The blog of the Urban Institute
February 27, 2019

How governments can leverage impact investing to solve local problems

Passage of a $54 billion plan to greatly expand transit access in the Seattle region presented a once-in-a-generation opportunity to improve system connectivity and boost the region’s economy. The plan also presented a challenge: How could decisionmakers ensure residents with the most to gain had access to affordable housing close to new transit corridors? How could leaders help align public and private investments for the good of the entire region?

In response, a range of government entities came together to create the $21 million Regional Equitable Development Fund to support the development and preservation of affordable housing adjacent to existing and planned transit sites. It uses limited public funds to leverage larger private investment by offsetting the high cost of acquiring and constructing affordable housing.

In this case, evidence suggests the fund leverages five private dollars for affordable housing for every one dollar in public funds. And although the context differs by region, using public funds strategically to unlock and nudge private investment toward the public good could help solve problems in many jurisdictions.

Impact investing presents opportunities for local and state governments

As state and local governments feel pressure to do more with less, foundations and private investors are increasingly interested in impact investing: making investments with both a financial return and a social or environmental impact.

Impact investments at the local level include building affordable housing units, investing in community-based social entrepreneurs, and supporting environmental interventions with economic benefits. This field is large and growing, and state and local governments have clear incentives for engagement.

As we explain in our new paper, impact investing lets governments use limited public resources to leverage new, external funding to meet local goals and priorities, stimulate growth and boost governance capacity, and shift innovation risk.

Some governments are already engaging with impact investing by partnering with social entrepreneurs to drive the development of local impact investing markets, managing dynamic partnerships with key philanthropic or private actors, and encouraging growth by nudging private resources toward local needs.

Effective engagement requires a strategy

Although the federal government can foster an enabling environment nationally, impact investing is largely local in practice, and it benefits from more localized engagement. State and local governments can be cooperative partners with impact investing projects by elevating the voices of marginalized communities, efficiently aligning different sets of resources, and facilitating opportunities in the public interest.

The best and most mutually beneficial forms of engagement vary, but governments should think strategically about the benefits, risks, and types of engagement best suited to their needs, capabilities, and interests.

Developing and implementing a clear and effective strategy—from an initial conversation to a measurable outcome—can take years. But as the Seattle area has shown, the results can be worth the wait for governments, investors, and communities.

A bus drives through Seattle. Photo by zhudifeng via GettyImages.

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