Why Should I Invest, It Doesn’t Produce Extra Income?

Simon Batchelor from Gamos offers his thoughts on energy investment and the concept of “temporariness”.

In his last blog, my colleague Mark Borchers from Sustainable Energy Africa (SEA), highlighted some points from a new book, Africa’s Urban Revolution

The point about attitude to living in a city and investment particular caught my eye.  He said:- “In many urban areas a significant proportion of the population regard their homes as elsewhere, and they subsist in the town or city and send remittances back to their homes, where their heart remains. So while they are present in the city, they are not investing in it. It is unclear what this does to the local economy and the tax base and service delivery demands on municipalities.”

It reminded me of a report I read on the Millennium Challenge Corporation (MCC), created by the International Housing Coalition back in 2007.   MCC at that time was an initiative of US foreign Assistance, and was championing a new approach to development assistance.  They were (I have no idea whether they still are – perhaps someone could help me in the comments section), very focused on Economic Rate of Returns (ERRs) i.e. the increases in income or value added as a result of a project.  The report focused on housing projects and asked the question whether the benefit of improved housing in urban situations could truly be measured by increases in income?    In the same way that the extract from the book suggests that people may not invest in their housing and ‘situation’ because it doesn’t necessarily generate more income for them (preferring presumably to send home remittances that support schooling and agricultural production); so too in this report, the donors and development assistance might also question investment because it doesn’t give an  immediate ‘extra income’ return.

They note that “The ‘benefits’ of well-designed urban and shelter reforms can have repercussions not only on the incomes of the individuals served, but also on the larger economy. There are large positive externalities to improved shelter in terms of health and life expectancy.”  However, the report argued – these benefits may not be captured in traditionally calculated ERRs.  They say “Urban shelter and infrastructure investments may indeed have direct economic benefits such as an increase in the rental value of housing, significant improvements in health, or increases in the productive capacity of the household……investments in urban areas can make non-trivial contributions to economic growth from a macro-economic perspective by adding to productive capacity of the city as a whole. Such benefits are also virtually impossible to enter in an ERR calculation.” (My emphasis).

Isnt this the same calculation those families and households are making?  They know instinctively that if they improve their urban situation, they will have a better quality of life and maybe increase their productive capacity in the longer term – but they also calculate that it won’t directly increase their income, and any ‘investment’ in their housing (or energy demand) has such a long return life (and they might not be around that long), that it is better to send money home to invest in the family’s rural ‘shamba’ or plot.   Indeed, what is interesting to me is that the MCC came up with the same conclusion.  The report says that “in practice many of the projects that have been approved are rural projects. These projects have met MCC’s ERR criteria.”

Mark seems to have highlighted an important point about short term thinking or ‘temporariness’ – something we need to keep in mind as we explore energy investments in urban areas as a part of SAMSET.

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