At a time where the need for funding impactful projects exceeds by far available resources in almost every country in the World, especially in Least Developed Countries (LDCs), the United Nations Capital Development Fund (UNCDF)—a specialized agency of the United nations that focuses on unlocking public and private finance in the world’s 47 least developed countries—has created an analysis & selection tool to match the available funding with the most promising investment opportunities.

The objective is not – or not only - the transaction. We aim to develop a pipeline of projects to unlock domestic finance in a systemic way by changing the perception of risk, demonstrating the viability of the investments, testing new business governance mechanisms. At national and global levels, we demonstrate that financing SDG require new innovative financial mechanisms, guarantee schemes, and in-country technical facilities and solutions.

The tool in question is called the Dual Key System, a multi-factor analysis based on two steps (keys).

The first step of the analysis is the “Technical Key” or “Impact Key”. By using this key, UNCDF tries to determine whether an investment will deliver local impact in the form of economic development, women’s economic empowerment, peacebuilding, food security or any other relevant form, thereby guarantying that the selected project is tailored to the specific goals of the program. This tool also grants the investment officer a certain flexibility to adapt the analysis to both the type of impact sought and the nature of the proposed projects. It may include both quantitative and qualitative indicators that form an amalgamated structure to select the most impactful projects. In this sense, multiple indexes are developed internally and used to evaluate the impact of a proposal on a specific area. For instance, The Women’s Economic Empowerment Index (WEE Index) -developed by UNCDF UNDP and UN Women- is one of the indexes whose use became systematic in all proposals that fall into the category of programs designed for Women empowerment. This step also offers the opportunity to assess the gaps in projects that hinder maximization of impact and supports the formulation of recommendations and capacity building plans that would allow to improve the project’s outreach.

The second step of the analysis is the “Financial Key” that focuses on the financial impact of the projects, evaluating the business model with a range of strategic and financial tools. However, this second key is not only about bankability, but also looks for the financial impacts in the form of sustainability and follow-on investment potential. The Objective of this tool is above all to determine if the project presents a potential to sustain its activities based on its own business model once the investment is done. Another important aspect of this key is that it creates a dialog between UNCDF and the bank with the aim to understand the risk perception and define the best option, the best instrument to be upscaled.

For instance, the use of the “Financial Key” allowed UNCDF team to provide technical assessment and assistance with the financial analysis of projects via the MSMEs COVID Response Platform in Senegal. This program took into consideration the impact of the COVID-19 crisis on businesses and the consequent urgent needs for support, as well as the challenge posed by supporting informal businesses (lack of data, technical capacity, etc). Thus, providing a demonstration on how this key facilitates the operation and upscaling of the financial instrument and platforms. Another different example is the application of this key in the Initiative for the Emergence of the Diaspora and Investments in the Territories - Initiative pour l’Emergence de la Diaspora et des Investissements dans les Territoires (INEDIT) – where the focus was more on the analysis of market opportunities and current competitors to ensure sustainable and profitable projects.

In sum, the coupling of these two keys present a very powerful tool that optimize the allocation of resources for small PPPs and SMEs to achieve the highest impact, with a direct involvement of financial sector. On one hand the first Key measures the magnitude and potential impact of an investment opportunity in the time of the investment. And on the other hand, the second key can be viewed as a measurement of the likelihood that the impact would continue occurring in the future without requiring further external investments.

In this sense, this tool is particularly useful in LDCs. From the point of view of host countries, it maximizes impact; and from the point of view of the investors or donors it allows to select the bankable solutions that can be sustainable. That is why UNCDF West and Central Africa (WCA) teams have now methodically included this tool in most, if not all, the programs that involve the selection of investment opportunities.

Case study: A dual key approach in Senegal for women empowering and sustainable investments

Aiming at contributing to overcome the constraints women face in their economic activities, UNCDF – with its capital mandate - designed a joint-program with the Sovereign Wealth Fund of Senegal (FONSIS) to establish an innovative financial mechanism addressing structural barriers faced by women, while unlocking domestic public and private capital for gender transformative investments.

UNCDF accompanied FONSIS in the structuring, creation, and management of an independent financial vehicle in the form of a capital investment fund named “Women Economic Empowerment Fund” (WE! Fund). This limited liability corporation is dedicated to investing in gender-sensitive SMEs and PPPs in the missing middle by providing equity and junior loans together with technical assistance. UNCDF supports the fund in building their capacity on pipeline sourcing, deal structuring, due diligence and impact measurement standards, and piloting SME investments.

The sourcing of the pipeline of projects goes through two steps: Firstly, WE! Fund supports the project leaders by providing them guidance to improve the gender responsiveness of their project. Indeed, the WEE-Index, which is a tool to assess gender dimensions of public and private investments using a comprehensive set of indicators, was developed by UNCDF, UNDP and UN Women; and is used to assess the correspondence with the high standards of the WE! Fund – in terms of gender responsiveness. If the project is accepted by the Gender Assessment Committee (Local Development Finance "Dual Key” Investment Comittee terms of reference - UN Capital Development Fund (UNCDF)) of WE! Fund, it enters the second phase.

Secondly, WE! Fund assesses the feasibility and financial sustainability of the business plan. These criteria are evaluated by the Investment Committee of WE!Fund. To allow funding, the combined validation of the gender responsiveness and the feasibility and financial sustainability is therefore necessary.

The use of the dual key system in this particular case allowed the program to select the most impactful projects with more than 5000 people expected to benefit from the program and 1250 new full time/ part time jobs created; while ensuring sustainable investment for the fund with 1000 Mn FCFA (USD 1.8 Mn) of additional revenue from the financed SMEs, and positive margins and ROIs.