On International Women's Day, Ranajoy Basu of Reed Smith says the success of the world’s first development impact bond in boosting female literacy in Rajasthan shows that private capital can tackle critical social issues
There are a host of complex and critical social issues around the world, and only a limited amount of third sector funding to solve them. The question is: does private capital have a role to play in addressing these issues? The answer, I believe, is a resounding yes.
There has been a growth in investment opportunities in recent years that seek both a financial return and a positive social impact. The range of opportunities available to impact investors is broad and growing, ranging from poverty, education, the environment and access to healthcare to more country-specific issues such as homelessness, displaced and disadvantaged youth and unemployment. The Educate Girls Bond is a cross-border Development Impact Bond (DIB). It is the first of its kind and its success has the potential to be replicated globally.
The DIB is financing around 166 schools in Rajasthan, in northern India, with the aim of enrolling girls in school and improving literacy and numeracy. Educate Girls, the NGO working to provide the social impact of the bond, received £238,000 in capital from the UBS Optimus Foundation in order to deliver its objectives.
Last summer the first-year results were announced. After one year we understand that 44% of the targeted number of girls had been enrolled in schools. As a result, UBS has recouped 40% of its investment with two years still left to run. The success of the first year is proof-of-concept. This type of financing, and the legal structures put in place to support it, can work.
Although described as a “bond”, the term can be misleading. Social impact bonds are performance-based contractual agreements rather than capital markets securities. The Educate Girls DIB is a good example of a performance-based structure. The service provider (Educate Girls) is delivering social impact to a targeted population, the investor (UBS Optimus) provided the upfront working capital required for the implementation of the project and the outcome payer (The Children’s Investment Trust) pays the investor on the success of the project against an agreed impact evaluation metric.
Return based on social impact
These contracts are complex. The return is based entirely on the underlying performance of the project and the social impact it delivers. Pricing of the return on investment is often aligned with the level of risk that investors wish to take on, including other factors such as the experience and track record of the intermediary and service providers in delivering on the targeted intervention, or whether the DIB is backed by well-known sponsors or governments. How social impact is monetised remains an area where there is much scope for development from both the outcome payers’ and investors’ perspectives.
The early success of Educate Girls bonds is due, in part, to the fact that there is a clearly defined measurable outcome in regards to an equally clearly defined target population. The promising year one results will no doubt help ease investor concerns about the viability of these products. Having said that, in order to further encourage investment into these schemes, the industry needs to commoditise and standardise its legal and contractual structures to the extent possible. The documentation on various transactions has so far tended to be bespoke due to the fact that no two DIBs are identical, with differing impact measurements and target populations.
A clearly identified impact evaluation metrics, efficient implementation of the project on the ground and a clearly constructed documentation structure have all contributed towards the success of the Educate Girls Project. While the model can most definitely be adopted for other social interventions, what will be different in every deal is the underlying data that will need to be produced for evaluation of the relevant impact bond. There is still a lack of consistency of impact evaluation data between projects and even more so between different jurisdictions. Consistency in data standards, along with standardisation of documentation (at least the financing structure) will greatly contribute towards investor confidence, which consequently will help the social impact finance sector scale up.
Ultimately, the DIB model challenges the traditional thinking that financial returns and social impact are mutually exclusive. As the Educate Girls bond is showing, this is not true. It seems likely that the Educate Girls DIB is just the start of development finance. It will be interesting to watch the sector grow and scale up. The next challenge will be to prove that pay for performance mechanisms can help finance a broad range of social interventions and that, with greater involvement of the private sector, implementation will become more efficient and impactful over time.
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