Boosting private finance for international development

Kirsten Armstrong

11 Oct, 2016 | Development Financing

This post forms part of ACFID’s blog series on Australia Ahead of the Curve: An agenda for international development to 2025. Views contained in this series are those of the authors and do not necessarily reflect the views of ACFID or its members.

To learn more about this series, read the introductory blog post. To view other submissions and find out how you can contribute your ideas on the future of development, visit our page on the ACFID website.

 

We stand at a crucial stage of global development with world leaders last year agreeing on 17 Sustainable Development Goals (SDGs) targeted at ending poverty, fighting inequality and tackling climate change. These goals aim to remove the key systemic barriers to global development over the next 15 years.

Aid alone will not be enough; financing these ambitious goals will require private international capital flows, foreign direct investment and strong international financial systems. However, with foreign direct investment in developing countries currently concentrated in just a few sectors and often bypassing the countries most in need [pdf, pg 17], there are significant investment gaps social impact investors could bridge.

As a leader in financial market innovation and regulation, and one of the few markets to emerge unscathed from the global financial crisis, Australia can, and should, lead on creating the environment needed to boost private finance in international development.

The Fred Hollows Foundation’s work in the eye health sector provides a clear example of how this can be achieved. PwC research commissioned by The Fred Hollows Foundation [pdf] to estimate the costs of ending avoidable blindness found an additional US$3.8b (in 2009 dollars) was needed to eliminate cataract blindness in developing countries, and a further US$11.8b annually was needed to sustain the healthcare systems to treat the ongoing incidence of blindness. That equals almost 40 per cent of all Official Development Assistance (ODA) for health. Clearly, we can’t rely on ODA alone.

Private investment is critical and we need to ensure investors can confidently and easily provide the capital for effectively growing and delivering healthcare systems.

Eye health strongly lends itself to social enterprise. The Aravind Eye Care System in India is one example – an eye hospital where wealthier patients’ fees cross-subsidise inexpensive treatments for patients with limited funds.

However, for social enterprise to grow to scale, it needs investment. This is the essence of social impact investment; by bringing together public, private and not-for-profit expertise with private capital, social impact investment can deliver a social objective alongside a financial return.

Since 2007, social impact investment has grown to around US$77b – or 0.3% of global managed assets – with suggestions it could reach between US$400b and US$1t globally by 2020.

Accessing this market could potentially unlock billions of dollars in capital and expertise to drive better development outcomes through innovation. By accepting lower financial returns for riskier yet ‘innovative’ projects with the potential to catalyse major change, social impact investors can make a real difference.

The Addis Ababa Action Agenda recognised this potential and encouraged philanthropic donors to manage their endowments through impact investment.

However, impact investment only works if investors can be matched with social problems which can be addressed through social impact investment. This may explain why only a handful of sectors have benefitted so far, with housing, finance and energy accounting for over half of investments in 2015. Conversely, health (6%), education (4%) and WASH (1%) received a very small proportion. And most social impact investment originating in Australia stays in Australia.

The Fred Hollows Foundation’s experience in Development Impact Bonds (DIBs) shows how difficult translating social impact investment into a development environment can be. DIBs are an adapted form of Social Impact Bonds (SIBs) used by governments predominantly in the UK, the US and now in Australia. While SIBs have successfully channelled private investment to social organisations [pdf], with at least 60 separate projects in 15 high-income countries including Australia underway, DIBs have remained largely theoretical, generating a lot of attention but little action.

While governments alone cannot create a social investment market, they can be an important catalyst to help investors enter and adapt to a new market.

Following recommendations from the UK Social Impact Investment Taskforce report, the UK Government has made great strides by building a market that supports social impact investment; creating the space for innovation, prevention and improved outcomes for the most vulnerable; and stewarding the removal of barriers to social impact investing.

The Australian Government could, and should, take similar steps to coordinate and grow local impact investment, and make it easier to channel into international development. Whilst DFAT should be applauded for launching the Innovation Xchange and Seed Pacific, which leverage private sector investment to tackle development challenges in the Pacific, more groundwork is needed.

The Australian Government should lead social investment in development, by driving four areas of focus:  

  • Boosting investment. Governments should expand their own social impact investment to provide the much-needed certainty to catalyse the market. This has been achieved at a local level, for example, in New South Wales a commitment to deliver two new transactions annually will provide the certainty to grow specialist investment funds, intermediaries and advisory firms essential for a functioning social investment market.

    Similarly, DFID has taken a clear lead by committing to fund a DIB to prevent sleeping sickness in Uganda; while the US Government’s Overseas Private Investment Corporation and Groupe Agence Française de Dévelopment have channelled their investments to draw in other investors, by taking on the higher risk ‘subordinated’ tranches in Eye Fund I, a global fund established by Deutsche Bank to support social enterprise eye hospitals.

    Tax relief, like the UK’s Social Investment Tax Relief, might also help boost impact investment and regulatory review could help release investments from Australia’s $2t superannuation sector.
     
  • Educating investors. Some governments are educating investors and providing the blueprint for action. For example, DFID provides online ‘open source’ knowledge platforms and a Development Cooperation Hub; the NSW Government has established an Office of Social Impact Investment and an expert advice exchange to connect NGOs with pro-bono legal, financial and professional services. Similar advice for investors interested in development would be invaluable.
     
  • Building common standards. NGOs like The Fred Hollows Foundation are guiding the market in constructive ways, but efforts tend to be piecemeal because of their relatively small size and the high cost of engagement. A recent survey of Australian investors [pdf] identified that a well-recognised investment framework coupled with more reliable research, information and benchmarks, would encourage new investors to enter the market. Common standards would also allow diversification of risk across multiple impact investments. The NSW Government’s Principles for Social Impact Investment and their database of benchmarking cost and outcomes are good examples.

    DFAT could, however, go further by using the DFID example of directly cultivating a pay-for-performance market in its own development portfolio and creating common expectations of good social outcomes.
     
  • Identifying good opportunities. Australian impact investors indicated [pdf] they would ideally triple the size of their impact portfolios over the next five years, if they could find more investable deals with evidence of social impact. Support is needed to help connect investors to opportunities in international development and to help organisations build investable business cases. Creative solutions - such as the ‘midway’ corporate structure created in the UK in 2005 - could identify organisations which are ‘doing good’ and have strong potential for investment. ‘Midway’ companies have proved popular in the UK, with some 10,000 ‘Community Interest Companies’ registered in the first 10 years.

Social impact investing is unlikely to satisfy all of the unmet resource needs in international development. However, with combined expertise from the private sector and NGOs, and leadership from the Australian Government, new and innovative solutions that foster growth and improve development outcomes can be achieved. For The Fred Hollows Foundation, this means more people will be able to receive the gift of sight, and eliminating avoidable blindness becomes a real possibility.

  • Kirsten Armstrong
    Kirsten Armstrong

    Kirsten Armstrong is the Director of Knowledge & Innovation at the Fred Hollows Foundation


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