"Managing risk and innovation to increase investment in infrastructure" by Petter Matthews
Sub-Saharan Africa requires more than $20 billion additional annual investment in infrastructure if it is to accelerate growth and progress towards the Millennium Development Goals (MDGs). But conventional financing and delivery systems are failing to mobilise investment on the scale needed. Innovative solutions are needed to increase the rate of investment and maximise its developmental impact. But from a corporate perspective, Africa is often seen as a high risk environment and aversion to risk tends to inhibit the development of innovative business solutions.
Risk management tends to focus on the mitigation of financial risk through various debt guarantee and insurance products. But infrastructure provision relies on a wide range of technologies and institutional arrangements that create additional non-financial risks. The use of public private partnerships for example, means that investors are increasingly involved in building, operating and maintaining infrastructure. They work in close proximity to project effected communities and face challenging social risks. The management of social risk is critical, not only because it helps ensure project success, but because the measures used to mitigate it can also deliver pro-poor outcomes. Work by Engineers Against Poverty (EAP) on procurement and supply chain development helps demonstrate this.
Many companies still see procurement as an administrative function and consider financial cost to be the most important performance criteria. But when procurement is used to maximise local job creation and enterprise development, it also performs important social risk functions. Local people secure a stake in the company and its operations, they are more likely to value its presence and less likely to threaten its assets. Any cost premium has to be measured against the returns, but it often delivers additional cost efficiencies.
If companies are to adopt these kinds of strategies, they need practical ways to mitigate the risk inherent in innovation. Useful starting points include:
• Selecting the right opportunities: Focus on opportunities that leverage existing capabilities and strengthen corporate competitiveness. The more closely aligned the opportunity is with a company’s core business, the easier it is to mobilise resources and combine commercial and societal benefits.
• Experimenting: Avoid the ‘big bang’ approach to innovation through experimenting on a small scale. New approaches can be tested on individual projects and rolled out across the business if they prove successful.
• Working through cross-sectoral partnerships: Working with partners, particularly non-traditional partners such as NGOs, helps to spread the risk and increases the chances of developing innovative solutions.
• Measuring the impact: It can be difficult to isolate and measure the impact of a particular innovation, but this should not be used to avoid the need to start the process of developing metrics and quantifying the outcomes.
Many companies are waiting for the African business environment to improve before they invest. But the presence of world class companies is a necessary part of the process of securing those improvements. Managing the tension between risk and innovation more effectively can help companies secure a foothold in growing African markets and increase the likelihood of African countries meeting the MDGs.
Petter Matthews is Executive Director of Engineers Against Poverty
Risk management tends to focus on the mitigation of financial risk through various debt guarantee and insurance products. But infrastructure provision relies on a wide range of technologies and institutional arrangements that create additional non-financial risks. The use of public private partnerships for example, means that investors are increasingly involved in building, operating and maintaining infrastructure. They work in close proximity to project effected communities and face challenging social risks. The management of social risk is critical, not only because it helps ensure project success, but because the measures used to mitigate it can also deliver pro-poor outcomes. Work by Engineers Against Poverty (EAP) on procurement and supply chain development helps demonstrate this.
Many companies still see procurement as an administrative function and consider financial cost to be the most important performance criteria. But when procurement is used to maximise local job creation and enterprise development, it also performs important social risk functions. Local people secure a stake in the company and its operations, they are more likely to value its presence and less likely to threaten its assets. Any cost premium has to be measured against the returns, but it often delivers additional cost efficiencies.
If companies are to adopt these kinds of strategies, they need practical ways to mitigate the risk inherent in innovation. Useful starting points include:
• Selecting the right opportunities: Focus on opportunities that leverage existing capabilities and strengthen corporate competitiveness. The more closely aligned the opportunity is with a company’s core business, the easier it is to mobilise resources and combine commercial and societal benefits.
• Experimenting: Avoid the ‘big bang’ approach to innovation through experimenting on a small scale. New approaches can be tested on individual projects and rolled out across the business if they prove successful.
• Working through cross-sectoral partnerships: Working with partners, particularly non-traditional partners such as NGOs, helps to spread the risk and increases the chances of developing innovative solutions.
• Measuring the impact: It can be difficult to isolate and measure the impact of a particular innovation, but this should not be used to avoid the need to start the process of developing metrics and quantifying the outcomes.
Many companies are waiting for the African business environment to improve before they invest. But the presence of world class companies is a necessary part of the process of securing those improvements. Managing the tension between risk and innovation more effectively can help companies secure a foothold in growing African markets and increase the likelihood of African countries meeting the MDGs.
Petter Matthews is Executive Director of Engineers Against Poverty
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