Thursday 28 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017

The social impact bond (SIB) mechanism is becoming an important tool for tackling social and environmental problems. While this form of investment is not usually the most obvious source of yield for bond investors, it has become more popular in recent years as a means for private investors to give back to the community and reduce the impact of tackling social problems on the public coffers.

The International Committee of the Red Cross (ICRC) recently set up a humanitarian impact bond (HIB), which is based on the SIB structure, to further expand its physical rehabilitation programme and transform the way vital services for people with disabilities are financed in conflict-ridden countries.

Tobias Epprecht, head of the HIB initiative, says that while philanthropic capital is growing, it is not an unlimited source of funding. “As problems get bigger and needs constantly increase,we need to see how we can diversify our sources of funding,” he tells Personal Wealth.

However, he stresses that this does not negate the need for philanthropic funds, which are still the main source of the ICRC’s annual budget of US$1.7 billion. “Philanthropic funds are the only way to finance certain needs. For example, in acute emergencies or natural disasters, you won’t have time to set up impact bonds and structure them because you need the money now.”

The ICRC has raised CHF26 million (RM110.9 million) via the HIB. The funds will used to build and run three physical rehabilitation centres in sub-Saharan Africa. The scheme, which will be running in Nigeria, Mali and the Democratic Republic of Congo over five years, is expected to help rehabilitate thousands of people.

The HIB, like the SIB, is technically not a bond but a private placement where repayment and return on investment are dependent upon the achievement of desired outcomes. “A large portion of ICRC’s investments come from government funding. We constantly have to see how we can diversify our funding beyond government donations,” says Epprecht.

“So, several years ago, we started looking at ways to leverage this new innovative financial environment. We decided to give it a shot because we needed to find out if it would work better than our traditional way of financing.

“We looked at various options and clearly impact investment was one we could strongly relate to. So, we decided to adapt the SIB to how a large organisation such as the ICRC operates in a conflict environment. We launched the HIB in July and announced it to the public in September after we had secured social investors and outcome funders.”

How is the HIB structured? The initial fund is supported by private investors, referred to as “social investors” by the ICRC. They are Swiss reinsurer NewRe (which is a part of Munich Re) and the Lombard Odier Philanthropic Foundation.

“At the end of the fifth year, the results will be reported and verified and trigger the payment-by-results agreement between the ICRC and outcome funders who signed the contract. Payment will be made to the ICRC,” says Epprecht.

If the ICRC achieves its objectives and targets, the social investors will be repaid — either make a profit or only a part of their investment — by the outcome funders, which are the governments of Belgium, Italy, Switzerland and the UK as well as Spanish charity La Caixa Foundation.

Epprecht says independent auditors will verify the ICRC’s reported efficiency in the three new centres. “The efficiency, which is the ratio of how many people receive mobility devices per physical rehabilitation professional, is compared with that of existing centres. If it is above the benchmark or historical average, the social investor will receive his initial investment plus an annual return. However, if the performance of the new centres is below the benchmark, it will lose a certain amount of the initial investment.”

He adds that there has been “high interest” from investors in Asia, but many have decided to take the wait-and-see approach to gauge the effectiveness of the novel initiative. “I do believe the interest is there, but no one is quite sure how this will play out. As usual, in the first round, a lot of people will just stand by and watch things develop so that they are in a position to jump on board the next time around. That is how I would characterise the interest we have seen from non-traditional supporters of the ICRC.”

Now that the HIB has been launched, the disaster recovery agency is looking to expand into other areas such as modern sanitation, healthcare and environment. “Apart from the impact bond structure, there are other instruments such as contention financing, where we get money only when we need it. There are similar products out there for pandemics. These are the ongoing discussions we are having,” says Epprecht.

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