SIBs – an in­no­va­tive fi­nanc­ing mech­a­nism

Pretoria News - - OPINION & ANALYSIS - David Geral, Kim Goss and Aun­nie Pat­ton David Geral and Kim Goss are of Bow­mans South Africa, and Aun­nie Pat­ton Power is the in­no­va­tive fi­nance lead at Bertha Cen­tre for So­cial In­no­va­tion and En­trepreneur­ship at the Univer­sity of Cape Town’s Grad­u­ate Scho

THE NUM­BER of for­eign di­rect in­vest­ments (FDI) projects into Africa in­creased by 6 per­cent in 2015, ac­cord­ing to the FDI re­port 2016. Africa also recorded 156 more FDI projects than the Mid­dle East in 2015, a fig­ure that has widened by 98 per­cent com­pared with 2014.

These for­eign in­vestors, foun­da­tions and trust man­agers are through their in­vest­ment ad­dress­ing sig­nif­i­cant chal­lenges that Africa faces in re­spect of poverty, in­fra­struc­ture de­vel­op­ment, health­care, ed­u­ca­tion and trans­port by sup­port­ing com­pa­nies deal­ing with these is­sues on the con­ti­nent. Ini­tia­tives in these sec­tors are con­sid­ered to be vi­able im­pact in­vest­ment op­por­tu­ni­ties, and in­vestors are seek­ing them out. Im­pact in­vest­ments are those in­vest­ments that pro­vide a mea­sur­able so­cial or en­vi­ron­men­tal im­pact, as well as a fi­nan­cial re­turn.

Much of the work in im­pact in­vest­ing mar­kets is start­ing to look at how money in­vested in so­cial and en­vi­ron­men­tal good could be al­lo­cated in a way that uses data to de­ter­mine the ef­fec­tive­ness of pro­grammes and in­sti­tu­tions. One of the in­no­va­tive fi­nanc­ing mech­a­nisms to emerge from this process is the So­cial Im­pact Bond (SIB).

A SIB is a fi­nanc­ing con­tract de­signed to drive com­mer­cially sus­tain­able so­cial out­comes. The bonds work by at­tract­ing so­cially motivated in­vestors to fund so­cial ser­vices up front. Re­pay­ments to in­vestors are then made by the govern­ment and/ or pri­vate fun­ders if pre-agreed out­come tar­gets are achieved. SIBs en­able gov­ern­ments and donors to al­lo­cate re­sources more ef­fec­tively to ad­dress so­ci­etal chal­lenges, par­tic­u­larly in the face of fis­cal aus­ter­ity, by way of public-pri­vate col­lab­o­ra­tion.

The use of SIBs stands poised for con­sid­er­able growth in Africa. The mag­ni­tude and speed of this growth de­pends on the ex­tent to which African gov­ern­ments create an en­abling en­vi­ron­ment through pol­icy. In this re­gard, South Africa has a rel­a­tively es­tab­lished so­cial in­vest­ment mar­ket, al­beit small by in­ter­na­tional stan­dards, fa­cil­i­tated to some ex­tent by Reg­u­la­tion 28 of the Pen­sion Funds Act, an ex­am­ple of how pol­icy can be used to lever­age in­sti­tu­tional in­vest­ment to­wards so­cial out­comes.

Reg­u­la­tion 28 is the pru­den­tial in­vest­ment reg­u­la­tion that gov­erns how and where South African pen­sion funds can in­vest, and it obliges pen­sion fund trustees to con­sider en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) fac­tors in pur­suit of a sus­tain­able re­turns pol­icy. It ex­pressly in­cen­tivises in­sti­tu­tional in­vest­ment into the rest of Africa. Sim­i­larly, there are reg­u­la­tions in sev­eral African ju­ris­dic­tions that al­low, even com­pel, do­mes­tic pen­sion funds to in­vest in other African coun­tries.

