Instead of additionality, British International Investment (BII) – the United Kingdom’s development finance institution (DFI) – uses the term ‘contribution’ (investor contribution) to refer to the difference that BII’s additional inputs make to development outcomes.
British International Investment’s investor contribution
Abstract
Despite being absolutely essential, assessing additionality is one of the most difficult and contested aspects of blended finance. The challenge lies in the fact that additionality is counterfactual by nature; it requires asking whether something would have happened without the intervention. This makes it conceptually tricky, methodologically complex and politically sensitive. Asking the right set of questions for each investment within a structured framework can go a long way to ensure a robust assessment of additionality.
Instead of additionality, British International Investment (BII) – the United Kingdom’s development finance institution (DFI) – uses the term ‘contribution’ (investor contribution) to refer to the difference that BII’s additional inputs make to development outcomes. According to BII’s investment policy, when making decisions on potential investments BII will consider, for each investment decision, its additionality/contribution to know whether BII is additional and how much difference BII’s additionality makes to development outcomes.
The assessment is operationalised through BII’s impact framework which includes an assessment of the additionality or contribution for each proposed investment across three aspects: 1) financial additionality, 2) value additionality, and 3) mobilisation of private capital. Financial additionality includes capital either not being offered or being offered in insufficient quantities or on unsuitable terms. Value additionality includes improved standards, skills, job quality, gender, climate, knowledge and innovation. Mobilisation is regarded as a form of financial additionality, bringing private capital to an investment where the private sector would not have engaged otherwise.
As contribution cannot be directly measured, BII assesses its expected contribution by asking a structured set of questions and assembling available evidence and analysis to reach a decision based on a balance of probabilities. The questions are used to evaluate availability and quality of comparable private capital, market maturity and investor appetite, depth and uniqueness of BII’s financial and non-financial support, as well as risk of crowding out versus catalysing private investment. Potentially relevant questions include:
Based on what you know about the availability of capital in the market — sector and geography — are there examples of recent private investments that resemble the investment under consideration, in the same market?
Does the business require finance of a certain quantity or on certain terms to be viable or meaningfully increase its probability of success? Do we observe finance on those terms available in the market?
What do we know about the project sponsor’s or general partner’s efforts to raise finance from private investors?
Does the investment in question differ from the typical investment in its market — is it an outlier? Does it have special characteristics that explain why superficially similar businesses could attract private finance, but this business could not?
Is the market in a down-cycle? (Would the investment be counter-cyclical?)
Is the investment part of a country’s agreed investment strategy, where it has already been determined that capital is lacking and DFIs like BII are needed?
Is the investment pioneering new markets or business models?
What does the risk-return profile look like? The more appealing the investment is as a commercial proposition, the less likely we are financially additional (all else being equal).
How deep has our engagement been with the sponsor or general partner? Have we observed material changes in the business plan, ESG practices (or commitments), or other practices, as a result? Can we document that?
Can we get an explicit statement from management about why they want investment from BII and what they will do differently as a result?
How much influence do we really have over management? (Seat on board, on committees).
If we are offering non-financial services, do we have real expertise and a track record of delivery? Have we dedicated the resources needed to follow through?
Do we have evidence the firm values our non-financial inputs, will there be meaningful consequences if they fail to implement what is proposed? Will we receive reliable metrics to monitor implementation?
How do the non-financial services that we propose to offer differ from those typically offered by commercial investors (who may also pay for ESG consultants, offer strategic advice, etc.)?
For funds, is our investment needed to get to a viable first close or a viable size? Have other investors in the fund expressly stated a desire to see BII commit? Have we helped educate inexperienced fund investors, or built the fund manager’s capacity?
The assessment of contribution is proportionate to the risk involved. A case where the risk of crowding out private investors is high requires more consideration and evidence than a case where this risk is low, and where the likelihood of being additional is high. BII’s contribution in each proposed transaction is rated on a 4-point scale, reflecting BII’s degree of confidence in their additionality and their view of the scale of their contribution relative to the impact of the investment. Investments are rejected if the contribution is deemed to be immaterial. The assessment is presented to the Investment Committee, who incorporate it into investment decisions alongside other considerations. BII rates contribution on a scale because it believes that the appropriate threshold for contribution should differ, depending on the magnitude of an investment’s expected impact.
BII’s investor contribution framework is not just a methodology; it’s a governance tool and a development compass. It shifts the focus from what BII does to what BII changes, making its contribution outcome/impact focused and less input oriented. The rating system goes beyond “box-ticking” and institutionalises accountability. It provides teams with a robust decision-making framework and invites them to challenge themselves rather than merely justify. It also has a conservative view on mobilisation and a critical lens on the impact of secondary transactions and buyouts. BII’s investor contribution framework thus sets a high standard for integrity, intentionality and strategic clarity in development finance, and the framework can be inspirational for other development finance providers.
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