The First Commandment of Social Impact Generation
By Pablo Antón Díaz, Opportunities for the Majority The first commandment for companies and organizations that aim at generating social impact is adopting mechanisms to measure it. Every line is the perfect length if you don’t measure it, and this same rule applies to impact investing. Narratives on a handful of beneficiaries can be useful and serve as great instruments for attracting new investors, but the only sure way of knowing whether your efforts are indeed being relevant in the lives of people is through systematic measurement.
Can your trip to the beach help reduce poverty?
As summer comes to an end in the Northern Hemisphere, many of us have been asking and answering the same question: how was your vacation? Our responses typically include anecdotes about the food, people, and places we encountered along the way. Perhaps we could also be asking ourselves how our vacation impacted those people and places.
What can the private sector in Latin America and the Caribbean learn from Korea’s economic miracle?
They say that Korea achieved in three decades what it took the Western industrialized countries more than a century to do. But, how did it do that?
Can innovation testing help boost private sector development in Latin America and the Caribbean?
Knowledge is increasingly seen as a key factor in promoting higher levels of productivity, competitiveness, and growth of firms. Despite this, innovation testing remains an untapped resource that can help boost private sector development in Latin America and the Caribbean. What is the best pricing scheme to maximize the demand for a product? Can technology increase the productivity of providers in a value chain? What type of product design can have the largest demand? What are the benefits to society or wider development impacts generated by a new product or service? These are questions that could be answered with an innovation testing exercise. What is innovation testing? We refer to innovation testing as the set of studies that include a randomized control trial in which an innovative approach is being tested. The final objective is to understand the cause and effect relationship between an innovative business practice or change (e.g. new product, new business approach, innovative marketing strategy, etc.) and the effects generated by it in an outcome of interest or a target population (e.g. increased demand, change in client behavior, etc.). Testing is conducted by empirically constructing a counterfactual or control group that tells you what would have been the situation in the absence of the proposed change. At the center of testing, there are considerations of cost-effectiveness, profit maximization, scalability, replicability, and/or development impact. For a long time, the private sector has been an important engine of knowledge generation and there are multiple examples of this. Back in 1842, entrepreneurs in the manufacturing industry were already experimentally testing the impacts of inorganic and organic fertilizers on crop yields, marking the beginnings of the chemical fertilizer industry. In the pharmaceutical sphere, private sector discoveries account for 80% to 90% of pharmaceutical products in the market and the industry is regularly conducting clinical trials of new drugs before introducing them into the market. Moreover, marketing companies are constantly relying on AB testing techniques to identify changes to web pages or advertisements to maximize an outcome of interest. For example, Google+ knew that with a full-screen ad that encouraged mobile website visitors to download the app, 69% of people left the mobile website right away, while 9% of the visitors clicked on the “Install” button. After they implemented and tested a nicer, less obtrusive app ad, the 1-day active users on mobile increased by 17%. Why consider innovation testing? For achieving best results managers are increasingly moving away from guessing when doing business towards using data-driven evidence to guide their decisions. Innovation testing can bring important benefits, both in terms of learning and accountability. For those in an expansion or starting phase, it can bring important learning lessons on what works and what doesn’t work before scaling up. For those seeking to explore new approaches to doing business, it can give them responses on how to design and select the business strategy that is the most cost-effective. For those seeking to generate evidence about the wider impacts or benefits they generate in society, testing can provide them with rigorous empirical evidence about their work. This is important, in this growing trend of impact investors seeking to generate social and environmental impacts beyond financial returns. It is also valuable for financial institutions that are increasingly seeking transparency and accountability. Despite the knowledge generation appetite coming from the private sector, the use of these methods remains widely concentrated in large companies and mostly in developed countries. The reality is that conducting innovation testing exercises requires technical expertise, time, and resources. In recent years, multiple firms have embarked in innovation testing exercises