The case of transforming impact investments into development practices in Tanzania.
Impact investing, which originated in the 1990s from social movements in the US and UK, gained significant attention during the 2007 Rockefeller Foundation Conference in Italy. It promised a "blended value" approach and impact, combining social or environmental impact with financial returns on investments. Unlike Development Finance Institutions (DFIs), which typically invest in established companies, impact investors may target young entrepreneurs and startups in developing economies, making them particularly attractive to the development sector. Is this truly happening?
As a Ph.D candidate at the University of Oslo, I recently spent some time in Tanzania, researching how impact investing is transforming the international development sector, funded by bilateral or multilateral official development assistance. In recent years, the sector has evolved alongside the global economy, with a notable shift towards financialization. This shift has prompted a new wave of research exploring how financial knowledge, formulas and practices are reshaping development. My research adds to this field by examining the role of impact investments as a case study of this financialization.
Can impact investments deliver development?
From the perspective of the development sector, impact investments are seen as a way to contribute to the 2030 Agenda and the Sustainable Development Goals (SDGs). They promise more efficient development aid and the mobilisation of private capital through "blended finance partnerships," which mix public-oriented finance with private capital. However, despite these promises, little research has been done on the actual impact of these investments in terms of development outcomes. My ongoing research aims to explore the realities behind the concepts of "blended value" and "blended finance partnerships."
A Case Study: Sandra's Journey
One of the key findings from my research involves the transformation of impact investments when applied in the development sector. Let's take the example of Sandra, a Tanzanian entrepreneur in her late thirties. Based in Dar es Salaam, Sandra's company employs six full-time staff and rents office space in a co-working environment.
Sandra successfully secured funding from three different impact investment programs in her city. To gain entry into these programs, she had to present her business idea and demonstrate how her products contributed to various SDGs. In one program, she had to show how her product improved sexual and reproductive health rights for young people with disabilities. After completing a three-month training program that included design thinking, financial management, and product development, Sandra presented her company at a "demo day." Although these pitches are typically aimed at attracting investors, this event was primarily attended by development organisations and workers, and diplomats from embassies. Sandra's presentation earned her a $5,000 grant.
The Transformation of Finance into Development
Sandra's story illustrates a broader trend: in aiming to create "blended finance partnerships," development actors have transformed impact investments into development programs. This shift is largely due to the lack of capital circulation for early-stage investments in the Global South. Development organisations have stepped in, adopting the role of venture capitalists and providing training and grants instead of long-term capital investments provided by the private sector. Private sector impact investors are replaced by international donors, multilateral agencies such as the World Bank and the International Finance Corporation, United Nations agencies, the European Union’s delegation to Tanzania and East Africa, and international non-governmental organisations.
Moreover, and probably most importantly, the traditional financial valuation tools are being replaced by the Sustainable Development Goals (SDGs). Let’s return to Sandra’s case. When seeking early-stage investments in the private sector, Sandra would either apply to enter accelerators driven by venture capitalists or approach angel investors for equity funding. This would normally involve long-term commitments and risk calculations provided by investors, and for the investors, investments in entrepreneurs like Sandra would be based on their assessment of potential future return on investments. Techniques such as discounted cash flow analysis and comparable company analysis would evaluate the company’s financial worth. Concurrently, frameworks like Impact Reporting and Investment Standards and the Impact Management Project framework would guide their measurement of social impact. In this way, investors would calculate the anticipated ‘blended value’ of the impact investment. However, when Sandra applied for admittance to the first impact investment development program, her application was valued out of her company’s potential positive contribution to the SDGs. Thus, her company was no longer valued out of the potential future return of investment on her firm, but rather on her future contribution to specific sustainable development goals. Investors and entrepreneurs that ideally, in the private sector, stimulate and negotiate with each other to assess the venture’s worth, are thus no longer participants in the valuation process.
A significant twist following the replacement of SDGs as a tool for valuing startups in these programs, then, is that the valuation of the ventures no longer is connected to the world of finance, but directly interlinked with the broader apparatus of SDGs, development actors, and thus development politics. The SDGs, in turn, are not necessarily prioritised in Tanzania, as the implementation of the SDG agenda took place in parallel with the country’s development of the National Five-Year Development Plan (NFYDP). The NFYDP aimed to put a direction in place to reach the country’s already set long-term objective: to transform Tanzania into a high-middle-income country by 2025, as formulated in the National Development Vision 2025. On the other hand, the SDGs are global goals driven forward by the UN and the Global NOrth through development aid policies. Over the years, the 2030 Agenda has acquired significant normative power when development organisations and donors are prioritising incentives and interventions into the Global South.
Moreover, the SDGs have become a significant governance instrument for prioritising and coordinating policies for development on the ground. In Tanzania, these tend to take place in the Sector Working Groups (SWGs), where development actors and partners are brought together to coordinate efforts within specific sectors, and the Development Partners Group (DPG), which are the dialogues between development actors and the Tanzanian government.
Thus, the valuations reside in new sites outside the word of finance, and inside politics, in the programming on the ground, in situations where development workers judge the uptake of startups to their programs, and in situations and moments in which the 2030 Agenda is put to work through the negotiation and decision-making on the allocation and distribution of development funding to programs and on the ground.
Lost in translation
My research thus reveals a significant shift: rather than finance driving development, development practices are redefining finance. And in this shift, something got lost in translation. Entrepreneurs were removed from the negotiation table, which has stymied the growth of an actual impact investment community in Tanzania, arguably preventing, rather than developing, the private sector. Once development actors began playing the role of angel investors, they occupied a space where companies prove their worth by their ability to generate returns. This inversion means in practice, that grants took the place of impact investments, “projectizing” impact investment, and development actors acting as investors, rather than facilitating blended finance partnerships. Consequently, they have also failed to deliver on the promise of blended value, where financial returns are achieved alongside social good, which was anticipated to enhance the efficiency of development efforts. Moreover, by being converted into development programs, impact investments have not succeeded in mobilising additional private capital for the development sector.
As a result, not only the lines between private and public capital are blurred, but attempts to mobilise private capital and motivating venture capitalists to join in as impact investors are also jeopardised. But, this is not the only case showcasing the difficulties in establishing private-public financial partnerships on the ground. A survey from 2018, revealed that only 12% of total blended finance partnerships were directed to Least Developed Countries (LDCs), and none of these were in sectors typically targeted by impact investments, such as health, education, or civil society (OECD, 2018). A follow-up survey in 2020 found that the volume and proportion of blended finance directed to these countries had declined even further.
How can the development sector play a more active role in providing the crucial early-stage seed investments that young entrepreneurs and their startups need?
These development programs were developed with the intention of creating a market for early-stage investments to the young Tanzanian entrepreneurs. It's important for development agencies and donors to shift their focus from the usual narrative of the SDGs financing gap. Instead, they should explore how financial support, combined with development incentives and grants, can genuinely address the needs of entrepreneurs who are tirelessly working to bring their visions to life and create jobs in their communities. To achieve this, development actors must be willing to innovate and ensure that entrepreneurs remain at the centre of their own decision-making processes.
The following text is a reworked version of an abstract for a paper presented at the 5th African Philanthropy Conference, organised by CEPSI, Witts Business School, Trust and Governance foundation. Victoria Falls, 29th of July 2024
The views and opinions expressed in this blog are those of the author and do not necessarily reflect the opinion or position of Future Horizons.