NEWS Sam Miles contributes to a new assessment report, “Digitalising Innovative Finance: Emerging instruments for early– stage innovators in low– and middle-​​income countries”

For the report, click here.


Exec­u­tive summary

Dig­i­tal tech­nolo­gies play a sig­nif­i­cant role in unlock­ing the poten­tial of inno­v­a­tive financ­ing mech­a­nisms across the util­i­ties sec­tors in Africa and Asia. Across these sec­tors, access to cap­i­tal is a major chal­lenge, par­tic­u­larly when enter­prises have out­grown grant fund­ing but do not have the scale to tap into tra­di­tional invest­ment chan­nels. Tech­nolo­gies like dig­i­tal plat­forms, arti­fi­cial intel­li­gence (AI), blockchain and the Internet

of Things (IoT) can bring inno­v­a­tive financ­ing instru­ments to the energy, water, waste, san­i­ta­tion, recy­cling, mobil­ity and asset-​​financing sec­tors. How­ever, the scale of inno­v­a­tive finance has yet to reach its poten­tial, with only a small por­tion of avail­able devel­op­ment assis­tance and sus­tain­able pri­vate sec­tor cap­i­tal being mobilised through dig­i­tally enabled inno­v­a­tive financing.

There is lit­tle research that focuses specif­i­cally on the role of tech­nol­ogy in unlock­ing inno­v­a­tive finance in the util­i­ties ser­vice sec­tor in low– and middle-​​income coun­tries (LMICs). This research serves as a first attempt to cat­e­gorise the com­plex value chain con­nect­ing upstream financiers explor­ing inno­v­a­tive financ­ing instru­ments to the mid­stream dig­i­tal tech­nol­ogy providers and solu­tions and on to the down­stream imple­menters of util­ity ser­vice deliv­ery and their beneficiaries.

The study uses novel con­cep­tual and ana­lyt­i­cal frame­works designed to cre­ate a com­mon lan­guage in iden­ti­fy­ing and analysing instances of dig­i­tally enabled inno­v­a­tive finance. The frame­work employs three dis­tinct lenses that cor­re­spond to the prin­ci­pal stages within the value chain con­nect­ing financiers to imple­menters. This approach acknowl­edges that the fron­tier of inno­va­tion is con­tin­u­ally expand­ing and context-​​dependent; what may be com­mon­place in one area can be con­sid­ered inno­v­a­tive when applied elsewhere.

To oper­a­tionalise this frame­work, each lens was defined through exten­sive desk-​​based research as well as con­sul­ta­tion with key stakeholders.Limitations to this approach are prin­ci­pally around the inter­con­nected nature of the dif­fer­ent finan­cial instru­ments and tech­nolo­gies which make cat­e­gories less dis­crete in real-​​world appli­ca­tions than in the­ory. Nonethe­less, the frame­work enables a com­plex land­scape to be bro­ken down into clear components.

Over 80 in-​​scope use cases were iden­ti­fied through this ana­lyt­i­cal frame­work. Use cases and their appli­ca­tion of inno­v­a­tive finance instru­ments are seg­mented into mature, scal­ing and emerg­ing cat­e­gories based on the num­ber of imple­men­ta­tion exam­ples doc­u­mented in the lit­er­a­ture, num­ber of coun­tries and sec­tors, and typ­i­cal vol­umes asso­ci­ated with the instru­ment. These use cases serve to con­cre­tise the

uni­verse of dig­i­tally enabled inno­v­a­tive finance instru­ments into a cat­a­logue of exam­ples where finance instru­ments, dig­i­tal tech­nolo­gies and the trans­ac­tion mech­a­nisms under­pin­ning them come to life in the real world. The study dives into five inno­v­a­tive finance instru­ments as case stud­ies — receiv­ables financ­ing, alt-​​lending, cli­mate, rev­enue– share mod­els, and digitally-​​verified RBF – as a means to fully explore the rela­tion­ship between dig­i­tal inno­va­tion and these evolv­ing models.