and multiple support platforms have emerge to help conduct these analyses. For example, Google Analytics offers support for online experiments to test which version of a landing page results in the greatest improvement in a metric value. Amazon Machine Learning Research has been conducting studies to scale-up AB testing techniques by proposing more efficient tools that help with multivariate testing and with learning how to implement ideas to reach the highest number of customers. The financial sector has also been very keen to use casual testing approaches to better tailor financial products and services to customer’s real behavior and to improve financial-decision making processes. How do we promote innovation testing? Development Banks working with the private sector bring new opportunities to support their clients with technical skills to conduct innovation testing while simultaneously providing financial additionality. Innovation testing is a key element in the IDB Invest Development Effectiveness agenda, as reflected in our annual Development Effectiveness Overview (DEO). Our focus when supporting causal testing is twofold: helping boost private sector growth while maximizing development impact, so that this becomes in a win-win opportunity for the region. We have exciting testing projects in progress related to the impacts of manufacturing companies promoting healthy practices; the effects of using machine learning techniques to increase farmer’s productivity in agribusiness value chains; and the use of technology to improve debt repayment and savings among clients of financial institutions, among others. There is still much work to do in Latin America and the Caribbean and the first step comes from the private sector demanding more hard evidence and business intelligence. This, coupled with continued support from experts in these techniques can only strengthen and boost private sector development in the region. We invite you to collaborate with us and learn more about our work at our recently launched Development Through the Private Sector Series. To know more download our first publication here. Subscribe to receive more content like this! [mc4wp_form]
The issues that marked the private sector in 2017
For the private sector, 2017 was a year marked by major changes and a call to prepare for the future. From the damages done by natural phenomena to the adoption of new technologies, several factors made this the year of adaptation, for both businesses and people. In this context, many Latin American and Caribbean countries began to explore new ways to grow, invest and even generate energy. Here we share the most discussed issues in 2017: 1. Solar energy took off In 2017, the constant increase in oil prices and the reduced cost of photovoltaic panels helped to spur notable growth in solar power, both in the developed markets and in Latin America and the Caribbean. The growth of this industry has gone hand in hand with the public and private sectors in the region, which have worked on procurement policies and programs to incentivize the use of clean energies, to transform the energy matrix and stimulate private investment. Review once again which countries are leading in solar energy in the region. 2. Natural disasters demand sustainable buildings Hurricanes and floods produced millions in losses, in Latin America and the Caribbean and the rest of the world during 2017. Hurricane Irma devastated the Caribbean, while other phenomena also left their mark in various countries of the region. For all of them, the lesson was clear: sustainable buildings are required. In all sectors, climate change is expected to continue causing havoc, and for this reason infrastructure must be increasingly more resilient. After the storm, many have already made the decision to adapt. We leave you with the case of Peru and its model of Reconstruction with Changes following the floods that swept through the north of the country. 3. Bitcoin whets investors’ appetite Bitcoin was another main issue in 2017. The cryptocurrency achieved fame when it entered the market, with prices above US$17,000, awakening crowds’ appetite. Although there are still many experts who warn about the risks of investing in digital currency, the imminent bubble it can cause in the markets, and the lack of regulation, it quickly became widespread. For many, investing in Bitcoin is a new way to diversify funds and even offset inflation in their countries. Also for this reason, every day there are more who seek to dabble in digital mining. Here we share the opportunities and dangers of Bitcoin mining in our region. 2017 was a year for adapting to new forms of construction, new ways to generate energy and even new ways to save and invest. For companies in Latin America and the Caribbean, this capacity will be key to continuing to have an impact on development and growing sustainably. As Peter Druker says: “the entrepreneur always searches for change, responds to it and exploits it as an opportunity.” What changes do you think will occur in 2018? Discover the rest of most searched terms during the year in Google Year in Search 2017.
What have we learned after a decade of public-private partnerships in Latin America and the Caribbean?
