Spicing up Philanthropy
How traditional philanthropy is set to become passé, thanks to exciting new structures like Development Impact Bonds.
A Mega Trend: Private capital for creating Societal Impact AND Earning Financial Returns
There’s a lot of buzz globally about the new approach of blended finance. It uses catalytic capital from public or philanthropic sources to mobilize private-sector investment for sustainable development. The Global Impact Investing Network (GIIN) estimates that the global impact investing market grew to USD $502 billion in 2019, measured by Assets Under Management (AUM). Sustainable investing assets in Europe, the United States, Canada, Japan, Australia, and New Zealand, reached USD $30.7 trillion, a 34% increase in 2 years[i].
India is a perfect innovation laboratory, cooking a healthy stew of development impact bonds, venture grants, and first and second loss guarantees. Within this, Development Impact Bonds (DIBs) are an exciting new asset class gaining traction.
Development Impact Bonds — Assured impact for the philanthropist; risk based returns for investor
Traditional philanthropy is set to become passé. It has suffered from unaccountable structures.
There are two unaddressed “Impact Risks”. The first is “Delivery Risk” — cutting a cheque upfront for an outcome that is hoped to be delivered in the future. The philanthropist relies on hope that the non-profit will carry out their programs as promised; and the programs will create the intended societal outcomes. The second is the “Measurement Risk” arising out of the lack of credible third party measurement of outcomes.
Both these risks are accentuated by lack of domain expertise of the philanthropists — they’re not experts at how to enhance learning outcomes in education, or to reduce deaths at child birth. Hence, non-profits are compelled to articulate their pitches, and craft their programs in more simplistic terms; e.g. number of kids fed, notebooks distributed or skill trainings delivered. These are input variables or activity measures; not outcomes. For outcomes, the vague, “number of lives touched”, tends to be used. Hence, despite best intention and efforts, the underlying social issue remains. The structure doesn’t inspire systemic and innovative solutions.
The Development Impact Bond structure addresses both these “Impact Risks”. The philanthropist now morphs into an “Outcome Payor”. They pay only when outcomes are delivered and certified by pre-determined independent agencies with relevant expertise.
But the non-profit needs capital upfront. This is where investors step in — appraising the risk, providing capital. Upon successful delivery of outcomes, they’re rewarded for risk taking. The outcome payor returns the investors’ capital, and an additional pre-agreed coupon rate.
This is revolutionary for a few reasons. Firstly, it can unleash the philanthropy that holds itself back, not because the philanthropist isn’t generous, but because the philanthropist is uncertain about the impact.
Secondly, it allows a new and exciting avenue for investors, including HNI investors to participate in the impact sector, at market or lower than market returns, but with the added dollop of impact returns.
Thirdly, for society, it not only unleashes greater amounts of funding, but also shifts the focus from inputs (e.g. the number of text books for students) to outcomes (e.g. an increase in students’ learning outcomes), spurring efficiency and innovation.
In the long run, governments must become outcome payors; and non-profits or social businesses can list on the Social Stock Exchange[ii]. Impact AND financial return seeking investors can provide risk capital, and develop expertise in appraising service providers’ capabilities and risks.
Real Life Action in India: A peek at select DIBs.
India is becoming the hotbed for DIBs. In 2015, I had the privilege of leading the “Process Evaluation” for the world’s first DIB in education in it’s set up phase. Here, UBS Optimus Foundation provided risk capital to “Educate Girls”, an NGO, to deliver two specific outcomes over 3 years — increase in enrolment of out-of-school girls, and measurable improvement in educational outcomes in 166 schools in 140 villages in Bhilwara, Rajasthan. CIFF UK was the outcome payor. Educate Girls surpassed both its targets by 116 percent and 160 percent respectively. UBS Optimus Foundation recouped its initial funding (USD 270,000) plus a 15% internal rate of return
Other DIBs have taken off since then. The USD 8 million Utkrisht Impact Bond launched in 2017 aims to reduce the number of mother and baby deaths by improving the quality of maternal care in Rajasthan’s health facilities. For the Utkrisht bond, the upfront funder, UBS Optimus Foundation, provides the initial working capital so the service providers — PSI and HLFPPT — can support up to 440 Small Healthcare Organizations (SHCOs) to improve services, meet new government quality standards and adhere to them over the long term. The outcome payers — USAID and MSD for Mothers — will pay back the investor the original amount invested, plus additional returns if predetermined targets are met. Progress will be assessed regularly by independent verifier Mathematica throughout the three-year program. The impact bond was designed by Palladium, who will also act as the implementation manager throughout the three-year term. It is an example of how highly efficient use of capital can save lives. Interventions will reach up to 600,000 pregnant women with improved care during delivery and could lead to up to 10,000 lives being saved over a five year period.
