Can enough development professionals speak the language of finance?

By Naki B. Mendoza 18 August 2016

Traders work on the floor of the Ghana Stock Exchange in Accra. Can development professionals and public donor agencies sufficiently navigate the financial landscape where the two fields intersect? Photo by: Jonathan Ernst / World Bank / CC BY-NC-ND

Aid workers can’t be grouped together with hedge fund managers, nor can the tasks of an NGO program officer be directly compared to those of a Wall Street banker. Traditional finance and development will continue to remain distinct. But increasingly, their agendas have been converging.

Impact investing, the practice of deploying profit-seeking capital to achieve social good, as well as shared value — a management strategy that equates business value with sustainability practices — have both become more mainstream in the worlds of banking and finance, for example. And there is a virtually unanimous agreement among business, government and civil society that the 2030 development agenda can only be met if public aid is used to leverage private capital.

All told, the principles of finance are seemingly becoming more and more intertwined with how development is pursued. Are development professionals becoming adequately versed in the discipline of traditional finance as these trends continue to take hold?

“The capacity from a financial structuring perspective is definitely lacking,” said Ricardo Michel, executive vice president of Amex International, a development consulting firm in Washington, D.C. “There’s no two ways about it.”

Michel’s comments were specifically geared toward aid workers in donor agencies, not public bodies such as the U.S. government’s Overseas Private Investment Corp. or Export-Import Bank who indeed describe themselves as experts in development finance. Nor were they intended to cast aspersions on public donors. Instead, Michel, the director of the Center for Transformational Partnerships at the U.S. Agency for International Development until February 2016, and previously an investment banker at JPMorgan Chase & Co., was addressing the limitations of financial fluency within donor agencies.

“It’s just not something that they are expected to do,” he told Devex.

Trends in development, however, will likely require those skills and demands to change. The traditional financial industry and its array of actors such as banks, institutional investors and venture capitalists have been factoring social impact projects more into their menu of investment options. And the Sustainable Development Goals present a cadre of investment opportunities for business. But ultimately, the impetus lies with donor agencies — the “stewards” of development resources — to bring those investment options to light, Michel says.

“The burden of attracting finance lies more largely on the development community,” said Marc Diaz, managing director of NatureVest, the impact investing arm of The Nature Conservancy, an international NGO.

In practice, that means donor entities are tasked with creating pools of capital for investors to buy into, as a way to promote market-driven incentives to achieve ambitious global development targets. Impact investments, development impact bonds, green bonds and “blended finance” funds are just some of the tools donors entities have been rolling out to attract the larger volumes of private capital needed on top of official development assistance.

Translation services

Development and finance have traditionally operated on a “church-state” divide, Diaz noted. In his experience it can often make for discordant exchanges when trying to fit the theory of change and return on investment into the same conversation.

However, “the language has evolved,” Michel said. “You are going to need more and more people who are steeped in and understand the esoteric principles of finance to relay and address these needs.”

Of course, it is a stretch to expect aid workers in donor agencies to underwrite financial transactions or spell out the specifics of a syndicated loan. Those responsibilities, after all, land directly in the orbit of traditional financial professionals.

But certain competencies can still be expected of development workers to better speak the language of finance where the two fields intersect.

A specific example is the case of blended finance — the practice of pooling together capital from a range of investors. As it becomes a more common way for donors, philanthropists and capital markets to collectively invest in development, a practical expectation is for aid workers to convene the right mix of investors based on an understanding of their different risk profiles and expectations for return.

“Donors need to demonstrate to capital markets how [social investments] can achieve development impact based on whatever their appetite is,” Michel said. “They need to know that and put it in such a way that they are speaking to the right audience from an investor perspective. It’s the donors who need to demonstrate that, which will draw the capital further upstream to take on the risks.”

More broadly, Diaz described certain proficiencies that will be increasingly essential for professionals who want to navigate both fields.

First, a detailed knowledge of cash flows, or what money is required for investments, for what purpose and at what point in time. Second, an understanding of local rules and frameworks. Often referred to as “enabling environments” in development circles, a key nexus is for investors to connect how rules and policies affect risks and, consequently, costs of capital. Finally, the ability to analyze and interpret delivery capacities, or how technical assistance and capacity building initiatives widely strategized in the development industry equate to project completion and returns for investors.

These skill sets shape what Diaz calls “translator” profiles and he projects that they will underpin the next generation of development finance professionals.

Risk control

Ultimately, much of a donor agency’s work in development finance boils down to mitigating risks for potential investors.

“In the end, investors will always be suited to identify what they want,” said Agnes Dasewicz, acting director of USAID’s office of private capital and microenterprise. The goal, she said, is not for donor agencies to reinvent the wheel by becoming transaction experts themselves, but to be better able to accelerate those transactions by aligning the interests of a diverse group of stakeholder.

Nor does the responsibility of incorporating financial interests into development projects fall squarely on donor agencies.

“The responsibility falls more broadly on the development community,” Michel noted. “As an international development consulting firm, I should be bringing the skills that donor agencies don’t have access to or can’t afford.”

USAID has been tapping into external resources where outside expertise is needed, Dasewicz noted. The agency, for example, has turned to the International Finance Corp. to provide trainings on public private partnerships around large infrastructure projects.

And where gaps in financial expertise still exist, other organizations can fill the void. For instance, Bankers Without Borders, a London-based nonprofit, has made a model out of turning sustainable development initiatives from international institutions into investor-ready projects to present to traditional financial institutions.

“The World Economic Forum, the United Nations and Organization for Economic Cooperation and Development call us and say ‘we have a great project with strong stakeholder support, the missing piece is getting a deal structured for traditional financial investment’,” Rupesh Madlani, chief executive of Bankers without Border told Devex. “Our measure of success is to get it investor ready.”

Looking ahead, experts say there is also a steady stream of “translators” filling the professional pipeline who will be bilingual in development and finance, and an abundant supply of those profiles will inevitably be needed to bridge disciplines and attain the 2030 development agenda.

“The pool of people available and interested in development is migrating toward finance,” Dasewicz noted. “A lot of people coming into development are interested in the intersection of finance and development.”

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About the author

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Naki B. Mendozamfbmendoza

Naki is a former reporter for Devex Impact based in Washington, D.C., where he covered the intersection of business and international development. Prior to Devex he was a Latin America reporter for Energy Intelligence covering corporate investments and political risks in the region’s energy sector. His previous assignments abroad have posted him throughout Europe, South America and Australia.

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