As we have written, this week, two members of the PCDN team are attending the annual Interaction Conference which is the key meeting of US based humanitarian and development NGOS.
Yesterday I attended a wonderful session on Innovative Finance for INGOS: What, When, Who and How.
The session had four wonderful participants including:
- Joe Dougherty, Partner, Dalberg
- Rachna Saxena, Senikor Project Manager, Dalberg
- Chris Walker, Social Innovations Director, Mercy Corp
- Caitlin MacLean, Director of Innovative Finance, Milken Institute
The session sought to provide an overview of what is innovative finance, what are the pros/cons of using these products, what are some successful case studies and how INGOS can think about both developing these products/partnerships as well as offer them to their own constituencies.
Innovative Finance is an emerging field that is using both new and old forms of financing (such as social impact bonds, loan guarantees and others) to help support development and humanitarian efforts around the world. This is not to say that traditional government, multi-lateral, foundation, corporate philanthropy or individual donors is not important, but there is an increasing push to find innovative ways to support and scale up development work. As Joe Dougherty commented in introducing the panel, over the past fifteen years over $94 billion (USD) have been invested through innovative finance. While it is continuing, at 10%-12% per year, innovative finance still represent less than 10% of total development funding. Mckinsey defines innovative finance as “In this context, “innovative” refers to finance mechanisms that might mobilize, govern, or distribute funds beyond traditional donor-country ODA.” (see http://www.mckinsey.com/insights/social_sector/innovative_development_financing)
The key questions that the panel addressed is innovative finance better funding and is it producing more effective or higher impact programs. Some of the key reasons for this push in innovative finance include seeking alternatives to grow beyond traditional development support, that many companies recognize it is good for business and a push also by investors who are seeking interesting new ways to have a social impact while generating positive financial returns.
Joe Dougherty outlined three types of financing for development.
They include the investor who wants a financial return (the person giving the money is looking for some kind of positive return on their investment). Second, on the non-financial side are grants, contracts, grants (often the return is a service or some impact is being generated). Third is the type of mechanism that doesn’t give money directly, but provides loan guarantees, various insurance products, credit swaps, etc.)
Across all three there is a spectrum degree to which people/institutions are looking for financial vs. social return. NGOs are ideally hopefully recipients of innovative finance. But also NGOs can be providers or innovative finance.
Some of the key questions the panelists addressed include:
- Where do I get this money, who do I talk to
- What do I need to get this money? How do I speak to investors?
- Who is doing it successfully? What are the challenges?
Some key findings/resources below
There is significant promise in innovative finance but caution is also needed. All the panelists talked about the significant potential of innovative finance to help fund, scale and support the most promising trends and projects in development. However, it is also important to be clear that innovative finance isn’t a magic solution and that any institution seeking to engage in this area needs to do due diligence, look at the appropriate match of their work to financial products, to make the case for investors, and also look at pitfalls. Organizations should’t necessarily try to twist their existing products or work to fit the innovative finance field, but there should a thorough assessment of if this is a good approach.
Needing to Speak Appropriate Language – If NGOs want to engage in this area, there is a clear need to also speak the language that appeals to investors. While making a positive social impact is key for many, each investor or financial company, may have varying level of emphasis on having positive financial return.
NGOS Can serve as key Sectoral Experts – For investors seeking positive social impact and returns, they often don’t have expertise in development, agriculture and related issues. NGOs can play a very important role in the innovative finance field, but working in partnership with investors and others.They can help bring together investors, public funding, to convene these type of partnerships.
Innovative Finance can help bridge Funding Gaps – There isn’t an infinite amount of money and one these products can help provide new sources of money trough capital markets that are seeking a positive return and social impact.However this shouldn’t be a catch all or solution for all needs.
There is a cost to innovative finance – A key question is how much are organizations will to pay to get the money? Money isn’t free and there are multiple costs to attract such funds. Investors have their own interest and this can conflict at times with the social impact goals of NGOs. Investors also may want to take equity in particular companies or have debts repaid. If an investor takes equity, this may mean he/she could potentially have conflicting goals with the founders of a social enterprise. The investor may seek maximum return on investment which may not be the goal of a particular effort. Investors often have shorter-term frameworks, while INGOs may think longer term.
Results are key – Private sector and public sector institutions working this area want to see quantifiable results. Thus there is a critical need to have clear and measurable goals of how programs will have an impact. This is particularly true with Pay for Performance or Development Impact Bonds. These financial mechanisms are setup where investors (can be private sector, foundation, etc.) provide money up front for implementers to run a particular social intervention (can be health, education, youth employment). The goal is intervention will achieve measurable goals and that this will be more effective than existing programs and help save costs for governments. If the program meets its goals, than the government will then repay the investors their investment plus a % profit based on the degree to which the goals were achieved. If the goals were not met, the government doesn’t pay anything. This is a way of paying for performance and helping to fund and support innovative results.
We are all learning in the field – Although there are some emerging based practices, we rae all still learning and there is a need for better researching what is working, what isn’t, what are the major failures, etc. based performance. However there are also critiques of such approaches as privatizing public responsibilities.
Challenge on finding investable projects – There is also the challenge that many NGOs have good ideas, but haven’t been thinking about developing true business or enterprise projects. Thus it can be challenging to find the right type of businesses to invest in.
Some Sectors aren’t appropriate – There needs to be much clearer exploration of what sectors might be appropriate for innovative finance and draw some boundaries.
Some particular projects that were discussed
One project being developed by Dalberg is the Global Finance Exchange, to foster collaboration among Public, Private and Philanthropic actors that are interested invest in projects in developing word. The project will be launched in early 2016 and aims bring practitioners together working on common issues with investors to design better innovative for finance product (to address specific development challenges).
Second building the market innovation, make people feel more comfortable for innovative finance. Provide primers on different structures, past cases, and database of deals for more standardized data to create more data on asset class. Also learn when appropriate to use or not
Mercy Corps is doing innovative work to establish a social innovation fund that invest in enterprises working on social impact efforts in the developing world. In return for providing investment, Mercy Corps will get equity in the companies. If and when the companies are profitable and provides the return on the investment, Mercy Corps can then use the funds to invest in other companies. Chris Walker commented how this effort can be much more sustainable than a grant which ends when the funds run out (meaning there is a 100% negative financial return)
Some key resource that were mentioned in the session
- TONIC – The global action community for impact investors (http://www.toniic.com)
- The Global Impact Investing Network – http://www.thegiin.org/cgi-bin/iowa/home/index.html
- Mercy Corps Social Venture Fund – http://www.mercycorps.org/innovations/social-venture-fund
- Dalberg http://www.dalberg.com/topics/innovative-finance/
- Milken Institute, http://www.milkeninstitute.org
What do others think? Have you been involved in innovative finance? What are the opportunities, challenges, recommendations or key resources?