives and are fundamentally sound but are not projected with certainty to be financially sustainable in the near term, the DFI’s blended finance department (or a newly designated, seasoned team) conducts a secondary screening of the project and actively and publicly invites offers of partnership from a wider pool of impact investors and charitable organizations.

Forging more and new kinds of relationships with charitable organizations on PPPs would benefit the charities, DFIs, and the countries and communities they serve. 

Let’s keep the momentum on this front, and grow it further.

 

 

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff, or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

 

 

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