Social Finance Roadmap recommends innovative financial solutions to develop sector

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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 6 - June 12, 2016.

 

Bonds that focus on preventive healthcare, green bonds, impact enterprise-dedicated crowdfunding platforms and a buffer fund for accidents are among the innovative financial solutions recommended by the Social Finance Roadmap for Malaysia (2016 to 2020). 

The strategic framework, developed by Impact Investment Exchange Asia (IIX) and Agensi Inovasi Malaysia (AIM), maps out short, medium and long-term strategies and initiatives that can be taken to mobilise new sources of capital to accelerate sustainable growth. The road map is also the cornerstone of the 11th Malaysia Plan.

These recommendations are part of the road map which details the use of these solutions to mobilise mission-oriented capital from multiple stakeholders. According to the report, the government can take the lead in the short term by introducing innovative financial mechanisms designed to achieve two main objectives: “to unlock upfront capital to fund high-impact initiatives today that will save larger outlays of government expenditure in the long term; and to make the social finance space more attractive to other stakeholders by enhancing liquidity and aligning with existing investor values”. 

The report suggests replicating the Humanity Bond, which was introduced by IIX. The bond should focus on healthcare and is best suited for preventive programmes where there is an advantage in unlocking capital today to save more lives and thereby avert larger expenditure in the future, such as immunisation programmes.

“For the Humanity Bond, the government would need to fund the cost of structuring the instrument and pay back the private sector investors over time (principal plus a reasonable coupon). However, funding preventive healthcare initiatives will enable the government to save millions in future capital outlay that would otherwise be required to fund hospitals and medication as well as immeasurable social costs to the rakyat who suffer from preventable diseases,” says the report. 

As Malaysia is the epicentre of the Islamic finance space, it shares many thematic overlaps with the goals of social finance. Thus, the report recommends structuring an Islamic bond for the short term (2016), one that focuses on financial inclusion and is targeted primarily at empowering the Bottom 40 (B40) households with access to credit and finance. The government should cover the upfront cost of structuring the instrument and the bond should be sold to private sector investors. 

In the medium term (2017/18), the objectives of the framework are to tap new sources of capital and bring new stakeholders into the social finance space that have traditionally not participated in the development agenda, such as private sector players. 

One recommendation is the structuring of a financial instrument modelled after the IIX Sustainability Bond (ISB) — the US$20 million Women’s Livelihood Bond. This bond is expected to be launched next month. Information on its structuring process will be made public (see Cover Story).

“The recommended focus areas for the ISB are addressing gender equality issues when it comes to women and sustainable livelihoods that can cope with and recover from shocks and stresses, providing income-generating opportunities for the next generation and contributing to the wider development goals,” says the report. 

Another suggestion for the medium term is to have an impact enterprise-dedicated crowdfunding platform, which can combine the elements of both equity crowdfunding platforms and impact enterprise (IE) private placement platforms from across the region. The report expects key sectors to include healthcare, education, clean energy and water. 

There is also a proposal to introduce green bonds, which will directly address climate change issues, to the market. The bond would typically offer acceptable returns while contributing towards a low-carbon and climate-resilient future. A precedent would be the Green Bond issued in 2014 by India’s Renewable Energy Development Authority to finance project development loans for renewable energy. According to a Bloomberg report, the bonds raised US$117.8 million.

For the long term (2019/20), the objective of the road map is to make Malaysia a more attractive “impact investing destination”. The proposals for this period include having a social stock exchange, a buffer fund for accidents and a Resilience Bond.

The social stock exchange will only be established when the local social finance space has matured. The IEs that are most likely to list on this exchange would be focused on high-impact sectors such as healthcare, education, agriculture, energy and water. 

The buffer fund for accidents, meanwhile, is aimed at anticipating the escalating risk of road accidents and the corresponding rise in healthcare costs. “The Buffer Fund for Accidents (BFA) is a revolving facility designed to support victims of accidents and ensure that their families are effectively insulated from the economic shock of high hospitalisation costs. The BFA will primarily focus on the healthcare sector,” says the report.

