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Delivering an Australian aid program: How DFAT taps the private sector for public good

This post, originally authored by Lisa Cornish on 17th March 2017, is republished with permission from Devex.

3i is not the first DFAT program to engage the private sector, but it is the first to engage it on a large-scale infrastructure program.

Australian aid programs delivered by the Department of Foreign Affairs and Trade have been growing larger and more complex. Many projects nowadays involve long-term investments totaling tens of millions of dollars, and they demand private sector partnerships capable of handling complicated deliverables.

Palladium is one of DFAT’s major partners in delivering large-scale aid programs and 3i: Investing in Infrastructure is one of the biggest aid programs that Palladium is currently managing within Cambodia. The program, worth almost 50 million Australian dollars ($37.8 million), will operate until 2020 with the aim of increasing access to utilities and infrastructure and creating new trade opportunities.

3i is not the first DFAT program to engage the private sector, but it is the first to engage it on a large-scale infrastructure program. But how does such a large-scale and long-term program operate to achieve its goals? Devex spoke with key personnel in Canberra and on the ground in Cambodia for their insights.

Managing expectations
3i’s Canberra-based project manager, Alwyn Chilver, is a former AusAid employee who was instrumental in developing the strategy and concept of the program. The idea of engaging the private sector in a large infrastructure project came through earlier successful engagements in Cambodia with the Cambodia Agricultural Value Chain, or CAVAC, program.

“One of the roles I played at AusAid was to promote projects that work with businesses,” Chilver explained to Devex. “It was a very tough, sometimes painful process. One of the first projects we got up and running in that vein was CAVAC. It was initially much doubted and problematic, but eventually proved itself and generated enough popularity and momentum inside AusAid.”

And it was off the back of that success that the agency decided to try engaging businesses in other sectors, including infrastructure. For Cambodia, Chilver explained, the private sector is an important asset for success. “In a place like Cambodia where the government has said that it can’t build water and electricity infrastructure across swathes of rural land — we work with DFAT to incentivize the private sector to invest and deliver these services.”

Chilver is responsible for the management oversight of the 3i program. “In practice that means supporting and challenging the 3i team to push the boundaries of what can be achieved, while managing the associated risks,” he said. “I’m responsible for ensuring that the project meets the client’s needs, but this is a two-way street — to ensure we maximize potential results we have an obligation to lead DFAT into new avenues and new ways of thinking about and doing development.”

As with many development projects, getting the right staff is always a hurdle. Chilver has hunted for project staff who can straddle the world of aid as well as business and manage the risk associated with this. “It’s a very different environment to the world of aid and NGOs. Overall it’s a huge era of change for the aid industry, and that inevitably means that systems and processes are behind, playing catch-up to stay relevant to the modern world.”

Working with governments creates additional challenges, especially in the area of innovation. “Businesses can make decisions and change tack quite quickly, quite easily. With governments there’s much more inertia and bureaucracy involved. One of the most satisfying aspects of my job is finding the sweet spot in the middle. In private sector development you’re always looking for common interests with other people, that win-win scenario where everyone has something to gain by working together.”

Money matters
As investment is a key aspect of 3i, services related to financial management and accountability are a priority of this development project.

“3i was the first project to explicitly go chasing private sources of finance — investors, impact investors, venture capitalists — to look to leverage them and their interests for development outcomes,” Chilver explained. “Our finance advisor, Morten, is the first person that DFAT has employed with experience like his and with no background in development, to work on a project like this.”

Morten Kvammen is the 3i advisor for business models and financing options. He brings extensive networks and relationships within the finance industry and has been important to the program in providing strategic advice for securing deals.

“I came from a finance-focused background,” Kvammen explained to Devex. This includes working in investment banking, corporate finance and private equity from New York to Dubai. “I first came to Cambodia as an entrepreneur to set up an investment banking and brokerage firm, which was one of the first firms which received a license to operate on the newly launched Cambodian stock exchange.”

Development financing was not initially on the agenda for Kvammen, but the ideas behind 3i changed that. “My initial view of international aid was that it’s not very efficient,” he said. “It largely ignores the opportunity for private sector activities to drive development in frontier and emerging markets. When I was introduced to Alwyn Chilver and the 3i program, I learned that Australia’s engagement with the private sector in development is quite interesting — it uses grant tools to fill a gap in the financing spectrum and facilitate greater private sector development in several sectors.”

The business model Palladium brings to development finance has strong links to the private equity industry. “Generally PE investment firms take a cut from managing a pool of other people’s money and set about finding a lot of potential investee companies to invest in — with a mandate to target a particular region, industry, financial, social or environmental return,” Kvammen said.

And Palladium’s approach has funding from one or more donors that are combined for a specific purpose. “This targets a particular development outcome or policy priority, and Palladium takes a management fee. 3i uses different tools and different methods of tools typically used in corporate finance, but fills a space where there currently is a gap in financing.”

On the ground
The high-level oversight of finances and project management needs smart and resourceful people on the ground. Mola Tin, a locally engaged management advisor based in Phnom Penh, does just that. And she explained to Devex her work is never straightforward. “You have to think and analyze the information that you have all the time,” she said.

With widespread gaps in water and electricity access in Cambodia, 3i has no particular geographical region or set of provinces as a focus. Instead, it is a nationally focused program. And the focus of partners is equally broad: a key aim of 3i is to maintain neutrality when it comes to local business competition by encouraging a level playing field for all businesses that want to partner or co-invest with DFAT in delivering essential water and electricity services to Cambodia.

This means 3i staff are required to travel widely in creating and monitoring opportunities and engage broadly with potential partners to ensure access to infrastructure is available, including to women and girls in remote communities. When these critical partnerships works, Tin says, it’s a great feeling. “If you can make a deal with a partner organization, it’s a satisfying feeling of confirmation — that actors in the private sector are willing to take risk and invest their money with you, that your idea is a good one.”

To make the project successful within Cambodia, Tin said innovation is important — so much so that it is embedded within the Palladium team culture. “The part that I love the most about the environment I work in is that I feel like my voice is heard,” she said. “Not every opinion is correct or decision is taken forward, but I feel that my voice is taken seriously and always considered. That is really important.”

Staff locally need to be willing to take risks, but management needs to provide guidance and support. And sometimes, staff within the developing countries need to throw out years of training to be risk averse.

“I’m the kind of person who likes to see things clearly all the time, understand a problem fully and have a straightforward solution,” Tin explained. “It was difficult to make decisions with so much uncertainty, but with support from the management, we were trained in how to make good decisions with limited information — that it was ok to make mistakes, and not every intervention would work. This was very helpful in coping with the uncertainty. Not everything you try will work.”