Key trends

Matur­ing use cases include social enter­prises’ use of finan­cial instru­ments such as alter­na­tive lend­ing, receiv­ables financ­ing and crowd­fund­ing. Dig­i­tal tech­nolo­gies dri­ving the growth of such use cases prin­ci­pally include advances in satel­lite imagery and dig­i­tal plat­forms that per­form ana­lyt­ics on trans­ac­tion and asset usage data enabled by IoT. Trans­ac­tion mech­a­nisms that fos­ter the growth of these use cases include tra­di­tional mobile money and pay-​​as-​​you-​​go (PAYG) sys­tems. The most mature use cases across the review were prin­ci­pally from the energy sec­tor, with emerg­ing inno­va­tion in the cook­ing space mir­ror­ing early suc­cesses of the PAYG solar light­ing prod­uct and solar home sys­tems (SHS) verticals.

Scal­ing use cases include those lever­ag­ing the growth of cli­mate finance, rev­enue shar­ing mod­els and digitally-​​verified results-​​based finance (RBF) mech­a­nisms. The dig­i­tal tech­nolo­gies prin­ci­pally dri­ving these use cases are IoT sys­tems paired with dig­i­tal plat­forms capa­ble of per­form­ing ver­i­fi­ca­tion ana­lyt­ics, increas­ingly lever­ag­ing AI, and dig­i­tal ledger tech­nolo­gies. Trans­ac­tion mech­a­nisms that fos­ter these mod­els include mass-​​payout elec­tronic pay­ment inte­gra­tions into dig­i­tal plat­forms, as
well as embed­ded finance mech­a­nisms. Use cases exhibit­ing char­ac­ter­is­tics of scal­ing are largely focused on agritech and pro­duc­tive use asset– lend­ing, par­tic­u­larly in the vehi­cle financ­ing space.

Emerg­ing use cases include social or envi­ron­men­tal cli­mate finance co– ben­e­fits mon­eti­sa­tion, impact bonds and
var­i­ous appli­ca­tions of dig­i­tal tokens and cryp­tocur­ren­cies. These use cases increas­ingly lever­age inno­va­tions in dig­i­tal iden­tity ver­i­fi­ca­tion like bio­met­rics and chat­bots, as well as dig­i­tal ledger tech­nolo­gies includ­ing smart con­tracts. Ledger tech­nolo­gies are par­tic­u­larly well rep­re­sented in the trans­ac­tion mech­a­nisms under­pin­ning emerg­ing use cases. Emerg­ing use cases were iden­ti­fied across sec­tors, with dig­i­tal tech­nolo­gies sur­fac­ing as par­tic­u­larly promi­nent in use cases focused on the co-​​benefits of cli­mate finance.

Accel­er­at­ing adoption

Screenshot 2023-10-19 at 2.53.05 PM

Across the use cases con­sid­ered, the most advanced and inno­v­a­tive organ­i­sa­tions have pio­neered a spe­cific tech­nol­ogy, instru­ment or busi­ness model, lay­er­ing on addi­tional inno­va­tions with time. Enter­prises or util­ity ser­vice providers aim­ing to lever­age dig­i­tal tech­nolo­gies to unlock inno­v­a­tive finance instruments

should mas­ter the tech­nolo­gies that pro­duce tan­gi­ble value in their sec­tor, and con­sider what oppor­tu­ni­ties are offered by off-​​the-​​shelf solu­tions providers, par­tic­u­larly for IoT plat­forms, satel­lite imagery pro­cess­ing or blockchain solutions.

