Thursday 28 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 16 - 22, 2016.

Datuk Dr Kim Tan, pioneer of impact investing, realised that charity rarely helps the causes it champions and came up with a more intelligent solution. 

He places great importance on the ownership of assets, because it helps migrate people from the informal to the formal economy. “It’s very expensive living in the informal economy … the poor get charged a lot more for everything. If they want to borrow money, for instance, they have to go to a loan shark. The products they buy are all in small packages that cost a lot more per unit than what you or I would buy in a supermarket.

“Once they have an asset, they are part of the formal economy. They have a credit number, they can go to the bank and negotiate a loan — an education loan, for example.

“The bank manager would ask them whether they have a job and a credit history and if they have collateral. And they can say, ‘yeah, I’ve got a vehicle or I’ve got a house’. They don’t need any more help. They are part of the formal economy,” he says.

Tan says these are some of the lessons he learned through the kind of investing he had been doing. “If we’re serious about helping the poor, these are all the issues that we have to address. It’s not just about giving them money.”

Another factor in effecting successful transformation is the presence of role models. “One of the things we find working among the poor who have been unemployed for several generations is a sense of hopelessness.”

So the first chairman Tan brought in was Professor Jakes Gerwel. “Jakes rose to become Nelson Mandela’s chief of staff. He looked after Mandela’s affairs when Mandela was in prison, headed up The Nelson Mandela Children’s Trust Foundation, headed up the Mandela Rhodes Foundation, was chairman of South African Airways and vice-chancellor of the Western Cape University.

“He was born on a farm next door to us, so he’s our kampung boy whose parents are buried here. When Jakes retired and bought a house back in the district, I went to him and told him that he’s got to come help me inspire our young people and show them that someone born here under these conditions can rise to high office,” Tan says.

All of his investments are in response to questions he asks about how to transform a particular community or sector. For instance, the safari park was built in answer to the question: “What can you do to transform a region of mass unemployment?”

This was not the only major question he asked. The other was: “What can you do about education among the poor in the slums?”

This question came about because the state schools and state education were really bad. The answer was the Bridge International Academies, an enterprise-based model where parents are charged US$5 to US$6 per child per month. Springhill Equities Partners was one of the earliest investors in the “Bridge schools” along with the Pearson Group (that used to own the Financial Times Group) and Pierre Omidyar of eBay. Today, it has attracted investment from Bill Gates and Mark Zuckerberg.

“State schools charge about US$2 per child per month, so we are triple that, and this is a significant investment for parents. We started with one school in 2008 and today we have 450 schools in Kenya and Uganda. We have 125,000 children in our schools and we build two schools every week. We employ 5,000 people,” Tan says.

“We have an educational group in Boston doing the curriculum. We test our children once in two weeks so we know exactly how each child is performing. And if you have gone to the website, you’ll see the latest results — we outscored the state schools by 30% to 40%.”

The children who have sat for these examinations will graduate and go on to secondary school. “We don’t run secondary schools. We are just preparing them at the primary school level. The key question we have is how do we keep improving, and because we have such a big cohort, we can run experiments. So we can have one-third learning algebra with a particular syllabus and another group using a different syllabus.

“So, we’re trying to improve all the time. What is the best way to teach algebra, the best way to teach geography, English. Because our pupils are all Swahili-speaking, our intention is that by the end of their seventh year they should be fluent enough in English to be able to get a better job.

“Bridge is expanding into Uganda, Nigeria, Liberia and India this year,” he says.

Tan attributes the success of the Bridge schools to something quite simple. In state schools, teacher absenteeism runs at between 30% and 40% because they don’t get paid on time by the government.

“They are demotivated and have other jobs outside. They don’t come to class. It is not that difficult to do better. Without having to claim anything about the superiority of the curriculum, just the fact that our students are actually being taught at all allows them to perform better than the students of state schools.

“At any one time, we are training 1,000 teachers, so we always have teachers on standby. If a teacher is sick, there is notice and there will be a replacement. We have the supply, we can meet the needs.”

The next question was: “What do you do about sanitation in slums?”

“We have huge problems about sanitation in slums. I come from the drugs industry and our usual approach to improving sanitation is selling drugs and diagnostics. But if sanitation is poor in these places, it doesn’t matter how much medical intervention we put in. Nothing is going to change.”

They had to apply a different sort of thinking to address this problem. “The NGOs and our good-hearted philanthropists tried to help by building toilets. But because these toilets are free, nobody looks after them and everything gets stripped — the roof, the walls, you name it.”

The impact investment solution was to come up with franchise model called Sanergy where the owners of these toilets pay a certain amount on a monthly basis to the franchise owners and, in turn, charge people for use of the toilets.

“On average, about 50 people per day use these toilets. So the owner gets an income and can look after the toilets.”

But as a business, this is small potatoes. The only way to make the business commercially sustainable, and ensure that the waste is collected regularly and moved out of the slum, is to convert it into organic fertiliser.

“We have to take the waste away manually. It is shipped to a plant where we then convert it into organic fertiliser, and it is selling the organic fertiliser that makes the whole thing sustainable.

“We now have franchised about 850 toilets and we take more than 10 metric tonnes a day from the slums. The machine we have can take about 15 tonnes a day and we turn that into organic fertiliser within weeks. We sell it to the people who need the fertiliser, particularly in Kenya where they grow roses on a large scale,” Tan says. 

The other product from this waste is protein from harvesting the larvae of black soldier fliers for the animal feed industry.

This, he says, is a creative way of looking at a basic problem and finding a sustainable enterprise solution rather than just doing charity. “The owner of the toilet gets to make a living, the investors make a small return and yet, there’s social impact.”'

 

A new asset class

Social impact investment has become a new asset class which Tan actively promotes throughout the world. He runs a number of funds and there are plenty of opportunities to invest.

The key is patience. “You put in US$500,000 for 10 to 12 years. And yes, there are returns. All our investments have to make money, even if it’s just 5% per annum, or else it’s just charity. And mind you, a 5% return is still better than bond rates, which have gone into negative territory.”

Today, Inqo, the oldest company set up under this framework, is listed on the ISDX Growth Markets in London. “And the reason for that is that we wanted to promote social impact investment, to say that there is a way in which you can do good and do well. You don’t have to choose one over the other.”

Today, many businesses claim to be impact investments because they create some sort of impact, but this is a misunderstanding or deliberate misreading of what impact investments were originally meant to do.

“I have just written a paper for Stanford University to challenge the term because it’s become very loose. Because if you create jobs, you have an impact; if you are in renewable energy, you create an impact.

“So Tesla is calling itself an impact investment opportunity, Goldman Sachs is calling itself an impact investment because it finances big power plants that impact the poor. Therefore, it’s too broad and maybe we need to redefine what it means. So, we call it social impact rather than just impact,” Tan says.

What is social impact? “First, there is an intentionality about it. We’re building businesses among the poor. So, to qualify, your products and services need to be primarily for the poor. Tesla’s products are primarily for the rich, so it should be classified under renewable energy and clean energy,” he says, pointing out that this is a very good classification already, in itself.

Likewise, a diagnostics company making products primarily for the rich can claim to be impact but not social impact. “But if you have a diagnostics company that is in the slums, creating jobs in poor communities and providing products and services that benefit the poor, then yes, we’re more than happy for those to be classified as impact investments.”

So, social impact is about serving the poor in a meaningful way that prospers rather than beggars them further. And as its increasing popularity attests, it is where the intelligent money is heading.

 

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