DFAT innovation lab needs help plugging the aid budget with private investment

By Stephen Easton

Friday August 31, 2018

While Australia’s foreign aid budget has shriveled to the smallest share of national income ever in the past five years, the Department of Foreign Affairs and Trade has been pursuing ways of attracting private venture capital to back local entrepreneurs in the Asia-Pacific region.

This week the department has begun calling for expressions of interest from organisations that can become “frontier brokers” — a role that involves linking investors with social enterprises based in Indonesia and other neighbouring countries.

The brokers will be called on to take part in the Scaling Frontier Innovation project, a $15 million program that has emerged from DFAT’s innovationXchange unit, which has focused on the funding-starved foreign aid program since its establishment in 2015. The idea is to use a relatively small amount of Australia’s aid budget to help social enterprises and local start-up incubators get off the ground in developing countries around the Asia-Pacific region.

The department has provided a flexible funding envelope of $1-4m for the brokers piece, and says “there is a lot of flexibility about how the funds can be allocated and used” to grow an “impact investing ecosystem” in nearby nations. Based on their EOIs, it will invite successful applicants to a “co-creating workshop” in Jakarta with departmental staff and “local experts” on October 4-5.

“DFAT is seeking innovative solutions to bridge the significant gap that exists between social enterprises and the capital they need to scale their impact,” according to the call for EOIs, which makes it clear that brainstorming will be the first step.

“DFAT is looking to co-create and support a new mechanism/organisation/business that will specifically match/connect/facilitate impact entrepreneurs with suitable investment across Asia-Pacific. It is expected that the frontier brokers will play an important role in ecosystem building for the benefit of the whole sector and region.”

The department also wants all proposals to promote gender equality through “gender lens investing approaches” which involve analysing markets along gender lines and identifying projects that advance the economic empowerment of women.

The overall approach has gained traction in a period when the Australian government has cut back its aid spending considerably — by almost a quarter since 2013 when adjusted for inflation, according to Lowy Institute researcher Jonathan Pryke. The AusTender post notes that globally, aid funding is $2.5 trillion short of what is needed to meet the United Nations Sustainable Development Goals.

“New solutions that support social innovation through leveraging private sector financial capital are needed to fill this gap,” it states.

“The impact investing market — investment directed towards businesses having a social or environmental impact — is growing and can contribute to bridging this gap in development finance. More broadly, gender lens investing is growing and being used to ensure that investment approaches incorporate a gender analysis and advance economic empowerment for women and girls.”

The call for EOIs from the department’s innovation lab goes on to refer to research it commissioned from academics at the University of Technology Sydney, which looks at the role governments can play in supporting the impact investment market.

“The assumption we are making is that there are both investors (interested in creating impact) and innovative social entrepreneurs (driving social change) but that there are not appropriate structures in place to connect them effectively (or efficiently),” the innovationXchange document states.

A “lack of connectedness between investors and social innovators” is the problem that frontier brokers will be asked to solve: “Better connectedness could lead to economies of scope and scale with transactions being faster, deals being more appropriate, and the costs of sourcing deals reduced — a symptom of this lack of connectedness is the current subsidisation of the social innovator capital market.”

DFAT is very clear about where it wants the investment to flow [emphasis from original]:

The frontier brokers will focus on South Asia (except India), Southeast Asia (except Malaysia) and the Pacific Island Region. We expect the brokers to base themselves in the Asia-Pacific region, with a strong preference for some presence in Indonesia as an important emerging impact investing market and strategic partner for Australia.”

And the Jakarta meeting is not the typical kind of industry briefing about an upcoming government contract opportunity, either:

“It is expected that all participants will actively collaborate with each other to revise and enhance their existing ideas or form new ideas. Co-creation will take place between DFAT and applicants (and between applicants) with the aim of improving and finessing existing concepts or creating new concepts. It is not mandatory for workshop participants to submit final concepts in collaboration with each other, but we hope that the workshop helps improve ideas and sparks new partnerships.”

There is nothing wrong with the idea of encouraging private investment in social enterprises that try to help their own communities in our nearest developing nations, but it can’t be ignored that Australia’s generosity in total aid spending has dipped to its lowest point ever since the last change of government, in what appears to be an exercise in political branding more than a measure with much practical impact on the overall budget.

The innovationXchange actually claims that foreign aid can hinder the kind of social impact investing it is working to encourage.

“If aid is displacing what business can do, you’re actually dampening how the market can grow and people can prosper themselves,” says senior DFAT staff member Amber Cernovs, in a promotional video on the Scaling Frontier Innovation website.

The erstwhile assistant minister responsible for aid Concetta Fierravanti-Wells — who resigned the post last week, saying the Coalition had moved too far to the left wing — has previously justified the significant aid cuts year after year with polling commissioned by the government showing most Australians did not want to spend more in the area.

However, as Jonathan Pryke has also explained, other polling shows the public generally has no idea about foreign aid to start with. The average guess is that around 15% of the federal budget goes to help people overseas and the average person thinks it should be more like 10%, when it is actually less than 1% and very few survey respondents guessed anywhere near that.

Since most people wildly overestimate how much we spend on aid to begin with, there’s not much point relying on their views about how much we should spend without providing more background information. If the public had a better understanding of the size of the foreign aid budget, as well as the humanitarian outcomes it achieves and why it is good for Australia’s interests, it seems unlikely that it would even register as a major issue on election day.

Top image: Mamma’s Laef, a social enterprise that makes cheap reusable sanitary pads in Vanuatu, pictured in the Scaling Frontier Innovation video. 

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