How private investments can support public services in a fast urbanising India

With a growing number of Indian entrepreneurs venturing into urban service delivery, investors are also beginning to experiment outside of the conventional consumer internet firms.

According to the Indian Economic Survey of 2018-19, meeting the infrastructure needs of India’s rapidly urbanising population requires an investment of about $200 billion annually. Given that the government’s fiscal constraints have limited their contribution to $100 billion-$110 billion a year, private investment will have to play a major role in covering the $90 billion annual deficit.

With a growing number of Indian entrepreneurs venturing into the space of urban service delivery, investors are also beginning to experiment outside of the conventional consumer internet firms. Despite the uncertainty surrounding the economy, Indian startups have seen an increase in both the number and size of investment deals in the first seven months of 2019, as against the same period in the previous year, with mobility and the sharing economy seen as two sectors driving this increase.

Innovation for Indian urban service delivery

Investors like Shailesh Vickram Singh of Massive Fund understand that Indian cities are challenged on every front – air, traffic, waste management or new trials that will likely emerge due to climate change.

He asserts, “In a nutshell, Indian cities are broken when it comes to delivering basic amenities to their citizens.” Echoing this sentiment, Vignesh Nandakumar of Aspada notes that compounding challenges around infrastructure, service, and governance are a lack of resources and decision-making ability at a local scale to be able to effectively address these issues.

With limited resources, innovation and technology offer avenues to address some of these gaps in ways that are potentially disruptive, and more effective and cost efficient than existing solutions. “Today, thanks to the Smart Cities initiatives and a global awareness of scalable solutions, there’s a number of models – both purely private initiative-driven and under the Private Public Partnership (PPP) space,” says Nandakumar, pointing out the shared economy and digital/ mobile-based technologies that are available today for transportation, health services, and even digital platforms to access government services.

At Asha Impact, Aparna Dua also notes the mutual benefits of shared economy models such as bus aggregators like Shuttl and Cityflo, which have both substantial impact, as well as potential for market-level financial returns for equity investors.

Investing and its impact in India

Both Singh and Nandakumar see huge potential for investment in these spaces.

Says Nandakumar, “Impact investors can drive other necessary non-commercial metrics in urban services, while investing in models where there is a commercial basis for the customers to use them. Resource scarcity is definitely driving a need for more productive and efficient services and, in turn, can impact additional metrics whether in terms of climate issues, higher utilisation of resources, and better planning due to higher data availability.”

Singh, on the other hand, believes that rather than purely impact, what drives investments at Massive Fund is the fact that impact investments today are themselves large opportunities offering great commercial returns.

He adds, “We believe that Smart Cities present the next wave of opportunity for investments as pollution and climate change become more and more severe. We are looking at all aspects related to pollution as they are closely linked and one cannot look at any of these sectors in isolation.”

Nagaraja Prakasam, angel investor and partner at Acumen, agrees that if a company has a successful business model, the investment will follow. He defines a social business as either one that buys a product from a low-income family/individual, sells it at a premium and transfers that premium back to the family/individual, or one that creates and sells a product or service for low income families/individuals while considering the triple bottom line of profit, people, and planet.

In Prakasam’s opinion, in this space, the challenge is finding the right solution or model, and requires the support of patient capital that allows for experimentation. Due to pressure from investors, people and planet often fall to the wayside against profit, and young companies can sometimes find themselves victim to mission drift. Acumen endorses a patient-capital approach that is flexible to the needs of entrepreneurs with regards to time horizons and risks, but still expects accountability in the form of a return of capital while ensuring the needs of customers are met.

At Asha Impact too, impact investing is viewed as a way to support experimentation by taking bets in high-impact and high-growth startups, in sectors where commercial venture capital is yet to flow in.

Rather than anticipating changes, it believes impact investment should seek to instigate and accelerate sectoral disruption to achieve better social and environmental outcomes. Detailing the approach, Dua adds, “We map our impact along the five-point framework provided by the Impact Management Project, and try to determine what our catalytic contribution is coming in as investors at a particular stage or subsector.”

What still needs to be done?

There is still, however, a paucity of investment in areas like water and waste management. These centre around four main issues:

The structure of urban service delivery in India

Investors acknowledge that the government has a huge role to play as new technology will only reach the larger population when governance and compliance are enforceable.

  • Dua advocates a proactive approach. “At Asha Impact, we have set up the Asha Trust, which leverages learnings from portfolio companies, validates it via research and engagement with sector experts, and then presents its findings as actionable policy recommendations to the government. Through our engagement with the Impact Investors Council, Asha Impact along with other members is also leading an industry-wide effort to build consensus on impact reporting in the Indian impact ecosystem.”
  • Angel investor Revathy Ashok recommends strong PPPs to bring technology-based solutions and forward-looking plans based on data. “Every service need not be operated by the government. They can define service-level benchmarks and work with private operators to ensure that services get delivered in a timely and efficient way.”

Investor fatigue

Both Singh and Prakasam believe that steps also need to be taken to address investor fatigue and incentivise investors. While Singh advocates increased clarity in policy, as well as tax breaks or financial rewards for investors, Prakasam offers an alternate equity model.

He explains, “Maybe the way out of the Ponzi scheme investment model lies in the creation of social exchange. A social exchange allows the trading of equity of social impact companies, simultaneously creating liquidity, and removing exit pressure on investors. In the two years since I first wrote about it, I’m glad to see the Indian government has been exploring the idea, going so far as to mention it in the Union Budget.”

Barriers to participation for small players

Acknowledging that working with the government is often a challenge for small enterprises, both Dua and Ashok recommend that entrepreneurs choosing to work in the sector, adopt more strategic approaches.

  • Dua advocates a workaround: “In almost every sector, there exist relatively smaller pockets that can be used as proof of concept. Enterprises wanting to work with the government must showcase evidence which would facilitate faster decision making. Additionally, for sectors such as waste, water, sanitation, etc., startups should work towards finding effective ways of working with the government and optimising existing machinery rather than creating parallel systems.”
  • Ashok, on the other hand, points out the importance of building a good narrative and influencing policy, saying, “It is not good enough to have a good product offering, but equally important for entrepreneurs working in this impact space to successfully connect with all stakeholders who will be influencers in the domain and consistently work on building the right narrative that impacts policy in the right direction.”
  • Finally, they both agree that it is crucial to select the right investor. Says Ashok, “This is not about just getting money. It is about getting intelligent funding that will be significantly value-accretive to the business.” The right investor, with long-term vision and relevant networks, can offer mentorship and strategic support that is much more valuable in this space.

The author, Aarathi Kumar, is part of Integrated Urban Planning programme, WRI India Ross Center and supports TheCityFix Labs India accelerator initiative. 

(Edited by Saheli Sen Gupta)


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