Spicing up Philanthropy
By: Rajen Makhijani
Tags: Wealth Management, Impact Investing, Sustainable Finance, Philanthropy, Development Impact Bonds

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].

Pic Courtesy: Colnect

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.

Source: India Development Review

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.

Source: Educate Girls

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.