Working with data from the Standard and Poor’s Ratings Service Global Financial Literacy Survey, (The Economist, November, 2015), the project team showed that the greater the level of financial literacy and access to financial services, the greater the degree of development implementation. Critically the research outcomes established that the role of finance in development is not well understood across stakeholder groups within South Africa. The project team therefore set out to develop a set of tools that help multi-stakeholder groups understand the role of finance within project development and then tested those frameworks with stakeholders.
Even though there are multiple definitions of an economy: green, blue, circular, etc. these terms only serve to provide specific focus to discussions and to communities, emphasising certain aspects of development that may need additional focus. However, in reality, there is only one economy and this means it is important to continually assess the solution against a framework that considers the entire economy.
After a lengthy and comprehensive consultative process across South Africa (the workshops around the country amounted to a capacity building programme focusing on the role of finance in development that reached over 150 people in positions of influence in their organisations) the 20 distilled policy recommendations will help policy developers and financial institutions in their design of policy and funding instruments (full report available on request from [email protected]).
Due to the fact that developmental finance is insufficiently understood there is a need for greater levels of inclusion of the financial sector in policy planning and project development and a concerted effort is needed to raise levels of financial literacy in policy and project developers. The commonly held view of the stakeholders involved in this research was that unlocking innovation within the financial services sector required two things:
– A unified (or common) understanding of the problem and price certainty. In this sweet spot, policy and intention are aligned and the full suite of financial instruments can be applied. A classic example of this type of success is the South African Renewable Energy Independent Power Producer Procurement Programme (REIPPP), which through clever policy and some financial innovation unlocked tens of billions of Rands of private sector investment.
– Interventions should create a unified understanding of the problem and collective intent and/or provide a mechanism to generate cash flow or price certainty within the project policy.
In the South African market a project is often required to grow using only grant and concessional debt. This severely inhibits the scale and risk tolerance of project and project classes.
Given that many of the interventions required to transform our economy are relatively new and possibly unknown they typically have a higher cost of capital than their traditional counterparts. In addition the case can be made that we underestimate the risk for traditional options based on a false sense of comfort. In both the case of new investments and established technologies the role of cost of capital, as well as the accurate estimation and timing (modelling) of cash flows is fundamental.