All stakeholders worldwide have recognized that the mobilization of the private sector in fostering economic growth, poverty
reduction and the attainment of the Millennium Development Goals is critical to success. While many programs are designed to
stimulate private sector investment in projects that contribute to the MDGs, there is still a significant absence of private sector
engagement in many development sectors. This absence is compounded when assessed through the lens of small-scale
infrastructure projects that are key to local economic and private sector development. An even dimmer situation is the nearly
complete absence of such projects that are financed through the domestic capital markets.
The Local Finance Initiative (LFI) is an innovative global programme of the UN Capital Development Fund designed to unlock
domestic financial sectors in developing countries for financing small and medium-sized infrastructure and agriculture-processing
projects that are needed for local economic and private sector development.
LFI is designed to mobilize private sector capital for the development of bankable infrastructure projects. The goal is to advance
economic development at both the national and district levels, engage private sector financial institutions, and stimulate the critical
government functions that are needed for identification, development, and finance of projects, The objective is to achieve a systemic
change in local business practices that will facilitate domestic financing of local infrastructure projects and that will strengthen the
country’s regional and global competitiveness and enhance the national and local business environment. Local living standards will
be improved by increasing incomes and reducing poverty. The LFI approach is unique, implementing for the first time in
developing countries the application of proven practices in the field of project finance to small and medium-sized projects. This
approach has been employed successfully in accessing long-term private finance for infrastructure projects worldwide, but is not a
common approach in developing countries, creating a game-changing opportunity to leverage limited official funds to unleash
private capital for widespread development.
LFI is implemented through programme components that include capacity building for public, private stakeholders and advisory
services to project sponsors, and the structuring of small and medium-sized infrastructure projects that will be financed by domestic
private capital. The LFI innovation is the introduction and application of a wide array of risk mitigation approaches and
instruments, leveraging both project structuring techniques and the full spectrum of risk mitigation instruments and credit
enhancement options. LFI places a strong emphasis on effective coordination and information mechanisms, including online tools,
which link relevant actors at the local and national levels both horizontally and vertically through government-investor networks and
allow timely identification and resolution of critical issues blocking financing of local economic infrastructure.
The LFI Programme was launched in May 2012, championed in Uganda by the Ministry of Local Government and the Uganda
Investment Authority. In Tanzania, the programme began in March 2012, led by the Prime Minister’s Office, Regional
Administration and Local Government, with the support of the Tanzania Investment Centre.
Example of LFI Project: Uganda Crane Creameries Cooperative Union (UCCCU) is a Uganda cooperative consisting of 16,000 dairy farmer
members in southwestern Uganda and serving over 30,000 dairy farmers through linkages to the market. UCCCU is currently in the final
stages of constructing a milk-processing plant to process its members’ milk. By providing a reliable market for the raw milk produced by the
farmers, the facility will significantly lower the risks faced by farmers, raise household incomes, and empower them economically by
preventing wastage of raw milk and protecting the farmers from the market vagaries and exploitation by large milk processors.
UCCCU has been supported by a wide range of development partners, including the Swedish Cooperative Council, DANIDA, USAID,
Agriterra, and aBi Trust. LFI is leveraging this support by providing financial advisory support to secure the debt finance needed to build the
processing facility. Key LFI interventions designed to reduce project risk include the development of a detailed financial model; independent
technical studies to validate key financial assumptions on prices, costs, revenues, and availability of raw materials; structuring of contracts
with equipment vendors and the construction contractor, as well as the preparation of a bank offering memorandum and documentation; and
assistance in negotiation with lenders. This transfer of risk, characteristic of project finance, will ensure the development of a viable project as
well as enable the project to secure private financing.