International Development Agencies Need Private Sector Partners: USAID, Connectivity Capital, and Expanding Internet Access to the Next Billion People
Worldwide, approximately 3.7 billion people do not have access to the internet. Investor-driven solutions to connectivity in developing countries have the potential to generate financial returns while achieving positive social impact, yet these transactions aren’t closing. USAID teamed up with Connectivity Capital, an impact investing firm with a mission to connect offline populations in developing nations, to figure out why.
By Emily Langhorne, INVEST Communications Specialist
In today’s technology-driven world, having access to the internet is an essential for building educated societies, pathways out of poverty, and competitive economies.
Unfortunately, approximately 3.7 billion people around the world — a little less than half of the globe’s population — do not have access to the internet. Most of the world’s offline population lives in developing nations, with approximately 3.5 of those 3.7 billion living in the world’s least developed countries (LDCs). In Europe, only 15.5 percent of the population lacks internet access; meanwhile, in Asia and the Pacific, that number is as high as 50 percent and over 70 percent in Africa.
Access to broadband internet has a ripple effect on communities because internet connectivity helps strengthen other sectors — such as education and healthcare — that are integral for social and human development progress.
For instance, high-speed internet at healthcare facilities enables medical professionals to rapidly access information that helps them diagnose medical conditions, share patient records when consulting with other specialists, and prescribe appropriate treatments. Moreover, as the Covid-19 pandemic has shown, access to internet plays a significant role in sharing critical public health information with communities.
Broadband connectivity also improves educational processes. Beyond providing students with access to online programs, high-speed internet helps teachers learn about training opportunities, incorporate more materials into lessons, and connect to gradebook software capable of sharing data with education ministries, which helps those institutions better assess the needs of students.
The spillover effects of internet access are evident elsewhere. People can communicate instantly across vast distances. Entrepreneurs can expand their businesses by selling products online. Underserved populations can access mobile banking services and other financial tools. According to the World Bank, raising internet penetration to 75 percent of the population in all developing countries could add up to $2 trillion dollars to their collective GDP and create more than 140 million jobs worldwide.
Solving the issue of last mile connectivity is an important step for connecting offline populations. Last mile connectivity refers to the local access network, or the connection between users and their nearest internet point of presence. It’s often the costliest part of the network and the most difficult to implement.
The financing gap for companies in connectivity infrastructure is expected to reach $1 trillion by 2040, and compared to other infrastructure projects, governments and development organizations play a relatively minor financing role.
However, there’s large commercial opportunity investing in last-mile connectivity. Connecting the world’s total offline population has a revenue opportunity of $308 billion.
The United States Agency for International Development’s (USAID) Last-Mile Connectivity Initiative has researched opportunities for investor-driven solutions to connectivity in developing countries. Since 2016, it has reported the importance, opportunity, and potential value of connecting the next four billion users. Its research has proven that investment in this market would generate financial returns, yet capital investment into last mile connectivity has flatlined over the past few years as investors continue to pass on last mile opportunities.
In short, last mile connectivity has a problem: investment transactions aren’t closing despite reasonable projected returns.
To figure out why, USAID’s Center for Digital Development (CDD) partnered with USAID INVEST to better understand why and where in the process these deals fall apart and how development agencies might help.
INVEST, an initiative designed to help USAID work with the private sector more easily, employs user-friendly strategies that make it less difficult for firms without previous government contracting experience to work with USAID.
A new partner with specialized sector expertise was exactly what CDD needed.
“CDD wanted a partner with a different skillset and point of view,” says Talin Baghdadlian, INVEST Partner Specialist. “Despite the previous reports that last mile connectivity was a potentially successful investment, no one was investing. USAID needed a fresh, innovative perspective to understand why. That’s likely to come from a new partner with on-the-ground experience in the sector, so CDD was totally onboard with taking a chance on a new-to-USAID firm that could offer new insights and a different solution, as opposed to a traditional partner that might just repackage well-known information.”
Enter Connectivity Capital, an impact investing firm with a mission to connect offline populations in developing nations.
