Partner, Palladium

Creating Economically Sound Models:

How International Development Companies Help Unlock Additional Capital

Multiple US presidential administrations have instituted development policy and programming that increasingly reflect the belief that the commercial incentives of private enterprise can dramatically help drive development outcomes. Private capital is in fact necessary to fill the gap between capital necessary and capital available to achieve development objectives. The U.S. government initially used USAID Development Credit Authority as a credit guarantee mechanism to help raise capital. Its success now forms an integral part of the newly legislated U.S. International Development Finance Corporation.

Innovative Solutions

International Development Companies have pioneered ground-breaking market-driven solutions, being at the forefront of private capital mobilization and investment for USAID, other donor, government, and private sector organizations for decades. Over these years, international development companies mobilized billions in investment to advance development objectives all over the world and continue to implement innovative USAID-funded projects such as CATALYZE. Just under this one contract design blended finance solutions and other mechanisms will be applied to mobilize $2B in private capital. From the 1980s through the mid to late 1990s, investments in microfinance and agricultural market systems had major roles in USG approaches to development. This accelerated with the fall of the Berlin Wall and disintegration of the Soviet Union and the concomitant decline of the intellectual and political influence of belief in state-centered and run economies and ushered in a long and expanding USG-led era of private, financial, and capital market development. As noted in an earlier piece, international development companies, such as those comprising the membership of CIDC, best steward and emulate the philosophy of foreign assistance as a hand up, not a handout.

CIDC members have played leading and prominent roles in the expansion of the role and objective of private sector development in foreign assistance. CIDC members have also played and continue to play leading roles in building new institutions and building the capacity of institutions that constitute the pillars of market economies, including, but not limited to, banks and other financial institutions, financial and capital market regulators, micro, small and medium sized enterprises across a vast diversity of industries and sectors, expanding numbers of local professional service providers who provide the support to and connectivity among commercial networks and supply and value chains. CIDC members continue to refine, adapt, and apply market systems development approaches to bolster the capacity and functioning of individual institutions.

The massive role of CIDC members in the post-Iraq and Afghanistan war scenarios has diminished, yet that work helped to establish a legacy for the importance of Development in the ‘3 Ds’, now manifest in the USAID Bureau for Development, Democracy, and Innovation (DDI). CIDC members not only complement and supplement humanitarian efforts in conflict and post-conflict zones, with private sector actors playing key roles in the delivery of short to medium term assistance, but also lead in the long-term work of building resilience to man-made and natural shocks. Fundamentally, this entails interventions such as installing and expanding digital networks (e.g., mobile phones and digital payment infrastructure for cash transfers), expansion and diversification of transportation options, diversification of supply chains to incorporate multiple micro, small, and medium enterprises, and deepening of financial and capital markets to provide insurance, emergency financial assistance, and other financial mechanisms that allow households, communities and countries to smooth the effects of shocks.

CIDC members lead innovation and expansion of the use of blended finance to help meet an expanding array of development objectives in commercially oriented sectors such as agriculture and energy, and ever more in social sectors, such as health and education. Blended finance – i.e., the leveraging of private capital, using donor funds – has become a tool for building market development and resilience, applying approaches that focus on enabling a key component of commercial ecosystems, namely, transaction advisory and business development advisors. Our approach generates blended finance transactions, by using donor grants to fund pay for results incentives for the advisors to “close deals” between financial institutions and designated demand-side clients (e.g., agro-processors, educational institutions, health services providers, women-owned enterprises, and so on). Meanwhile we also provide training, mentorship, technical assistance, and other forms of capacity building support to those advisors. We also look to embed long-term market viability and capacity support by connecting advisors to local and regional training and other institutions, facilitating connections among advisors and other key market actors.

Mobilizing the trillions of dollars required to meet the Sustainable Development Goals—and innovating systemic changes in business models to create lasting change—requires coordinated USG action. The COVID-19 crisis has shed glaring light on the insufficiency of ecosystems of key actors and enabling policies, structures, and capabilities, which mutes blended finance potential. Lack of local capital market integration, poor capacity of intermediaries to connect enterprises with emergency sources of funding, and an absence of blended finance vehicles that work in the aggregate (e.g., standby facilities that would trigger guaranteed government bond issues in a crisis) comprise only a few of the shortcomings in current markets.

Concurrently, COVID-19 does offer an opportunity for us to broaden the frame to look at blended finance through a risk/resilience lens. For blended finance to have sustained relevance, especially in the most fragile states, it must be able to respond in a systemic way to systemic crises. Blended finance must yield scope and scale that go beyond individual actors, and over periods of time that extend well beyond “normal” transactional timeframes, not just in response to COVID-19, but also climate change, recurring natural disasters, and persistent threats of man-made unrest.

Conclusion

CIDC members lead this next exciting phase of unlocking more private capital to meet a diversifying and deepening well of development and emergencyresponse needs. Financial capital fuels the economic models and systems required to propel development and reduce the risks and impacts of shocks and disasters. CIDC members have the proven profiles, networks, and capacities to partner with other private sector and international development actors, enjoining them to scale beyond the transactional to the systemic.

Maria Martinkov, Managing Partner, Palladium