Are Impact Investors missing a trick? Plugging the last-mile infrastructure delivery gap with community finance
Nearly ten years have passed since a coalition of philanthropists and investors introduced the financial-services industry to impact investing, which aims to generate social and environmental benefits alongside financial returns. Since then, impact-investing funds have amassed more than $77 billion in assets under management.
Dureen Shanaz, one of the pioneers of impact investing recently described during a talk why impact investing will be a game changer: “People who didn’t have a voice before in the financial markets, now come in and can have a voice … with impact investing women now have a voice and marginalised communities can have a voice.”
However, how idealistic are those words and how many marginalised communities really do have a voice at the table? Not many I would argue.
Impact investors, including DFID’s own Impact Programme, focus on investing in businesses. However, businesses need water and electricity to run, roads to transport their goods on and markets to sell their produce and house their stores. Infrastructure is key in helping businesses thrive and create jobs.
Yet, cities of the global South often lack basic infrastructure such as sewers, electricity grids and all-weather roads. These shortfalls are in part because of the difficulty of constructing infrastructure in informal settlements for regular investors. Many are deterred by informal arrangements around land rights as well as the potential for possible disruptions by residents. The job is therefore left for Governments to do, and low-income communities at the fringes of cities are rarely a priority for Governments.
Community finance organisations are constructing basic infrastructure
Across the global South, low-income communities have therefore come together to find ways to manage their own affairs and construct basic infrastructure. One such initiative that exists across most countries of the global South are savings schemes predominantly established and run by women. Savings offer a means to cope with low and unstable earnings, and provide deposit and credit services for women who lack access to financial services. The savings groups provide a platform for people to organise, so that they can collectively negotiate with government and support the construction of affordable housing, water and sanitation.
Organised savings schemes have proven to be effective and successful. In Uganda for example, the Jinja Municipal Council worked with the National Slum Dwellers Federation of Uganda to establish a community upgrading fund. As of 2014, the community fund had been capitalised with US$161,949 from daily savings helping more than 40,000 people. This fund supports community-led initiatives to improve informal settlements through toilets, water tanks and the renovation of health centres. It now underpins Transforming Settlements of the Urban Poor in Uganda (TSUPU), a $2.67 million programme financed by the World Bank to work with the urban poor and local governments on upgrading informal settlements.
Community finance could facilitate private investment in informal settlements
Informal and illegal land ownership has thwarted many housing developments. Community enumerations can help prospective investors to understand land use patterns and political relationships. Existing relationships between communities and governments can be used to clarify access to land and services, and to negotiate regulatory issues and state subsidies.
In addition to being sources of local information, communities can contribute with labour, site access and help in designing purpose-built infrastructure that really meets their needs. Working with community finance structures therefore offers an opportunity to reduce the costs associated with formal, private-sector provision of infrastructure, as well as the risks of operating in informal settlements.
Some countries have already piloted partnerships between commercial actors and community finance organisations. The Mchanga Fund in Malawi has provided housing loans to 1,583 people who live and work in the informal sector. It offers an interest rate of 12 per cent per year, compared to the national average of 17.5 per cent for commercial banks. Recovery rates exceed 85 per cent.
A catalytic role for impact investors?
From a private sector perspective, community finance carries high risks and high transaction costs due to the fragmented nature of savings groups. Investments also have very low liquidity and require detailed knowledge of organisations that facilitate access.
Impact investors specialise in navigating such spaces: forging innovative partnerships, collecting new evidence, building local capacities, and piloting and refining business models. Many are willing to take on higher risks in order to achieve social gains and in pursuit of long-term economic returns. Impact investors could therefore play a catalytic role in bridging formal, private operations with informal, community activities.
Impact investors have the expertise and institutional set-up to develop and experiment with innovative financial models. They could provide support to community groups in writing solid business plans and financial modelling. They could partner with community groups to plan and deliver last-mile infrastructure in ways that reduce capital costs and maintenance needs. With one billion people living in informal settlements, impact investors could not only achieve huge social impact but find entry points into a huge market.
DFID’s role as a facilitator
DFID can play an instrumental role in bridging the gap between communities and impact investors. There are three five immediate actions that DFID country advisors can take to help develop innovative investment solutions:
1. Increase internal DFID knowledge about Community Finance Initiatives
2. Increase dialogue between impact investors, such as Acumen and community finance groups, such as Slum Dwellers International
3. Assist the financial viability investments by supporting pilot schemes by covering transaction costs through hand-son technical assistance and grants
4. Facilitate regular workshops and discussions with impact investors and other sources of capital to explain the streamlined approach that DFID is supporting (i.e., financially-sustainable business plans for long-term investments, underwriting of communities to demonstrate aggregate creditworthiness).
5. Mitigate risk through the incorporation of credit guarantees
There is a range of precedents in other fields that can set the tone. Dureen Shanaz, for example has launched a Women’s Livelihood Bond to get women involved in the financial markets. The US Agency for International Development (USAID) is guaranteeing 50% of the principal of the bond. “Now, there is a financial structure with an incredible social angle to it — and a very solid bond will be giving a 6% guaranteed return over four years,” says Durreen. It is high time to make Dureen’s initial promise of impact investing a reality and finally give communities a voice and an avenue to transform their livelihood through infrastructure investments.