Understanding the Mission Behind the Firm: Why Fixed Internet Connectivity Matters
Connectivity Capital manages a sector-focused fund that identifies, invests in, and partners with market-leading ISPs (internet service providers) and network infrastructure companies that expand access to internet connectivity globally.
Jim Forster, its Co-founder and General Partner, spent more than 20 years on the technical leadership team at Cisco Systems, starting as an early software engineer and becoming a Distinguished Engineer. After he left, he began working on angel investments around internet connectivity.
“Throughout my career, I saw the value of the internet as it grabbed hold in the U.S. and Europe,” says Forster. “After I left Cisco, I did a mixture of nonprofit and for-profit work on expanding connectivity. Eventually, I concluded that nonprofit work is valuable for piloting and learning, but, if we want to have impact and connect millions of people, then we need scale. Scale requires sustainability, and sustainability is actually closely linked to profitability.”
In terms of worldwide internet availability, tremendous progress has been made over the past two decades. Nearly 97 percent of the global population now lives in areas that have access to a 2G or greater mobile connection. However, availability is not accessibility. In other words, having a 2G connection enables voice calls and a slow internet signal, but doesn’t mean that the population in a region has access to a meaningful internet connection.
The lack of “meaningful connectivity,” which the Alliance for Affordable Internet defines as a high-quality connection rather than just connection itself, is a problem throughout the developing world in which factors such as speed, quality, device capability, data availability, and the frequency of connection limit the power and impact of an internet connection.
The Limits of Leapfrogging
In developed nations, early internet connections such as dial-up and DSL were built upon existing telecommunications infrastructure. Because many developing nations lacked this infrastructure, establishing fixed internet connections wasn’t easy, affordable, or even possible. Once mobile technology came about, mobile network operators could “leapfrog” this infrastructure gap and connect billions of people in developing nations to the internet through their phones for the first-time.
However, leapfrogging this infrastructure meant that developing nations became largely dependent on mobile connections, which has subsequently given rise to other connectivity issues. For instance, mobile internet is more expensive per gigabyte (GB) than fixed internet connectivity. That’s problematic because accessibility isn’t possible without affordability. In developed countries, where broadband comes from a mix of mobile and fixed connectivity, 1GB of data costs less than two percent of average monthly income. In the world’s least developed countries, the cost is more than 10 percent of monthly income.
Fixed connectivity from ISPs plays an important role in removing the affordability barrier. Unfortunately, mobile technology continues to dominate the internet market throughout the developing world. As of 2018, fixed internet penetration is less than five percent in South Asia and less than one percent in sub-Saharan Africa.
“If you want to bring internet faster and cheaper to a place, having a fixed internet connection is important,” says Forster. “Before mobile, so many people had no connectivity, not even access to a phone. But like any technology, mobile has limitations. If you look at developed countries, fixed infrastructure has allowed for separate mobile and fixed ecosystems with separate capital and separate companies.”
“Affordable, sustained connectivity is necessary for taking full advantage of the internet,” adds Connectivity Capital Co-founder and Managing Partner Ben Matranga. “Mobile health, e-governance, e-commerce, education platforms, and mobile financial services all ride on the rails of a cheap bit of data. Only when the price point for data gets low enough do people naturally take advantage of those digital services.”
In addition to issues of affordability, most mobile internet connections aren’t intended for heavy usage, so there’s often a cap on the amount of data available, which makes using a mobile connection for daily work or education unsustainable.
“Mobile works great when you’re on-the-go,” explains Matranga. “But people in developing countries often use it for tasks it’s not optimized for because there is no other option. This often forces consumers to limit their consumption of information.”
Because of these issues, Connectivity Capital recognizes that investment in a dual ecosystem of mobile and fixed connectivity is essential for expanding internet access in developing countries. USAID’s desire to understand the barriers hindering investment in fixed connectivity and the ways in which development agencies could help reduce those barriers connected with the firm’s mission.
Working Together for the First Time: Connectivity Capital and USAID
Forster and Matranga found out about USAID’s request for proposals (RFP) from a colleague.
