Innovation for Transformative Results: Empowering Communities by Making Finance Work for the Poor
Despite significant inflows of domestic and international, public and private investment capital for infrastructure, very little is reaching the critical local infrastructure that forms the backbone of dynamic local economies, builds resilience to wider economic shock and transforms economic structures, adding value and employment. Localities often lack the fiscal space, capacities, access to finance and pipeline of bankable projects that would enable them to bring priority projects to fruition. And investors perceive high levels of risk, low promise of return, limited ability to perform due diligence on local projects, and difficulty in identifying reliable management arrangements to assure long-term project sustainability.
The UNCDF’s Local Finance Initiative (LFI) programme was designed to address these challenges. It set out to show that local infrastructure projects that are prioritized by local governments and communities can attract funding if existing market failures are addressed. It was also designed to further promote economic transformation by unlocking primarily domestic capital to fund this infrastructure, thus deepening capital market development and furthering economic integration and resilience.
#UNCDFExpertsChat spoke with Peter Malika, Chief Technical Advisor and Manager of LFI about the prospect of developing local investment opportunities that can deliver transformative impact for financing by the private sector and domestic capital markets.
Prior to joining UNCDF, Peter was the Africa Regional Director at E+Co and Persistent Energy Partners LLC (Clean Tech Fund and Private Equity investment Fund respectively), managing the entire investment life cycle, overseeing direct investments, portfolio development and operations management. Prior to E+Co, he was the Managing Director at Choice Capital Management, Director at KPMG LLP in Minneapolis, and Data Analyst at Piper Jaffray Investment Brokerage Firm also in Minneapolis, USA. Peter holds a MBA from the University of Phoenix School of Business and a Bachelor degree in Accounting and Finance from Metropolitan State University in Minneapolis.
#UNCDFExpertsChat: What is the development challenge you are trying to solve? How does UNCDF’s LFI programme solve that challenge?
Peter Malika: The Least Developed Countries (LDCs) are amongst the world’s fastest growing economies and yet, they face significant disparities and risks, with many localities not sharing the benefits of growth. Localities lack capital investment and infrastructure required to accelerate local development and ensure a more sustainable and equitable inclusion into the growing economy.
The goal of the LFI programme is to ensure that people in all regions and locations benefit from the economic development growth. This means dealing with the specific local development challenges of, for example, peri-urban areas and remote rural locations. It means unlocking and re-investing domestic resources and services back into local economies using innovative forms of private capital mobilization together with improving the effectiveness of public and private investments in fostering local economic development. These approaches lead to increases in local revenue (through taxes and fees) for local institutions that again can be reinvested in the local economy. In Tanzania for example, the LFI Programme is currently supporting 30 active small and medium infrastructure projects (both public and private) in 18 regions spread across the priority sectors namely public service delivery, agriculture, clean energy & climate resilience. These projects are collectively worth 303 million US$.
In essence, LFI is bringing to the table an innovative approach to an old problem. This innovative programme is designed to promote sustainable and inclusive development through the development of local investment opportunities and productive capacity to deliver transformative impact at the local and national levels. LFI supports public and private sector investments to unlock domestic capital to invest in transformative ‘productive systems’ at the local level to support food security, climate resilience and clean energy, women’s economic empowerment, and local economic development. In order to pave ways for further resources, LFI applies a variety of investment modalities including structured project finance, SME finance and public private partnerships, in concert with local development strategies and national policies.
#UNCDFExpertsChat: What is the last mile financing model of LFI? How does it build public/private partnerships?
Peter Malika: LFI’s last mile financing model is applied to non-traditional project developers, such as local government authorities and local entrepreneurs and/or companies that develop local economic development projects that traditionally are not attractive to commercial banks due to perceived risks. These investment projects generally lack both capital and project development expertise, a critical barrier to the development of such projects. Their sponsors also lack the experience to anticipate complexities, challenges, high transaction costs and extended development time particularly in emerging markets where the policies and business enabling environments are limited.
The risks present at all stages of project development (pre-feasibility, investment, construction, implementation and operation) require significant capacity and experience of the developer in order to be properly managed and mitigated for investors, lenders, contractors, and other third parties.
