October 2020 – Alitheia

Creator: ASHRAF SHAZLY | Credit: AFP/Getty Images

Politics, Philosophy and Economics of ODA in a time of COVID-19

In these unprecedented times, development assistance must shed the skin of its past and be adaptive. Despite a long history of Overseas Development Assistance (ODA) flowing into developing countries, ODA has failed to fulfil its ambition of developing the essential infrastructure needed to tackle the health pandemic and economic fallout from a crisis like COVID-19. With the global pandemic and economic meltdown, there’s a risk that the already meagre. ODA could be reduced, as developed economies look inward to prioritize spending at home to recover the economic and human loss that many have experienced this year. This will create an epic gap in the ability to develop economies to provide an environment that enables the bottom billions to reach their full potential.

ODA’s historic inefficiency has always been evident to astute observers, however, the pandemic spotlights the glaring gap and inadequate investments (or perhaps mismanagement by the ODA receivers) in the healthcare, education, finance, and energy sectors. The lockdown has even further exposed the under-funding, inefficiency and unsustainability of key sectors of developing economies; from the exclusion of children of the digitally excluded with no opportunity for remote learning to businesses which continue to remain heavily reliant on cash transactions. In the face of this crisis, investments to boost and transform these sectors are pertinent now more than ever. As with past crises, this is a defining moment. Stretching the deficiencies of ODA further, the investment gap in critical sectors will impact our collective ability to achieve the Sustainable Development Goals (SDGs). For instance, how can we achieve SDG3 to ensure healthy lives and promote well-being for all with an inadequate and crippling health infrastructure? Or SDG 4 to ensure inclusively and quality education for all when ordinary folk cannot afford to send their children to school, talk less of providing the technological tools that COVID-19 has revealed as sine-qua-non to fully participate in modern-day learning?

COVID-19 will no doubt have long-term negative socioeconomic consequences that will further fuel inequalities and vulnerabilities. The developing world already fraught with weak healthcare systems, and other existential threats (such as disease, food security, climate change, etc.), faces the additional impact of the pandemic and subsequent reversal of limited economic development successes and reduction of ODA.

Aside from the long-term effects of the pandemic, the short-term practices and policies required to ‘flatten the curve’ of the disease are difficult to enforce in developing economies where low-income households/individuals are reliant on daily income generation to meet their basic needs. For this group, their livelihoods are key to their health and lives. The UNDP Administrator, Achim Steiner estimates that developing countries could lose US$220 billion in income, noting that this pandemic could cause “a massive reversal of gains made over the last two decades, and an entire generation lost, if not in lives then in rights, opportunities and dignity.” So, already fragile economies (and households) are set to suffer a triple whammy of poor infrastructure, debilitated income, reduced official development assistance, and comatose SDGs.

Global cooperation has played a critical role in development and recovery, especially post an incident of significant proportions as COVID-19. Post-world war II interventions provided a template for ODA enabled countries to contribute and collaborate to lift up the weakest. However, years of low impact and slow progress have revealed the problems of an ODA formula based on the North-South flow of aid through NGOs and humanitarian work as the dominant narrative for poverty alleviation and economic development in the global south. A recent USAID report also points to this, noting the inadequacy of current global health funding. It suggested that new models of financing development are needed to achieve the Sustainable Development Goals (SDGs).

ODA presented as charity often results in short-lived solutions and small-scale impact. However, outcomes can be significantly improved by employing some key principles of impact investing: intentionality, sustainability, and metrics. This may serve to reduce the short-term nature and behaviour of aid money flowing into NGOs, and the seemingly tick-box nature of ODA by Development Assistance Committee (DAC) countries. With this possibility, either redesigning ODA in order to improve accountability, sustainability and scale of impact is imperative or simply doing away with it. I recommend we consider the former and look for ways to meaningfully repurpose and redesign ODA.

