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NatGas forme a partnership with the state government of Querétaro in Mexico and was able to convert one-fifth of the state’s public transportation fleet to burn natural gas in less than two years. (Photo: NatGas)
Wednesday, May 20, 2015
Perspectives

Private Capital for the Public Good


How social impact investing helps Latin America.

BY GABRIEL SANCHEZ ZINNY 

In a recent paper for the Atlantic Council I explored the growing impact investing sector in Latin America and its potential to make a difference in health, education, the environment and other areas.  The paper centers on a series of interviews with investors, entrepreneurs, the public sector, and multilateral agencies active in social impact investing in Latin America.  Through case study analysis certain clear trends emerged and from that lessons learned were extrapolated and a draft roadmap for growing the sector was created.  This article provides a brief summary of the paper (available here).  

 

The majority of the entrepreneurs we interviewed identified one clear trend- that social impact investments are most successful when numerous parties in the impact investing ecosystem work together and enable them to grow.  For example, NatGas, a Mexican company which converts traditional vehicles to use cleaner natural gas engines, is currently working with state and local governments, the private sector, and the Mexican Development Bank to scale up its operations. NatGas was founded in 2012 and, by forming a partnership with the state government of Querétaro in Mexico, they were able to convert one-fifth of the state’s public transportation fleet to burn natural gas in less than two years. Numerous other Mexican state governments have since expressed an interest and have invited NatGas to start operations in their states.  In addition to demonstrating the importance of a diversified investor base for growth, this example also shows how government can have a catalytic role as a first investor – a key hurdle which virtually all startups need to overcome.    

 

The challenge inherent in finding a first investor is another noticeable trend.  Though governments have an important role to play in this area they are not the only potential catalytic investor.  Multilateral funds have played, and will continue to play, an important role.  The Inter-American Development Bank’s Multilateral Investment Fund (MIF) for example has been a critical support to the Latin American impact investing sector since 1999.  It was the first investor, for example, in FINAE, Mexico’s first private student loan program.  FINAE shares student loan risk with the Bank and with ten private universities which are responsible for creating student loan packages. Thus far FINAE has supported 6,000 students who would otherwise be unable to attend university and, based on initial student loan repayments, is now successfully sourcing private sector funding.

 

As demonstrated through these examples sourcing catalytic funding is critical for social entrepreneurship ventures and governments and multi-lateral agencies have been working to fill the gap.  However, a more propitious investment climate could be enabled to encourage private sector actors so they invest earlier in social entrepreneurship ventures.  I recommend the following: 

 

  1. The creation and usage of standardized metrics for social impact because poorly measured qualitative data on impact does not inspire private sector investors. The World Bank is using the Global Impact Investing Network’s (GIIN) Impact Reporting and Investment Standards (IRIS) to evaluate their investments.  Spreading this standard to a wider audience and to entrepreneurs earlier on would create a wider body of data on the financial and social impact of social enterprises and further the sectors acceptance by mainstream investors. 

  2. Furthering the growth of impact investing ecosystems where entrepreneurs, investors, government and multilateral actors can share lessons learned and success stories.  In this area there is a space for think tanks, universities, investors associations like LAVCA, and multilateral organizations to play a convening role and act as accelerators.  Gatherings of this type will reduce the fear of the unknown and encourage private actors to invest in earlier stages and scale up their investments. 

  3. The creation of legislation that will encourage private sector investment in social enterprise.  In 2014 Great Britain implemented the Social Investment Tax Relief program which grants a 30 percent tax break to government accredited companies.  This policy could be replicated in Latin America and existing government agencies like INADEM in Mexico, which provides support to startups, could become the accreditors and provide information about the tax breaks.  

  4. That governments design programs which target entrepreneurs from the bottom of the pyramid.  Government incubators, like Start-Up Chile and Start-Up Brazil, could intentionally recruit and provide funding and entrepreneurial training to Chileans from impoverished backgrounds.  There are innovative ideas which remain untapped because of low-income entrepreneurs’ lack of access to capital and contacts.  These young people need to be recruited because they have firsthand knowledge about the products and services which could most benefit their communities. 

 

Although impact investing cannot solve all societal ills, there are numerous examples of private companies working towards social good and succeeding where the government alone cannot. Many Latin American countries still suffer from weak educational systems, poor access to credit for bottom of the pyramid populations, unemployment, and lack of access to healthcare. There are social entrepreneurs working to tackle these problems, and they need access to funding and information to successfully scale their companies.  Creating a substantial social impact investing market and making “doing good while doing well” part of mainstream investment portfolios can only help Latin America develop and I hope to see a continuing conversation on the topic and more young people from all walks of life joining the social impact movement. 

 

 

Gabriel Sanchez Zinny is president of Kuepa.com, a Latin American Blended Learning company, working in incorporating technologies to reduce drop out rates.

 

 

 

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