“I’d heard of some companies that had headaches working as direct contractors with USAID, so I would have been nervous about directly contracting with USAID,” says Forster.
In onboarding new partners, INVEST aims to remove such headaches. It has a dedicated procurement team that focuses on simplifying the subcontracting process and moving at a speed that aligns with a private sector timeline.
“With INVEST, it was very streamlined to apply, and once we got into the process of work planning and deliverables, there was a lot of clarity about the engagement,” Matranga says.
“It was also a fairly quick process” adds Forster. “We heard about it, submitted a proposal, and had a response about a month to six weeks later. Then, we were contracted. That whole process took about three months, and the work itself took about four months more.”
USAID recognizes that new partners, especially small and local firms, can bring specialized expertise, strengthen local capacity, and deepen local markets, which leads to better and more sustainable development results. The creation of INVEST and the partner network is part of a larger, purposeful strategy designed by USAID to bring more of these voices into its work. By helping new partners through the government subcontracting process and simplifying proposal-writing and submission, INVEST makes the subcontracting experience more user-friendly, thereby enabling firms with deep and sector-specific experience, such as Connectivity Capital, to work with USAID.
“Traditional implementors are quite adept at writing proposals, and they definitely have the resources to submit polished ones,” explains INVEST’s Baghdadlian. “Often, new partners don’t have much experience with USAID proposal writing, so we do a number of things to try and level the playing field, including requesting the proposal in a PowerPoint format. Even having never worked with USAID before, or for that matter writing a proposal for USAID contracting work, Connectivity Capital submitted a strong proposal, and they were shortlisted for a phone interview. The interview is where it became obvious that they were the best candidate. They weren’t just academically interested in the problem: they had skin in the game. They wanted to figure out what was going on and why these investments do or don’t close. They weren’t just interested in writing a report for USAID for payment; they wanted to answer the question about investment barriers to start solving that problem.”
After the selection process, the INVEST team guided Connectivity Capital through the subcontracting process.
“The structure of the contracting paperwork can be a huge barrier for new partners,” explains Lisa Gans, INVEST Strategic Investment Advisor. “Traditional implementors know how to fill out that stuff. For instance, providing the daily rates that USAID requests can be a challenge for firms new to working with USAID. Traditional contractors use daily rates because they mostly do government work. Firms that haven’t regularly worked with the government typically don’t use daily rates for employees, which means USAID’s request does not align with how many private sector firms operate.”
Connectivity Capital doesn’t use daily rates for its employees, but INVEST’s procurement team specializes in finding creative ways to help new partners meet these requirements.
“From USAID’s perspective, the price for the work must be justified, and analyzing cost buildups, including day-rates and travel costs, is a good way to do that,” says Baghdadlian. “Our procurement team spends time helping new partners figure out what those rates would be. We meet every USAID requirement, but we work closely with the new partner in how we do that. We can’t bend the requirements because a firm is new to working with USAID, but we can get creative in working with new partners to arrive at meeting those requirements.”
Baghdadlian collected a lot of paperwork and backup documentation from Connectivity Capital to provide USAID with a justification of the company’s proposed day rates.
“The INVEST team was very good,” says Forster. “The world that USAID lives in is more process driven than a small firm like us. We have the freedom to go from observation to action fairly quick. While it’s a bit different than what we’re used, the INVEST team helped us quite a bit and really worked with us the whole time.”
“The subcontracting process places a lot of onus on the partner, so I think it’s important to explain the ‘why’ behind the processes,” says Baghdadlian. “In our orientation call, we explain that we’re not trying to be difficult or tedious and that it’s not just compliancy for the sake of bureaucracy. We do all of this — the cost inputs and cost reasonability etc. — because the U.S. Government has entrusted INVEST to be stewards of U.S. taxpayer money. The heart of the matter is that we want to spend taxpayer money carefully and responsibly.”
INVEST wants to help new partners become repeat partners. By assisting them with the contracting legwork, INVEST ensures that they’ll have an easier time with the process should they contract or subcontract again with USAID in the future.
Matranga says that Connectivity Capital is “100 percent open to working with USAID or INVEST again.” He also expects that working together again would be more streamlined, too, now that they have “a shared understanding of what’s important and how to get there.”
