OECD, rich G8 countries look to channel their funding into impact-investing projects

A convergence is being spied between foreign aid and private sector interests. Hillary Clinton, US secretary of state, outlined this intent while addressing the Global Impact Economy Forum at Washington DC this April.

She said: “We know that working with the private sector can bolster both our foreign policy interests and our development efforts. But we hope the private sector knows that working with government and civil society also offers value. And increasingly, our goals, I would argue, overlap.”

On the occasion, Clinton also unveiled the state department’s newly minted impact initiative— Accelerating Market-Driven Partnerships (AMP), starting with a pilot in Brazil focused on affordable housing, skills training and waste management systems.

Lars Thunnel, who stepped down in June 2012, as head of the International Finance Corporation (IFC), in an interaction with McKinsey Quarterly recently, said: “I think the private sector has come into the middle of the whole development agenda.”

Need And Effectiveness

The desire for better results and value for money is apparently driving policymakers into the arms of the private sector. It’s also congruent with the increasing pressure from anxious western taxpayers to either cut aid or at least secure better aid effectiveness, especially in these times of economic stress.

“We have a particular duty to show that we are achieving value for every pound of UK taxpayers’ money that we spend on development,” says Andrew Mitchell, former UK secretary of state, in an email interaction facilitated by the Department for International Development (DFID), the country’s leading foreign-aid institution.




Mitchell recently concluded a root-to-branch review of UK’s multilateral and bilateral aid as a precursor to reforms within the DFID. A need effectiveness index to assess a recipient country for its level of poverty (for need) and the quality of its institutional environment (for effectiveness) was created.

India is a top scorer here. “Our plan is to focus on providing risk capital to private enterprises in the form of equity, loan or guarantees to facilitate projects that may not have otherwise got off the ground,” says Mitchell. UK, post the Mitchell review, has set a budget of £1.2 billion in aid for India (2011-15).

According to the Development Assistance Committee, 23 of the rich OECD countries gave $133.5 billion in foreign aid in 2011. Aid reported by DAC is known as official development assistance (ODA). Private foundation and NGO giving is in addition to ODA, and was estimated at $31 billion in 2010.

Rich countries funnel aid largely along two paths: bilateral (country-to-country programmes) and multilateral (funds made available to UN agencies, the World Bank and initiatives like PIDG). In 2011, the bilateral component, at 72% of ODA, made up the bulk.

Indications are the mix is set to undergo a churn, with multilateral aid adding to its 28% share. Following its review, the UK, for instance, has decided to withdraw funding to poor performers like the ILO and the UNIDO, and has put several other UN agencies on watch.

The top performers have been multilaterals like PIDG, Global Alliance for Vaccines and Immunisation (GAVI) and the Global Fund to Fight Aids, TB and Malaria (GFATM)—all in the impact mould.

Green Flags, Red Flags

The £50 million that DFID will save from ILO and others is to be directed to the newer alliances. “The GAVI and the Global Fund are fascinating examples of aid generosity,” Bill Gates of the Bill & Melinda Gates Foundation (BMGF), a prime mover of these initiatives with significant private participation, told ET during a visit to India two months ago.

In 2011, GAVI received $564 million from G8 countries, representing 50% of the contributions received by it. Another recent innovation is the African Agricultural Capital Fund (AACF), for which JP Morgan extended a loan of $8 million, 50% of which was guaranteed by the USAID. The other investors in AACF are the Gates and the Rockefeller foundations.

In the bilateral space, and in the Indian context, DFID, with SIDBI, has put in place the $61 million Samridhi Fund. Its focus is on drinking water, supply chains and financial inclusion, with expected returns of 25% a year.

“It’s a significant trend (foreign aid in impact investing) and I see them as a catalytic injection to build infrastructure and businesses where no commercial investor will invest,” says Vineet Rai of Aavishkaar, which funds social entrepreneurs.

Ankur Shah, interim country director for Acumen Fund, founder-member of the Global Impact Investors Network (GIIN), is happy about the turn of events, but has a word of caution. “All stakeholders have to ensure impact reaches the poor, else they will have to face consequences similar to the microfinance crisis,” he warns.

BetterAid, a global partnership of over 700 civil society development organisations, expresses similar concerns. BetterAid’s recent comment on the OECD working paper for a global monitoring framework is brutally candid: “We are concerned that private sector monitoring is limited to the conditions that allow the private sector to flourish.”

As the private sector begins to address global developmental challenges, adherence to international rights frameworks and the creation of governance guidelines is an imperative.

BetterAid, for example, insists on the “the monitoring of the private sector itself and its contribution to development”. That is beginning to happen. As impact investing matures, several impact measurement mechanisms are taking shape.