AID can be repurposed and redesigned to achieve ‘more bang for every buck’

ODA should be extended, repurposed and redesigned to accelerate the attainment of desired developmental goals. Investing in businesses that simultaneously deliver social and financial returns has given me a front-row seat on investing in scalable and sustainable enterprises that consciously solve developmental problems. These enterprises are founded and led by entrepreneurs and management teams who maniacally attack an intractable problem and desire to build organizations that are leaders in their domain, at scale. They want to be accountable. They are intentional and consciously pursue profit with purpose. This combination of factors achieves significantly more than pure aid.

Data published by the OECD shows that between 2015 and 2017, Nigeria and Ghana received a net aid disbursement of over $40 billion and $7 billion, respectively with little remarkable difference in development. In comparison, during the same period, less than $7bn was allocated to impact investing transactions in the two countries ($4.7 billion in Nigeria and $1.2 billion in Ghana) according to a report published by the Impact Investors Foundation. Yet, this has resulted in accelerated growth in new models of access to financial services, health, and education for over tens of millions of individuals, households, and businesses with targeted financial and social returns exceeding two times the value of each dollar invested.

Investing with a purpose allows for measurable economic, social, and environmental returns providing sustainable and scalable solutions to the intractable problems of developing countries. With impact investing, funders and entrepreneurs collaborate with the intention of addressing market failures with home-grown solutions at scale. They analyze the sustainability of their interventions through a financial lens while simultaneously tracking the impact of the money on their intent to improve and transform lives. Unlike ODA, providing a return on funds that flow from the developed to the developing world. Integrating the latter to the broader global economy in a commercial manner while meeting the latent consumer needs and desires in poorer economies. This is crucial given the complaints around aid from the citizens of donor countries and their increasing retreat to national preoccupations

This is not to completely discount AID but instead to call for greater focus on how the mechanics and dynamics of private equity and impact investing in emerging markets can be employed to solve the social challenges of these economies. Finding a balance between ODA as a charity and investing with impact is the sustainable way to progress. Opening a tap for ODA to be reallocated to an investing approach will increase the odds of the attainment of sustainable development goals.

In the wake of the COVID-19 health crisis, although it will be easier for donor countries to focus funds on the recovery of their economies, deciding not to commit to ODA due to the resulting economic downturn will impact DAC countries whether they like it or not. The world is only as strong as the weakest healthcare system and, dare I say, economy. Thus, this is the time for ODA to double down and hold recipient countries more accountable by switching a greater proportion of funds from pure aid to a combination of charitable and investing strategies. This is not the time to retreat into self.

Through innovative financing ACEF is enabling social impact by helping reduce deaths from respiratory diseases, which currently exceed 1.6mn deaths annually

Impact Investing seeped into the conscience of the investing ecosystem over a decade ago and refers to the varying degrees that investments can deliver positive social, developmental, economic, and financial returns all at once. Impact investing therefore refers to investments that deliver both social and financial ‘returns’. These social returns improve the livelihoods of low-income households by providing access to essential services such as health and wellbeing, education and opportunity, finance, and growth, which would otherwise have eluded them. Despite its growing popularity and necessity, funds allocated to impact investing still represent less than 20% of global mainstream funds under management.

Within the impact investing ecosystem, there are two schools of thought: the purist’s view which assumes that the investor must have a stated intention determined at the onset of an investment in order to track and measure certain outcomes. The stated intention comprising targets such as increasing the number of households with access to clean water, off-grid clean energy, good quality health or education, or other social services. This view is so pervasive that those not explicitly professing the purist mantra are viewed with suspicion. The second school of thought believes that by virtue of financing opportunities in key sectors of an economy and thereby creating jobs, impact implicitly emerges.

As a former Wall Street investment banker turned impact investor, I have had cause to pause and rethink the many ways impact can occur. I have found myself caught in the middle of two seemingly irreconcilable positions. There are those who believe that anyone professing to be an impact investor should constitute itself as a non-profit organization, for whom profit is secondary. They say one should not be making money off enterprises that benefit or serve the poor. Others ask, ignorantly, whether it is even possible to think of the poor as a potential market to be addressed for anything other than aid.

