Taxis, churches, renewable energy and low-cost housing – these are the typical developmental investments that aim to provide investors with both commercial returns and tangible social and developmental impact. But what about investments into underprivileged children? While there is no question about the need, how would an investor earn a financial return? It turns out that a group of NGOs, funders, and investors have crafted an innovative financing solution that recognises that children, correctly developed, are future assets in a society.
This particular project aims to improve the cognitive and socio-emotional development outcomes of more than 2 000 children aged between three and five in the low-income communities of Atlantis and Delft in the Western Cape.
The period from conception through the first five to six years of life is critical for the development of a child’s physical, social, emotional, and cognitive wellbeing. However, governments tend to spend significantly less on early childhood development (ECD) than they do on primary and secondary education, where the returns on investment are lower. This is due in part to the fact that benefits are not necessarily immediately apparent, accruing over a lifetime, and most ECD programmes are run by smaller organisations that do not have robust monitoring and evaluation systems.
Enter the plethora of players who came together to change this.
First up is the team that developed the Impact Bond Innovation Fund (IBIF), which is the financing mechanism that enables the programme. The bond was structured (and is managed) in a partnership between mothers2mothers (m2m), an international non-profit organisation headquartered in Cape Town, and Volta Capital, an international impact investment-structuring specialist.
The investors in this bond include The Standard Bank Tutuwa Community Foundation, LGT Venture Philanthropy, and Futuregrowth Asset Management, the only institutional investor involved. Futuregrowth invested the capital through its Infrastructure and Development Bond Fund, a specialist yield enhanced bond portfolio.
Funding for the project comes from the Western Cape Department of Social Development, in a matched funding arrangement with ApexHi Charitable Trust.
A social impact bond (SIB) is a contracting and financing mechanism where socially motivated investors pay for social services upfront and are repaid by outcomes funders, says Michelle Green, an investment analyst at Futuregrowth. “In this case, the SIB is a three-year debt investment whereby investors are repaid, at an interest rate commensurate with the risk, when specified social outcomes are achieved,” she says.
This is in contrast to traditional contracting methods where governments pay upfront for a set of inputs or activities that may or may not lead to intended outcomes. Impact bonds and outcomes-based contracts more broadly provide donors, foundations, financial organisations and governments with a way to introduce competitive efficiencies normally associated with the private sector into the public and non-profit realm, so ensuring that social and environmental programmes deliver maximum impact.
If successful, the model will be replicated across the Western Cape, and then nationally; applied by government to other social interventions, thus creating opportunities for the blending of public capital and private capital, and crowding-in new funding to underfunded programmes.
“We are excited about the potential of the IBIF to create a new source of ECD funding, establish a benchmark for proven ECD programming, and promote the adoption of rigorous performance management systems for the ECD sector,” says David Torres, senior advisor to the CEO at m2m.