“The government should fund the cost to structure and manage the BFA. Private-sector players (such as large private hospitals and insurance companies) can contribute the initial pool capital that can be lent out — potentially tapping into their CSR budgets. The mechanism is designed such that the initial pool of capital is only required for the first five years, after which the BFA is designed to be self-sustaining based on interest repayments of the loans.”

The Resilience Bond will be designed to mobilise upfront capital to fund programmes that improve the nation’s ability in dealing with social, environmental and economic shocks and stresses. The bonds is modelled similar to the Humanity Bond. “Using a bond structure, low-coupon debt securities will be sold to foundations or international non-governmental organisations with an agenda to invest in urban resilience, and the proceeds will be used to fund the immediate cost of high-impact programmes that invest in preventive measures and build systemic resilience to social and environmental issues. The bondholders will be repaid over time by the bond issuer through pledged/committed public sector funds. The recommended focus area is flooding, which remains a persistent issue locally.

 

The short-term and long-term phases

The road map is aimed at achieving three outcomes — to reduce dependency on public sector funding for development and creating cost savings for the government; develop a mature social finance space; and accelerate sustainable development in accordance with the Six Strategic Thrusts outlined in the 11th Malaysia Plan.

To achieve these goals, the framework lays out short-, medium- and long-term objectives in three phases, which are developing demand to create a demonstrable impact, mobilising the supply of mission-oriented capital and bridging the gap between supply and demand.

To develop demand that creates a demonstrable impact, the report recommends the following: laying the foundation to build a pipeline of high-impact service providers, including introducing more incubators focused on IEs to help them move from innovative ideas into investment-ready enterprises; initiating a financial sustainability programme that enables existing non-governmental organisations in the country to shift to an IE structure (retaining their non-profit status but generating revenue streams through their own operations); and holding competitions similar to the 2014 AIM Berbudi Berganda Social Innovation Challenge. 

These competitions can act as a litmus test to understand the current state of the IE pipeline, use grant capital that would be awarded to the winners and act as a platform that would show public sector support for the social finance space. They can be held on an annual basis, but with different parameters and criteria for winners each time as the space matures.

The report identifies IEs as those that are either mission-driven for-profit organisations or revenue-generating for-profit organisations — unlike traditional non-governmental organisations, which are dependent on grants or donations.

For 2017/18, the objective of the road map is to help get ready the pipeline of early-stage IEs in Malaysia transition to growth stage, with reduced dependence on government support. To enable this, there should be an increase accelerator programmes, where they are directed at early-stage companies that have already established proof of concept, but still need mentorship and tools to reach the next stage of growth. The second intervention would be to introduce a revolving credit facility to finance the upfront costs of technical assistance for IEs. The programme can be modelled after the Shujog Assistance for Capacity Building and Technical Services (ACTS) — a programme that expedites specialised technical assistance to prepare social enterprises to raise capital.

To bridge the gap between supply and demand, the report suggests short-term strategies such as introducing a legal definition for IEs. This will enable them to be formally recognised as legal entities, which will ease the implementation process proposed for the medium and long term, such as corporate social responsibility (CSR) mandates, ethical procurement, eligibility for equity crowdfunding platforms and applicants for competitions. 

A Social Finance Commission should also be set up in the short term to help institutionalise the social finance space and guide the execution of the road map, either in tandem with or as a sub-initiative of AIM. 

For the medium term, the report suggests the introduction of various policies, such as the implementation of a Social Investment Tax Rebate and introducing a CSR law around disclosure, which could be a useful method to have corporations participate in the space in a more structured manner. 

To close the data gap arising from a lack of impact-related data that is comparable and standardised with the rigor of financial market information, the report says it will be critical to create a Data Bank — a platform that can aggregate impact metrics across sectors and help benchmark performance. 

“The Data Bank will achieve three overarching objectives: (i) bring added transparency to the social finance space: This will attract more mission-oriented investment capital to high-impact organisations; (ii) provide capital/asset allocation: This will allow investors to compare impact performance across sectors and suggested models to guide decision-making; and (iii) support investment product development: This will accelerate the development of new investment products and help open up social investments to mainstream capital markets,” says the report.