On the other side of the debate, since creating Alitheia thirteen years ago, my experience has been that my former investment banking colleagues are stuck on the thought that I am perhaps running a charity and financial returns are not on my mind. My ‘new’ acquaintances who are on a crusade to rid the world of its social ills cannot believe someone with my hard finance training, skills, and experience is truly aligned with their objectives of improving the lot of the poor and lifting them out of poverty.

The questions that occupy my mind when I think of these two positions are: is it really a crime not to state intention at the onset? Who should have the responsibility to state intention? Shouldn’t good business sense and investing include a broad set of metrics that considers the social good of an enterprise as well as the financial good? Is measuring impact really such an anathema to the spirit of capitalism?

I experienced first-hand the purists’ suspicion when Alitheia set about to finance and develop an enterprise that helps prevent infant mortality caused by the effects of the inhalation of firewood smoke on an infant’s respiratory system. The enterprise provided a low-cost alternative to energy usage by enabling women in low-income households to use cooking gas instead of firewood, switching from a dirty to a cleaner fuel. The enterprise’s stated intention is to have a positive social and environmental effect on the lives of five million households over a five-year period, while also turning a decent profit for investors.

Alitheia worked with a large oil and gas company in Nigeria to make the project a reality and at a meaningful scale. Despite the lauded positive social outcomes, the new enterprise struggled to secure financing from purists. They could not get past the fact that the oil and gas company stood to gain profitably from the cooking gas sales. Never mind the hundreds of thousands of infants that would survive early childhood or the 30,000 community entrepreneurs created in the distribution network. They had not thought about the trees that will be spared or the noxious substance that will be reduced in the environment.

The purists questioned whether the oil and gas company would remain committed to the new enterprise since it had not stated an intention to have positive social outcomes. Furthermore, they argued that the oil and gas company were only interested in providing a clean gas solution because Alitheia had made them aware of the market potential of low-income households.

My view was that intentionality is not the only prerequisite to impact investing. What was important is that, by Alitheia helping the company to make the connection between social conscience and profit, a win-win scenario was created for all parties – the infants, the households, the environment, the oil and gas company, and the investors in the new enterprise.

Working with the oil and gas company, Alitheia designed and financed a product and accompanying distribution system that not only benefited women in low-income households and their families but also opened up a new customer base for the company.

Although the social outcome of the enterprise is significant, foundations and philanthropists, etc equally viewed it with suspicion with comments such as ‘another large corporate turning a profit off the poor.’ While these kinds of thoughts are beginning to shift as success stories are beginning to emerge, investors are nonetheless classed as either ‘impact first’ or ‘finance first.’

The continuum runs from those who are chiefly concerned with having an impact, to those who are driven by profits. Even though it is perfectly possible to balance the objectives of impact and profits, the purists think that anyone to the right of impact first is not really bothered with the poor, and may simply be using the impact tag for some ulterior motive. At the other end the traditional investor, driven by profits, views those to the left of finance first as charitable organizations.

However, if impacting investing is ever going to gather meaningful momentum, purists and hard finance pundits alike will need to shift positions and recognize the necessary role of the other. By recognizing their mutuality and co-conspirator, perhaps one day we can report on impact investing commanding a bigger slice of global financial flows to drive shared prosperity to make a dent in solving global issues that improve the lives of all.

Thirteen years after Alitheia started, it is good to see our philosophy of impact investing becoming more mainstream with the original ‘Finance First’ naysayers joining the movement. Nowhere is this more apparent than with KKR topping the recent Private Equity International ranking of impact investors. Alitheia shows up in this ranking through its partnership with Goodwell, the runner up to KKR. Nonetheless, the presence of traditional investors now highlights the importance of impact investing.

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