The LFI technical team provides this capacity through specific interventions that help projects to reach financial closure. Additional support is provided in the form of grants for technical studies, seed capital, subordinated debt, loan guarantees, credit enhancements and options that reduce last mile transaction costs. The limited-recourse project finance approach, as one example, has been deployed successfully in developed countries to access long-term private finance for productive systems and infrastructure projects, yet is not widely applied for small and medium infrastructure projects in LDCs. UNCDF’s use of this approach is a critical element to leverage limited public funds needed to unleash private capital to scale up local development.
In our experience, public and private partnerships happen when projects such as those developed by local government authorities access private sector funding and seek other services through outsourcing and contracts for services connected with the implementation of the project.
#UNCDFExpertsChat: How does LFI support the achievement of the SDGs?
Peter Malika: The majority of the SDGs are linked to LFI’s focus areas such as sustainable economic development and communities, clean energy, food security, and women’s economic empowerment. SDG 1 on poverty, 2 on zero hunger, 5 on gender equality, 7 on clean energy, 8 on economic growth, 9 on innovation and infrastructure, 11 on sustainable communities and 17 on partnerships, are particularly central to LFI’s current work and long-term goals. It is also important to note that the LFI approach can also be applied to the other SDGs, such as education and health.
Having an integrated approach and working in close partnership with the public and private sector to support progress towards these selected goals is crucial to achieving the SDGs, and LFI is uniquely placed to support that process.
Strategic partnerships with the private sector is also going to be critical to support the achievement of the SDGs. LFI will continue to work closely with leaders in the private sector to help improve the basic financial, legal and fiscal infrastructure required for private sector development, which is lacking in many LDCs.
#UNCDFExpertsChat: The SDGs have a strong focus on leaving no one behind. How does LFI reach poor communities and under-served regions in LDCs? How does it make sure that it reaches women and vulnerable groups?
Peter Malika: The LFI financing approach implements UNCDF’s primary objective of transforming economies in LDCs through various key thematic interventions such as women’s economic empowerment, climate resilience and clean energy, food security, and cross boarder investments.
For example, LFI investments in clean energy projects will result in improved livelihoods of its community members. More specifically, the use of clean energy will improve the health of villagers particularly for women and children, due to reduced use of toxic fuel wood or kerosene for cooking and lighting. The LFI-supported Lupali project (small hydro-power plant) in the Njombe Region in Tanzania will support over 7,500 community members, 3 secondary schools, 7 primary schools, 6 nursery school, 16 churches, 4 dispensaries, 1 health centre and 4 other institutions with access to power. The benefits of having access to power will significantly empower women and contribute to local economic development at large.
#UNCDFExpertsChat: Can you give an example of how LFI has made a difference to the lives of poor people and communities?
Peter Malika: The LFI programme has continuously shown how it can potentially transform communities and people’s lives for the better. In 2015, LFI provided both technical and financial support to Ileje District in Mbeya Region in Tanzania to establish a community radio station. The project is an excellent demonstration of how ICT can be operationalized at the community level to improve access to information - ultimately empowering communities.
Once operational, the Ileje community radio is expected to bring a number of positive changes to Ileje District and beyond. With improved access to information, the predominantly farming community will be able to make more informed economic decisions, thus enhancing crop yields and their livelihoods. The radio station will also help to promote and raise awareness on key social issues such as gender equality, reproductive health and family planning, HIV prevention, empowerment of marginalized groups, including women and good governance.
LFI has also just published its End Term Report covering the period 2012-2015. The results, lessons learned and recommendations for scale up and sustainability highlighted in the report showcase how UNCDF’s ambition to see a change in investor behaviour and a “crowding in” effect to attract interest in funding smaller-scale projects has been met in practice.
LFI has used targeted seed capital investments and technical support to attract private resources, such as from domestic banks, to fund essential infrastructure and basic services at the local level. It has helped a growing number of communities to prepare and structure bankable projects, and demonstrated how investments in local infrastructure – hydro-power, agro-processing, transportation hubs, market development, and telecommunications – can have a transformational impact on local economies, supporting local food security, women’s empowerment, job creation and access to clean energy.
#UNCDFExpertsChat: What are the lessons learned from LFI's implementation so far?
Peter Malika: We have definitely learned quite a few key lessons from the pilot implementation of the LFI programme in Tanzania between 2012-2015, particularly with regard to use of domestic capital, scaling-up and replication in local governments.
