Lessons Learned

S³IDF’s founders and senior advisors pooled their collective 200 years of development and infrastructure experience in more than 60 countries when they created S³IDF and the Social Merchant Bank Approach (SMBA^SM).  While all of the critical aspects of the SMBA^SM have been verified throughout the organization’s history, there have still been important lessons learned about implementing the SMBA^SM and developing and implementing pro-poor infrastructure and related productive use projects. Key lessons include:

Extended Time Requirements

Almost every critical aspect related to successful development and implementation the SMBA^SM business concept took more time (and often effort) than anticipated.  This started with getting critical regulatory approvals in both the US and India.  And now much project and portfolio development often takes more time and effort than anticipated (even after adjusting for learning). Additionally, identifying bank partners, changing bankers’ mindsets and finding the correct technical partners often takes more time than predicted – even as we build partnerships and hone our pre-investment skills. We keep reminding ourselves that infrastructure investments – big and small – are complicated and all the more so when focusing on the poor.

Challenges of Local “Rules of the Game”

Working within the “rules of the game” (laws and regulations) is critical to the business-like approach of S³IDF and its SMBA^SM. The “rules of the game” determine whether and how the necessary organizational structures and partnerships to implement the SMBA^SM are put in place. This has become problematic in India as recent changes have created hurdles and constraints for business-like activities and partnerships by NGOs with charity status.

Trade-Offs Related to Pre-Investment Costs, Capacity Building, Leverage and Sustainability

Achieving some financial sustainability for S³IDF and its revolving fund as well as maximizing leverage of S³IDF’s efforts requires a number of trade-offs. Balancing the level of S³IDF’s project pre-investment costs with the goals of increased project, portfolio and revolving fund-level sustainability is challenging, especially in the context of projects where S³IDF’s recovery of costs (whether by fees or capitalization into “hard” investment costs that are repaid) is constrained by the poor’s limited ability to pay.

Additional pre-investment efforts improve one or more aspects of the investment during implementation, such as better arrangements for risk mitigation, stronger partnerships, better leveraging of resources, more thorough capacity-building, and/or less need for revolving fund (RF) deployment due to more co-financing (from local commercial and/or development sources) . Ultimately, increasing pre-investment efforts improves the likelihood of sustainability on the project- and portfolio-levels in addition to increasing the chances for lasting social and environmental impact. But these results often come at the cost of reducing organizational-level sustainability since the additional costs often mean lower RF returns and fees.

Furthermore, all investments entail financial and operating risks, whether they take place in the developed or developing world. Though increasing pre-investment efforts is the best avenue for minimizing project risks, pre-investment efforts do not prevent many micro-, small- and medium-sized enterprises from failing. Thus, giving appropriate and continual attention to balancing the scope and costs of assistance with the returns in terms of project success, benefits and replicability has proven to be particularly critical in S³IDF’s efforts to implement and disseminate the SMBA^SM.

Changing Mindsets: Explaining the SMBA^SM

Our Social Merchant Bank approach is not easily explained nor quickly understood by many banks or development and philanthropic professionals and institutions. This is partly due to the multi-dimensional aspects of its bundled business, technical and financial support (and focus on leverage); its sectoral range of energy, water, sanitation, transport, communications and end-uses; its enterprise focus; and its overlap with microfinance. As a result, changing the mindsets and behavior of these banks and development and philanthropic professionals and institutions has turned out to be challenging and time-consuming. Nevertheless, securing these entities as partners is critical to expanding the reach and increasing the impact of the SMBA^SM. We have had some successes, including the critical support of Blue Moon Fund, USAID, and ADB, and we hope to find supporters to help expand India operations and continue to disseminate the SMBA^SM for its application elsewhere.

Fundraising for Pro-Poor Enterprise Development

Despite success with some foundations, and international competitions, fundraising for S³IDF’s unique mission objectives continues to be challenging. Overlapping with the challenge of changing mindsets, one problem is that S³IDF and its SMBA^SM do not fit neatly into distinct programmatic funding categories, either by sector or approach.  Further complications have arisen from the reality that our approach needs philanthropic funding to help create for-profit enterprises that explicitly benefit the poor. Ultimately, this means that we do not qualify for strictly for-profit development capital or for many types of philanthropic funding. This reality has made finding and working with funders more difficult and time-consuming.

In addition, S³IDF has made attempts to obtain carbon financing from its start, but aspects of the SMBA^SM have proved prohibitive to tapping this market. Almost all of our investments produce carbon assets with true “additionality” (as they would not happen without SMBA^SM intervention), but the amounts per investment are small, the investments cover a wide range of technologies, and the annual amounts are not large enough to interest intermediaries, including ones with focus on collateral benefits.  We need to continue to work on both aggregating our carbon assets as well as finding cost-effective small-scale retail markets.

As S³IDF develops and expands its impact, we will continue to build on our experiences and tackle the challenges that our work and approach face.  The poor’s need for infrastructure services to escape the poverty trap is too critical for there not to be greater and broader application of paradigm-shifting approaches, such as the SMBA^SM.