Kiran Mathur Mohammed
Just a few weeks ago, I spoke with a patient in the 1970s tower block that is the Port of Spain General Hospital. She related how she gripped her bed rails as plaster rained down on her during the earthquake. In biblical style she overcame her terror, raised her hands up and made her peace with God. Only later did she find out how close to collapse the building had been, even before the earthquake.
Our infrastructure is crumbling and is expensive to prop up. Well-meaning public servants have nothing to spend. Many hundreds of people are being sent home and must go unpaid. Tax revenues from oil and gas have fallen below regular government spending (think subsidies and benefits, schools, hospitals, the police and army and the like). And most new and good policies require money.
So the government must borrow more. But it is in a bind: borrow too much over the self-imposed limit of 65 per cent of GDP (we are at 61 per cent now), and rating agencies and lenders will downgrade its credit ratings due to ‘fiscal irresponsibility’. A lower rated sovereign would have to pay more interest and have even less to spend on people. And if the government is considered riskier, so is everyone else. Everyone pays more interest. This becomes a downward spiral. To manage, the government is slashing spending, selling off assets, and delaying payments to suppliers.
As a way out, the government has also rightly promoted public-private partnerships. This is good, but investors are wary. How can they be confident that they will be repaid?
Then what other innovative forms of financing can help the government raise cash? Social impact bonds for one. How do they work? First, a government agency or a non-profit identifies a project that costs money upfront but will save more over a subsequent period. An investor then fronts the money and is repaid over a specific schedule. In addition to their principal, the investor is paid an interest amount that reflects the risk of the project going belly up.
The world’s first such programme, One Service, worked with prisoners in the UK’s Peterborough prison. One Service hired and trained credible case workers (ex-convicts themselves) to work with prisoners to re-integrate them into society. It earned a respectable three per cent return for investors, having reduced re-offending by 9.74 per cent.
In 2015, Bridges Ventures and Big Society Capital funded Step Down Fostering in the UK. Each foster child costs the British state up to 750,000 pounds over the period of their care. Six combined charities are aggressively placing up to 2,000 children with foster parents over ten years. At 54,000 pounds per child, this is pennies in comparison with state foster care. The British government will save a packet, and investors will earn a tidy profit.
Outside investors want their money. They will therefore pressure project managers and government agencies to actually get projects done. They will also want projects completed as cheaply and efficiently as possible, to maximise their returns.
It is not a miraculous formula. Social impact bonds only work if certain things are in place, as Dan Gregory at Common Capital has pointed out. Issuers and investors must have objective mechanisms to assess and agree on outcomes. Target groups (like prisoners) must be identifiable and large enough. Benefits must accrue in cash and in a reasonable time frame to one or a few budget-holders. Finally, it requires a proven intervention model that costs less than the expected savings. There are lots of good projects. Local non-profits could propose even more.
Critics have noted that for governments, traditional financing is almost always cheaper than social impact bonds. So they only make sense when models are unproven…or if a government cannot borrow more using traditional means. That is the position we are in.
Stanford’s Social Innovation Review notes that there are at least 29 social impact bonds operating across 15 countries. Last year, Citi Mexico priced a US$500 million social impact bond for the Mexican government to finance projects including energy efficiency and small business development. Goldman Sachs announced a US$250 million fund in 2013. Morgan Stanley set an even more ambitious goal of US$10 billion.
The Inter-American Development Bank has dived in and the World Bank’s for-profit arm (the International Finance Corporation) has facilitated impact investing in Peru and Colombia. At home, Independent Senator Jennifer Raffoul is championing them to help the most vulnerable. Impact investing deserves serious attention.
Our crisis is forcing tough decisions. Maybe we can make some easier ones.
Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh.