For many Indian businesses whose CSR work has largely included grants-based philanthropy, a new approach using measurable impact is required. The new Companies Bill has ensured that CSR departments now have long term budgeted funds and are mandated to disclose utilization.
Using market mechanisms such as Social Impact Bonds (SIBs) companies can use the available funds and expertise in a new way. In this piece we take a look at implementation structures of SIBs and develop a decision enabling model. This piece builds on our earlier story.
There are three key elements in a SIB:
a. Raising of resources
b. Creating a programme of actions
c. Making a commitment to repay
It must be noted that SIBs are not bonds in the strict financial security terms. Rather, they have flows that are in nature of financial bonds.
Successful implementation of SIB requires:
1. Enthusiasm and commitment of top management
2. Realistic possibility of scaling a successful initiative
3. Strong alignment with performance goals (generic and project specific)
4. Ability to generate interest among investors
It is also important to understand when regular investment (fund on the basis of activity) is better than SIBs (fund on the basis of results). These are:
– Where there may be few opportunities or benefits associated with transferring risk to an independent provider or investors. This typically happens when there is a fixed prescribed way of implementing a project.
– Where performance improvements are sought within an existing approach. Here additional resources are not required and performance improvements can be funded internally.
SIBs originated in the UK and then spread to Australia and US. The initial experiments have been by governments/quasi-government organisations the concept is easily replicable for corporates.
There can be three broad delivery mechanisms
1. Streamlined delivery: An organisation uses its existing resources to fund a package of interventions designed to achieve a social impact. It would have an agreement with the government or a government body to receive a series of payments in future on the achievement of specified milestones. If successful, the amount received from the payer would cover the costs of delivering the interventions plus an additional return.
This is a simple model that is easy to design and implement; has low transaction costs; and suits high performing organisations confident in their ability to deliver. On the flip side the lead delivery agency bears all the risk; may need to bring in funds if required’ and lead delivery agency needs to have strong delivery capability.
Example: The government wants to raise technical skill of a community to increase job opportunities for community members. The initiative reduces welfare costs for the central government (e.g. reduced MNREGA costs) as more people are at work. Companies, as a part of their CSR activities can take this up. The project can easily be undertaken in the streamlined delivery mechanism.
2. Lead delivery agency: Funds are raised from philanthropic and private sources and transferred directly to a Lead Delivery Agency responsible for implementing a package of interventions. Often, the Lead Delivery Agency can also be a part funder of the bond. The Lead Delivery Agency then implements a package of interventions either directly or by sub-contracting to another agency. The payer would make payments directly to funders based on the impact of the interventions.
This approach provides for risk sharing among multiple organisations; potentially unlocks new funding streams for social interventions; and incentives are well aligned- particularly if the lead agency is also a funder. It may, however, lead to conflicts between funders and lead delivery agency.
Example: The government wants to strengthen maternal and child health including Immunization. The benefits include improved health and lower mortality. Companies can fund the lead delivery agency which in turn can match with internal funding. Payments can be linked to lower medical costs. Companies in the manufacturing / FMCG sector can participate in this.
3. Special purpose vehicle: A dedicated vehicle – a Special Purpose Vehicle (SPV) – is a legal entity (usually a limited company) created to fulfil specific objectives, and they are an integral part of public private partnerships common throughout Europe which rely on a project finance type structure. In this case, the SPV would receive incoming investment from funders and act as the lead organisation responsible for ensuring the delivery of the intervention programme. It would pass the funding to contracted delivery agencies and manage the contracts with each agency to monitor their performance. It would also receive payments from the payer, based on the success of the interventions, and pass these back to funders. The SPV would not deliver any services itself.
The SPV mode reduces engagements levels of funders, payers and contractors; sets out clear roles and incentives; and provides an option for many contractors. On the other hand, it raises transaction costs and overheads.
Example: The first SIB to use a SPV model was a pilot by Social Finance in Peterborough aiming to reduce the likelihood of prisoners reoffending. A SPV was established to manage the finances, contracting the St Giles Trust to provide intensive support to 3,000 short-term prisoners over a six year period.
Which model works?
Given the multiplicity of models the natural question that arises is which model works best? Clearly there is no single answer to this question. It depends on the nature of intervention, quantum of funds that are available and duration of the project. Projects that are relatively simple, that requires less funds and are short term are best served by streamlined delivery approach. Projects that require large amount of funds and are long term oriented and spread over long time frame are best served by SPV model. All other projects are best served by the lead agency model.