The participation of UBS Optimus Foundation and Merck For Mothers (MSD for Mothers) is noteworthy. Unlike USAID and CIFF which may be called as “pure play development sector actors”, these entities are offshoots of for-profit businesses, at least historically. And that’s actually a good thing.
Sounds exciting? Want a piece of the action? Here’s what you can do.
If you are a High Networth Individual (HNI) or a Family Office:
Speak to your private bankers and express your desire for more innovative financing products that blend impact and financial returns. Cite how UBS through its foundation; and IndusInd Bank and SBI Captial Markets, through their CSR wings have participated in Educate Girls Bond, and Haryana Government’s Pay for Success Program respectively. In the latter, SBI Foundation and IndusInd Bank have committed Rs 2.8 crores and Rs 14 crores respectively.
Banks always respond to client needs. Alternately, if you can aggregate like minded HNIs, then service providers like Palladium, Dalberg, and others can help you put a bond together. The Malaria Performance Bond in Mozambique came about by a similar mobilization initiated by the founder of the global chain, Nando’s.
If you are a private banker yourself, alert your colleagues to the new trend. While your client portfolio may still largely be commercially focused, you can capture the imagination of your clients through this innovative format of philanthropy (as outcome payor) and / or investment (as investor). This kind of client engagement creates stickiness in an otherwise vanilla market.
If you are an entrepreneur or a senior leader in a ‘profit-with-purpose’ business, with a proven model, and scale up ambitions: There are early examples of for-profit social businesses exploring “patient capital” for scale ups using results-based financing. Consider the example of Essilor, the world’s leading vision care company. As part of its efforts to bring eyeglasses to 10 million underserved populace in India, Essilor has been training and supporting 5500 independent rural micro-entrepreneurs to ensure demand creation and distribution in rural markets. These entrepreneurs, called “Eye Mitras” (“friends of the eyes”), help overcome the shortage of trained optometrists in emerging markets — a critical hurdle to expansion into poor rural communities. But internally funded scale up beyond a point is difficult. So Essilor has started seeking external funding to support the Eye Mitra model using outcome-based contracts with structures similar to DIBs[v].
Today’s Innovators, Tomorrow’s Leaders
The opportunity is clear and open to be shaped in different ways. Those that take the lead, will benefit — in business, and in creating societal and environmental impact; as also a tinge of genuine pride in their employees — millennial or otherwise.
About the author, Rajen Makhijani (MBA, IIM-Calcutta 2000), Ex-McKinsey, Dalberg and ex Country Director of University of Chicago’s Tata Centre for Development, Founder Leadership By Results)
Rajen led the Process Evaluation of the world’s first Development Impact Bond in education, in it’s set up phase. He brings 20 years of inter-disciplinary approach to pressing issues for leaders in business, politics and development. He has held leadership positions in top global strategy consulting firms, and line organisations. In investing, he has served UBS Optimus Foundation, CIFF UK, Blackstone, Actis, LeapFrog Investments, ADB, DEG, USAID, UN Capital Development Fund, apart from serving wholesale banks of ICICI, Standard Chartered Bank, asset managers like Optimix, and insurers like AIA and AXA. His book chapter has just been published in The Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards A More Sustainable Society (John Wiley & Sons, Dec 2020). He has published in BusinessWorld, Huffington Post, NextBillion, India Development Review. Watch his TEDx talk –‘Uneducated not Stupid — How the Poor See Life’ at Nanyang Technological University Singapore (225,000+ views).