Larger African in­sti­tu­tional in­vestors are quite fa­mil­iar with other ini­tia­tives to strengthen aware­ness and im­ple­men­ta­tion around ESG and re­spon­si­ble in­vest­ing, for ex­am­ple, the UN Prin­ci­ples for Re­spon­si­ble In­vest­ment, the closely aligned Code for Re­spon­si­ble In­vest­ment in South Africa (Crisa), the Re­spon­si­ble In­vest­ment Own­er­ship Guide for Pen­sion Funds in South­ern Africa pub­lished by the Sus­tain­able Re­turns for Pen­sions and So­ci­ety ini­tia­tive in 2013. Zim­babwe also in­tro­duced re­spon­si­ble in­vest­ment codes re­cently and Kenya im­ple­mented its stew­ard­ship codes last year. The King Code IV has also placed em­pha­sis on cor­po­rate so­cial re­spon­si­bil­ity and has re­ferred to Crisa.

The reg­u­la­tory en­vi­ron­ment in South Africa has ar­guably led to the in­creased in­ter­est from for­eign foun­da­tions, look­ing to in­vest or create in­vest­ment op­por­tu­ni­ties in projects in South Africa and to ex­pand them into Africa.

These projects in­volve many in­dus­tries, (al­though we have seen par­tic­u­lar en­thu­si­asm in the health­care and agri­cul­ture sec­tors), with the need for le­gal ad­vice on all lev­els. Ex­change con­trol rules of­ten have to be ad­hered to, when the fund­ing ini­tially en­ters South Africa, and for any sub­se­quent in­vest­ment abroad. These con­straints dic­tate the struc­ture of the deal and the flow of funds and make leg­isla­tive ad­vice a pre-req­ui­site.

For­eign in­vestors also fre­quently look for part­ner­ships with lo­cal com­pa­nies that have the ex­per­tise, the lo­ca­tion and the know-how to ad­dress so­cio eco­nomic is­sues. In South Africa, the ob­sta­cles faced by load shed­ding as a re­sult of en­ergy ca­pac­ity is­sues, for ex­am­ple, have given rise to many busi­nesses of­fer­ing re­new­able en­ergy and so­lar en­ergy so­lu­tions – which in turn of­fers more ESG friendly in­vest­ment op­por­tu­ni­ties for lo­cal in­sti­tu­tional in­vestors.

In the al­ter­na­tive en­ergy mar­ket, mea­sur­ing the re­turn on in­vest­ment is be­com­ing rel­a­tively straight­for­ward. How­ever, it is less easy to put a price on in­vest­ing in hu­man dig­nity or cog­ni­tive de­vel­op­ment in chil­dren, for ex­am­ple. One of the stick­ing points in the im­pact in­vest­ing move­ment has been how to gauge if funds in­vested in so­cial good are hav­ing any mea­sur­able im­pact.

Ear­lier this year the West­ern Cape De­part­ments of Health and So­cial De­vel­op­ment in South Africa al­lo­cated up to R24 mil­lion to trial three SIBs aimed at im­prov­ing the health, nu­tri­tion and de­vel­op­men­tal sta­tus of preg­nant women and chil­dren, up to five years who live in low in­come com­mu­ni­ties. Two cor­po­rate donors have com­mit­ted an­other R24m to bring the to­tal amount of the bonds to R48m. The Bertha Cen­tre for So­cial In­no­va­tion and En­trepreneur­ship at the Univer­sity of Cape Town’s Grad­u­ate School of Busi­ness, fa­cil­i­tated their de­vel­op­ment and Bow­mans ad­vised on the le­gal and tax struc­tur­ing of these SIBs.

These SIBs are the first to be ini­ti­ated in an emerg­ing mar­ket, and they will pro­vide use­ful guid­ance and lessons on how these bonds can be im­ple­mented in other coun­tries in Africa. This in­no­va­tive fi­nanc­ing mech­a­nism could be a pow­er­ful tool pro­vid­ing a prac­ti­cal and work­able so­lu­tion for Africa’s most press­ing chal­lenges, while of­fer­ing worth­while re­turns for so­cially motivated in­vestors.

This in­no­va­tive fi­nanc­ing mech­a­nism could be a pow­er­ful tool pro­vid­ing a prac­ti­cal and work­able so­lu­tion for Africa’s most press­ing chal­lenges.

A flock of birds is fly­ing over a power sta­tion at sun­set in Cape Town. In South Africa, the ob­sta­cles the coun­try has faced in the past year by load shed­ding as a re­sult of en­ergy ca­pac­ity is­sues have given rise to many busi­nesses of­fer­ing re­new­able...

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