Helping Excellent Partners Produce Excellent Work
Different activities require different levels of support and so do different partners. INVEST tailors the amount and type of support given depending on both the type of work that is going to be done and the partner selected to do it. Once the subcontracts are signed, INVEST’s technical teams can assist new partners in many ways, customizing the assistance to fit the individual needs of a partner. In the case of Connectivity Capital, INVEST helped ensure that the final product the firm created aligned with USAID’s expectations.
For their report, the Connectivity Capital team interviewed more than 25 investors and 10 ISPs and developed four case studies of transactions in Africa and Southeast Asia to determine the key factors contributing to why connectivity deals succeeded or failed.
“Connectivity Capital has deep technical and sector knowledge that was invaluable to answering USAID’s questions about investment barriers,” says Gans. “They are well-respected and well-connected in this field. They talked to the right people, asked the right questions, and performed high-quality research and analysis. However, I think they had some difficulty translating that analysis into USAID deliverables with USAID protocols. That’s where we could really help, to play the role of translator for USAID.”
Matranga agrees: “The INVEST team was phenomenal. They were really helpful in providing clarification on the deliverables, showing us what was important to USAID and guiding us towards that. They were good at figuring out what was needed and helping us in that direction.”
Ultimately, Connectivity Capital’s report revealed that there are four overlapping barriers to investment in last mile connectivity deals — the multiple external dependencies of the sector, the early growth stage of companies, the mismatch between investor return expectations and available ISP potential transactions, and the possibility that regulatory uncertainty or ineffectiveness could complicate a transaction.
Using these findings, they provided recommendations as to where and how USAID can most effectively drive investment in last-mile connectivity through approaches such as blended finance, closing information gaps, and addressing policy and regulatory challenges.
However, the reports findings have benefits beyond informing USAID’s future work: they inform Connectivity Capital’s, too.
“We wrote a report that is hopefully of value to USAID, but it has value to us, too” says Forster. “We talked to various actors in the sector — investors, corporates, and others — and the information we gained can help us as we move forward in our investment strategies.”
Matranga points out that Connectivity Capital’s independent stake in these findings actually increases the value of the report to the U.S. taxpayer and development partners because the firm will use the report’s finding to make on-the-ground decisions that expand internet connectivity in developing countries.
“There are external benefits to having sector-focused and mission driven firms do this type of work,” he says. “We wrote the report for USAID, but we did that work in the context of thinking about how our firm can contribute to solving this development problem independently. We’re involved in the sector, and we’re going to keep working on expanding access to connectivity after the report is finished. It’s mutually beneficial that the findings of the report can lead to action and influence our future impact.”
After finishing the report, Connectivity Capital had intended to give a presentation at USAID in Washington, D.C. However, because of Covid-19 and subsequent social distancing policies, they instead presented via a webinar.
“Being online rather than in person actually had some benefit because it meant we could reach a larger audience,” says Gans. “It was also more inclusive because people in Latin America and Africa attended. The presentation was excellent. Attendees were really interested in hearing and learning from Connectivity Capital because they are the professionals in this field.”
The opportunity to work with new firms like Connectivity Capital is important and valuable to USAID staff. The external collaboration exposes them to new ideas, provides them with up-to-date market intelligence, and allows them to interact with a network of professionals working in different sectors.
However, Matranga would also like to see the establishment of a larger ongoing dialogue between mission-driven private sector firms and international development agencies.
“I would love to see the creation of a two-way information flow even after the engagement is finished,” he says. “Impact and mission-driven firms are in the business of solving problems. Every day, we’re identifying challenges and seeing opportunities for impact. Some of those challenges we believe we can solve, so we go out and raise money from impact investors to solve them. Other challenges require ecosystem interventions and different types and sources of capital, so we end up passing on them. It would be nice to have a way to report those opportunities and insights back to a likeminded development partner that is receptive to hearing about them. Even if they choose not to pursue them, I think that having those conversations and understanding why we can or cannot solve certain problems would be beneficial to everyone.”