Until the end of 1990, Latin America and the Caribbean was the region with the greatest proliferation of public-private partnerships (PPPs). At that point, investments plummeted, partly due to negative reactions caused by its deficient implementation. In 2005, thanks to the joint efforts of public, private sector, and multilaterals, PPPs became again a widely used tool. Driven by the fall in commodities prices, the increase of fiscal deficits, and the improved conditions for implementing PPPs, many countries established specific institutions and strengthened their regulations. As a result, investments through PPPs grew almost five times, from US$8 billion in 2005 to US$39 billion in 2015. In barely one decade, Latin America and the Caribbean has registered US$361.3 billion in investments for almost 1,000 infrastructure projects through PPPs, primarily in the energy and transport sectors. PPPs potentially can help to overcome some of the public-sector limitations but they also raise concerns. Large-scale projects involve many technical, financial, environmental, and social risks. PPPs demand greater attention to risks assignment, conflict resolution, and the analysis of “value for money.” They also require institutional development that takes time to consolidate and, when it is poorly done, can even increase costs and reduce services or its quality. Transparency is also key to mitigate the risk of corruption, which has become more visible in Latin America and the Caribbean in recent years. In this context, multilateral development banks can play a key role supporting the development of proper environments for attracting private investment, supporting independent projects preparation, and helping to bridge financing gaps. These banks, also have a potential comparative advantage: their ability to be directly involved with the public and private sectors. 10 keys for strengthening the multilaterals’ support for PPPs The Office of Evaluation and Oversight has reviewed IDB Group support for PPPs in infrastructure projects at three levels: favorable environment, project preparation and financing, besides other development banks’ experience. These banks financed a small (3%) but considerable proportion of PPP’s investment in Latin America and the Caribbean. The IDB Group provided the most financing (35%), among these entities, with 145 approved operations for US$5.8 billion between 2006 and 2015. Based on our conclusions, the Evaluation of Public-Private Partnerships in Infrastructure, published last March presents 10 recommendations: Specific diagnostics: identify and evaluate potential demand for PPPs by country, including analysis of infrastructure needs in the sector, PPPs environment, fiscal limitations and risks, and type of support needed by the governments. Priorities: include a general framework to determine which countries and sectors need support, type of support needed, and define priorities. Focal point: establish a PPP focal point with sufficient authority and resources to promote collaboration among all parties involved in the institution. Capacities: do an inventory of existing capabilities, identify what is missing, and try to attract and maintain the necessary capabilities. Incentives: reform the incentives, granting rewards when private investors’ funds are mobilized and creating incentives for collaboration. Advisory services: Analyze infrastructure projects in the pipeline, and advise countries regarding the most suitable delivery model, regardless of the sector that will originate the operation. New products: Explore the use and development of new financial and advisory products tailored to the countries’ specific needs, such as local currency financing, advisory services, specific instruments supporting subnational governments, and project preparation mechanisms. Results framework: examine the value for money of PPPs operations, the quantity and quality of the services provided, costs to the taxpayer and the user and its sustainability, in addition to evaluating whether critical environmental and social objectives have been met. Knowledge: Design a specific knowledge strategy on PPPs to systematically capture and file the results of operations and lessons learned. Lessons learned:Systematically incorporate lessons learned by your own organization and other banks on the design and implementation of new PPP operations. Many Latin American and Caribbean countries with solid capacity for implementing PPPs have an extensive list of potential projects, and practically all the larger countries have an infrastructure investment program in which PPPs play a fundamental role. Moreover, since in some of the region’s most important economies the ratio between private investment and gross domestic product (GDP) continues to be low, there is a considerable margin for new projects. The development banks are well positioned to play a fundamental role in these future PPPs, providing support to ensure their suitability in economic, environmental, and social terms, to generate favorable environments that attract private investments, and to close the financing gaps. Only if these recommendations are implemented will we be able to contribute to a wave of successful PPPs and avoid the negative reactions we have seen in the past. The IDB Group has accepted the recommendations and is ready to put them into practice. Subscribe to receive more content like this! [mc4wp_form]