The pilot clearly demonstrated that the LFI approach can have positive, transformational and sustainable impact at local and national levels alike. More specifically, I would say the key four lessons for us were:
- ‘Bankable’ projects are the starting point for unblocking domestic and private finance: The most critical bottleneck to accessing finance is the lack of projects that are ready to be assessed by a formal financial institution. Finance is not available because requests for finance tend to be just “concepts” or “wish lists,” lacking business plans, feasibility studies, market assessments, engineering and legal inputs, etc.
- Active participation and support of the government was key in opening doors, providing references and communication with local government project developers to tap into the LFI approach, leading to a growing pipeline of projects from Local Government Authorities.
- Mind-set change has been possible due to the sustained decrease in public funding to LGAs, which has resulted in a paradigm shift. Consequently, Local Government Authorities are now more open to entrepreneurial approaches such as LFI.
- Last, but not least, we have learned that local economic development is a complex issue undertaking requiring time and national and international partnerships. And what we have learned is that strategic partnerships with private sector actors such as commercial banks and project developers has been a key factor in unlocking private finance for development in Tanzania.
#UNCDFExpertsChat: What's the plan for scale up? What can we look forward to in the future of LFI?
Peter Malika: The future of the LFI Programme looks promising and exciting. The Government of Tanzania has already expressed keen interest in applying LFI’s techniques and strategies in all its local governments. In Tanzania, LFI has demonstrated that local development projects can access private sector capital and domestic capital can be used to finance sustainable local development and create opportunities for trade, entrepreneurship, jobs, build climate resilience, empower women and youth and improve people’s lives through poverty reduction. In addition, if local development is to be successful and sustainable over the longer term, the private sector, including financial institutions, needs to be fully mobilized.
Currently, the LFI Technical Team is working closely with the President’s Office – Regional Administration and Local Government on establishing a national platform to further replicate the LFI approach with local governments and the private sector. However, the proposed scale-up strategy will require additional discussions and input from key stakeholders as well as more funding before being finalised in coming years.
We look forward to continue working closely with our key partners, the Government of Tanzania and the Swedish International Development Agency (Sida), whose support has been critical in the success of the LFI programme; and with other development partners to scale up LFI and expand it to other LDCs. The LFI programme was also recently launched in Uganda and Benin and plans are underway to further replicate the programme in three more countries, possibly Bangladesh, Laos and Lesotho in 2016.
#UNCDFExpertsChat: What's exciting about working in this space?
Peter Malika: I am excited to work in this programme at the country level, being at the forefront of innovations in local development finance and to be a part of the solutions to promote sustainable and inclusive local development with the end-result of improving people’s livelihoods. Managing the LFI Programme together my technical team means that we get to work closely with public and private project developers providing them technical expertise, seed capital, and risk mitigation strategies that help to unlock private sector investment capital required to accelerate development and expand businesses, create jobs, grow local economies and transform communities.
UNCDF is the UN’s capital investment agency for the world’s 48 least developed countries (LDCs). With its capital mandate and instruments, UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development. This last mile is where available resources for development are scarcest; where market failures are most pronounced; and where benefits from national growth tend to leave people excluded.
UNCDF’s financing models work through two channels: savings-led financial inclusion that expands the opportunities for individuals, households, and small businesses to participate in the local economy, providing them with the tools they need to climb out of poverty and manage their financial lives; and by showing how localized investments -- through fiscal decentralization, innovative municipal finance, and structured project finance -- can drive public and private funding that underpins local economic expansion and sustainable development. UNCDF financing models are applied in thematic areas where addressing barriers to finance at the local level can have a transformational effect for poor and excluded people and communities.
By strengthening how finance works for poor people at the household, small enterprise, and local infrastructure levels, UNCDF contributes to SDG 1 on eradicating poverty with a focus on reaching the last mile and addressing exclusion and inequalities of access. At the same time, UNCDF deploys its capital finance mandate in line with SDG 17 on the means of implementation, to unlock public and private finance for the poor at the local level. By identifying those market segments where innovative financing models can have transformational impact in helping to reach the last mile, UNCDF contributes to a number of different SDGs and currently to 28 of 169 targets.
The Local Finance Initiative (LFI) is a UNCDF investment mechanism and a set of tools that enable least developed countries to unlock the flow of domestic capital to invest in local economic development. LFI supports public and private investments and projects that have impact in the local economies by providing technical expertise in project development and finance, seed capital, guarantees, credit enhancements and other risk mitigation strategies to attract further financing from local domestic capital.