Wheeler Institute project team contributes to the development of knowledge piece on Sustainable Investment Clusters

Demonstrating how Investment Clusters and Special Economic Zones can be used to drive sustainable and inclusive growth

Wheeler Institute project team members – George Looker MBA2020, Charlie Krober MBA2020, Victoria Zhao MiM 2020 along with your author Sarah Pavlu MBA 2020 – supported the knowledge piece collaboration between, P4GSYSTEMIQ and Savo Project DevelopersHow to Get Stuff Done through Sustainable Investment Clusters.  The report was launched at 2020 Super Returns: Emerging Markets virtual conference.

The perceptive and pragmatic discussion document has been developed based on the ongoing experience of SYSTEMIQ’s involvement in sustainable investment clusters (SICs) in Africa; the inputs and progress of partners such as P4G, PIDG, GGI, and UNIDO; and the research and insights of students and collaborators from the Wheeler Institute. It is full of case studies and real-world applications and provides a set of practical guidelines and pointers for those interested in driving sustainable industrialisation – from financial institutions and policymakers to zone developers, operators, and companies looking to recognise the enormous impact they can have through their industrial facilities and value chains.

On behalf of the Wheeler Institute project team, I hope you explore the knowledge piece, and join us in investing the time, risk, and dedication to pioneer a change. A summary of our findings can be found below.

A new type of zone

This knowledge piece defines a new type of commercial activity cluster (areas designated as export processing zones, innovation hubs, trade corridors, special economic zones, industrial parks, etc.) that embeds sustainability at its core. These Sustainable Investment Clusters (SICs) represent a new horizon in industrial development and planning and seek to drive enhanced social and environmental impact while creating greater economic results over conventional approaches. Different from conventional zones or industrial parks, SICs require all five of the below characteristics:

  1. A mandate for sustainable operating principles and procedures, e.g. through a tenant Sustainability Pledge
  2. A prioritisation of sectors that have a direct and outsized impact through products and services (e.g. hospitals) while working with other sectors to enhance their impact (e.g. using water demand for a cement company to scale shared services for the community)
  3. A view of zones as a hub for ecological and social enhancement through value chain linkages, e.g. incentivising smallholders to plant bamboo in a regenerative value chain based on zone demand
  4. Incorporation of circular design principles to create reliable, renewable, and low-cost utilities and input, creating value from waste
  5. A long-term view to deploy the best technical solutions upfront, reducing the operating costs and increasing long term competitiveness

Although not distinct on their own, these characteristics are rarely seen in collective application. And challenges arise when trying to set up this best in class sustainable zone from the start. However, the experience from the work already underway by SYSTEMIQ in Nigeria, Kenya, and Ethiopia has provided actionable insights that can be applied to get started, get interest, and get stuff done in support of sustainable, and inclusive growth.

Key learnings

Project Bankability

Experience has shown a gap in the reported capital available for development projects and the number of projects that reach completion. There lies a disconnect in the development project structure, classification, and risk with what is commonly accepted as commercially viable. Recent SICs developed in Africa have demonstrated new ways to prepare and structure projects to combat this – including effectively creating a variety of cashflow opportunities (from lease and rental charges, core utilities, and auxiliary services), disaggregating and reaggregating underlying assets to better suit investor interests, and structuring the project lifecycle to align risk levels to the appropriate finance type. Additional gaps are discussed, including how project developers and the supporting ecosystem can work together to tackle them. These include the ‘chicken and the egg’ problem of investor and tenant interest (investors demanding secured tenants before funding, but tenants demanding guaranteed facilities before committing) and the ‘valley of death’ seen also in venture capital (a lengthy approval process for continued development funding that can leave the initial work of developers stalled, sometimes indefinitely).

Conducive Policy

Another challenge for SIC development is navigation of the policy landscape between governments, zone operators, and international organisations. Each of these players is key to developing policy and holds a comparative advantage in their respective fields. Utilising the plethora of policy resources available, plus the input of key policy shapers, the knowledge piece has identified the segmentation of responsibilities for each of these players that will allow for and encourage sustainable and inclusive development. Governments should create a fertile ground for attracting zone developers and tenant companies (such as tax duties and currency convertibility to one-stop permit shops). Zone operators should regulate and support tenant operations (such as standard operating procedures to tenant-level commitments). Whereas international organisations should support frictionless trade, bringing standardisation to zones, sectors, and tenants (such as standards for products and supply chains).

Value Chain Potential

Companies operating within a zone have the most vital role in driving sustainable industrialisation through collaborative and proactive operations. This knowledge piece details three ways that the companies operating within the zone can create an outsized commercial and environmental/social impact. First is acting as a market shaper – driving improvements to their suppliers along the value chain. Second is acting as an anchor offtaker – using their scale and resources to develop infrastructure and shared services in the area. Third is acting as a value chain collaborator – working with other companies, suppliers, and the community more broadly to create holistic change in the zone, region, and industry such as the development of shared services (e.g. e-transport, entrepreneurship incubators) and supporting skill and technological development.

Vision for the future

Building on early successes, Savo Project Developers has a vision to inspire and support the creation of 50 Sustainable Investment Clusters by 2030 and to help advance the move to a sustainable real economy. The bulk of this knowledge piece highlights the learnings from the initial stage that included demonstration of the first SICs as a concept. However, to combat some of the gaps still identified, there is need to create a SIC Project Development facility – a dedicated project development vehicle that is focused on sustainable industrial development to improve the speed of early stage risk capital to catalyse projects in the space. As this new type of asset class is developed, it will require the work of international and national financing community to launch a Global Sustainable ‘SIC’ Fund to aggregate mission-aligned capital and incentivise the development of sustainable industrial parks.

The knowledge piece authors believe SICs will be a new asset class that can scale as a default option for anyone considering industrial development in a sustainable investment cluster. We hope you engage with our experiences and our learnings captured in the knowledge piece to drive progress for sustainable and inclusive industrial development.

Sarah Pavlu is a Project Officer at the Wheeler Institute and a MBA2020 alumna of London Business School.   Over the past 18 months she has been part of the project team that produced The Africa List Business Barometer and supported the content development of Professor’s Paolo Surico and Andrea Galeotti’s pandemic research.  Sarah has also made several contributions to the Wheeler Institute Blog on sustainable supply chains

The ‘Sustainable Investment Clusters’ knowledge piece is part of the Wheeler Institute’s portfolio of internships – offering students a professional experience in London to support the development of applied research, often in collaboration with external organisations. In this instance our collaboration was made possible by Gail Klintworth, one of the Wheeler Institute’s Advisors.

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