The inter­sec­tion of cli­mate and fin­tech finance is an emerg­ing macro trend that will likely impact the land­scape of util­ity ser­vice providers. Smart­phone pen­e­tra­tion and increas­ing matu­rity in satel­lite imagery, IoT plat­forms, blockchain and AI are cre­at­ing oppor­tu­ni­ties for util­ity ser­vice imple­menters to advance their digi­ti­sa­tion jour­neys. Trends in mobile money inter­op­er­abil­ity and cross– bor­der con­nec­tiv­ity are also poised to unlock addi­tional oppor­tu­ni­ties for build­ing on PAYG mod­els across Africa and Asia, par­tic­u­larly for receiv­ables finance and cli­mate finance.

Util­ity ser­vice enter­prises need to recog­nise the value of digi­ti­sa­tion in lever­ag­ing inno­v­a­tive finance. Digi­ti­sa­tion processes typ­i­cally begin with a desire to improve oper­a­tions, with inno­v­a­tive finance oppor­tu­ni­ties often emerg­ing as a byprod­uct. Devel­op­ing a sector-​​specific under­stand­ing of which tech­nolo­gies are best suited to improv­ing oper­a­tions is often the first step towards tap­ping into the most appro­pri­ate inno­v­a­tive finance mechanisms.

Financiers across the impact-​​return spec­trum need to lever­age the data-​​sharing oppor­tu­ni­ties unlocked by dig­i­tal tech­nolo­gies to gen­er­ate sec­tor stan­dards. The use of inno­v­a­tive finance spe­cific to the util­i­ties sec­tor is poorly char­ac­terised in the avail­able lit­er­a­ture. Grant, equity and debt financiers can lever­age the expo­nen­tial increase

in data gen­er­ated by util­ity ser­vice providers to develop and share sector-​​specific bench­marks that can gen­er­ate, bench­mark and socialise both com­mer­cial and impact indicators.

Global cor­po­ra­tions need to sup­port trans­par­ent, and acces­si­ble finan­cial inter­me­di­aries and instru­ments that can effec­tively allo­cate impact– ori­ented cap­i­tal flows. Increased atten­tion on cor­po­rate cli­mate and ESG impact met­rics means that cor­po­ra­tions need to drive dig­i­tally enabled mech­a­nisms that can enable stan­dard­ised, timely, and reli­able impact data.

Mobile net­work oper­a­tors (MNOs) have a key role to play across the land­scape of use cases. Increased atten­tion to util­ity ver­ti­cals rep­re­sents a sig­nif­i­cant oppor­tu­nity for oper­a­tors to develop addi­tional rev­enue streams and move towards a posi­tion­ing as a tech­nol­ogy part­ner for organ­i­sa­tions in the ecosys­tem. Laser-​​focused atten­tion on facil­i­tat­ing third-​​party access to mobile money inte­gra­tions across mar­kets can addi­tion­ally sup­port util­ity ser­vice providers’ abil­ity to digi­tise oper­a­tions in their financ­ing journeys.

Part­ner­ship oppor­tu­ni­ties high­lighted through the land­scape empha­sise the need for blended finance. Devel­op­ment financiers and impact– ori­ented investors can unlock new pri­vate cap­i­tal by de-​​risking invest­ments into tech­nol­ogy– enabled sec­tors through guar­an­tee mech­a­nisms and con­ces­sional forms of invest­ment. Such part­ner­ships rep­re­sent the oppor­tu­nity to include novel play­ers like local banks and pub­lic agen­cies in pio­neer­ing oth­er­wise poorly under­stood finan­cial instru­ments across new geographies.

Achiev­ing an inflec­tion point in inno­v­a­tive finance using tech­nol­ogy will require ded­i­cated efforts in break­ing down silos across the invest­ment land­scape. The returns on invest­ing in dig­i­tal inno­va­tion can take years to be realised, and typ­i­cally require time and effort to under­stand for those not already immersed. This report serves to cap­ture some of the most sig­nif­i­cant inter­sec­tions of tech­nol­ogy and finance trends that will guide the needed deploy­ment of climate-​​resilient, pro– poor cap­i­tal in the util­ity ser­vice sec­tors in the com­ing decade.


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