Expert Speak India Matters
Published on Jul 04, 2020
Blended finance for a Post-COVID19 world

As the country comes out lockdown facing the unprecedented socio-economic implications of Covid-19, we need to dramatically increase, and improve the quality of, spending on healthcare and education in order to maintain our development trajectory and deliver inclusive, poverty-alleviating growth. Blended finance provides a toolkit to help us unlock the additional funding that is needed and also ensure that the money is spent as effectively as possible.

Even before Covid, it was estimated that over $500 billion of private capital has to be mobilised on an annual basis to meet India’s sustainable development goals by 2030. With the recent erosion in both public resources and market-based endowments, government and philanthropic funding will need to be applied even more judiciously. How can this capital be made more outcome focused, i.e. deliver better results, and also unlock new, private funding for development?

Blending philanthropy and commercial investing

A potential answer lies in blended finance, or using a combination of public or philanthropic (grant) and commercial (equity or debt) capital to create new funding structures. Some of these, like social and development impact bonds, are effectively a backstop or guarantee from a government or philanthropist that they will repay for the cost of a particular social intervention with a pre-agreed rate of interest, provided the targeted social outcome is delivered successfully. This assurance allows the service delivery provider, usually an NGO, to raise upfront funds for the operating cost and working capital from risk investors, who earn a return on their investment based on the level of success of programs they underwrite.

Such pay for success models like impact bonds make philanthropy more targeted and crowd in return-seeking capital and due diligence to improve the scale and quality of service. They enable differential risk sharing and pre-negotiated pricing of social impact outcomes in terms of financial return. Blended finance enables more effective and efficient funding for NGO delivery models because:

  1. It unlocks new private funding for social service delivery, as risk capital from venture funds, family offices, HNIs and even retail investors.
  2. It channels the capital to NGOs and service providers that are able to best deliver and measure outcomes, and gives them flexibility in operations.
  3. It allows government and philanthropists to identify evidence for models that work and make their spending more efficient (only pay for success).

Blended finance has mobilised $130 billion globally since 2007,  including allocations from DFIs and banks like guarantee structures for infrastructure and climate projects. But the global market for  Social and Development Impact Bonds is much smaller at ~$420 million. There have been over 190 SIBs/DIBs launched in 33 countries, half of these being in the US and UK which have pioneered the use of these structures. In India, the market is currently at an inflexion point with a dozen or so impact bonds under different stages of development, three DIBs currently operational, and one successfully closed. 

Education and Healthcare for the ‘New Normal’

In the post Covid world, millions have been rendered jobless or lost incomes, and schooling has shifted to the home with unequal digital access, putting further at risk low-income children already behind in learning levels. As cases rise to levels burdening our healthcare systems, there is a need to invest in long-term prevention and mitigation measures, which go beyond the immediate response of building capacity for Covid treatment and our broader healthcare needs.

To meaningfully address the access and quality challenges in education and healthcare delivery, one has to improve the performance of government schools and hospitals, and add additional private capacity focused on the mass market and not just elite segments of society. To enable this, we need to scale the work of successful impact-focused ed-tech and med-tech models that provide community level connectivity and online solutions to the ~150 million children studying in government or affordable private schools and a range of healthcare services – from low cost diagnostic and treatment devices to at-home care and tele-medicine to community health services including quarantine – to the vast majority of Indians who don’t currently have access to reliable medical care.

Blended finance is relevant across major social sectors – from agriculture to skilling and employment. But it’s especially suited for funding the extraodinary efforts needed in education and healthcare because of the following reasons:

  1. Clear outcomes in terms of learning levels (measured on a test versus baseline) or health outcomes (whether the patient is successfully treated)
  2. Strong funding interest from both risk capital providers and outcome funders as well as large and diverse pipeline of service providers.
  3. Existing templates on pricing of outcomes from multi-providers DIBs in the market and robust ecosystem of intermediaries active in this area.

The best example of this in education has been demonstrated by India’s first DIB led by Educate Girls, an NGO working to improve enrollments of girls in public schools in Rajasthan (by engaging with their families) as well their learning outcomes (once they are in school). A DIB structure allowed Educate Girls to adjust its approach on the ground as needed, and improve efficiency with active performance management, to exceed the pre-agreed targets with funders, giving them both a modest financial return and verifiable ground level impact. Based on this success, the NGO was able to substantially scale up its funding and impact.

In healthcare, the Utkrisht DIB (covered by ORF in July 2019) also raised private capital for a multi-year intervention to improve the quality of maternal healthcare facilities annually serving 2-4 lac pregnant women from low-income backgrounds. This is estimated to save over 10,000 lives in the state of Rajasthan, which has a 18% neonatal and maternal mortality rate. Multiple service providers were provided funding to support maternal clinics to meet quality standards and government certification, and their performance measured in how well their facilities subsequently fare in treating patients. A successful performance as per agreed targets, gives investors a modest return and ability to recycle their capital; and outcome funders (foundations and the Rajasthan government) assurance that their valuable healthcare spending is well spent and having verifiable on-ground impact. If a provider does not perform, it is removed and its funding rechanneled to the interventions that are working.

Challenges to unlocking blended capital

The big criticisms against impact bonds, especially in richer countries, have been the high transaction costs and long timelines, and thus their lack of scalability. DIBs in the West have averaged $3 million in size and benefitted 12,000 users on average. Give our demographics, in India the numbers are much larger.

To scale these instruments further, we need to go beyond bespoke structures to larger risk sharing arrangements and syndicate funding to HNIs and family offices. Investors need be educated about this new asset which has a lower risk-adjusted return but some capital loss protection as a sweetener, a philanthropic investment that allows capital recycling while funding measurable impact. If the market grows and sees a good track record for risk investors, in the future impact bonds could even be offered by wealth managers as a retail product.

For this to happen, we need to create bigger pools of multi-provider outcome funding by mobilising major philanthropists and the government to allocate more capital for outcome funding or guarantees that can, leverage 5 to 10 times as much risk capital. Private capital can also be unlocked through enabling regulations like the provision to use CSR for outcome funding or by creating new marketplaces like the proposed Social Stock Exchange, which could potentially list impact bonds and not just equity instruments of social enterprises.

The final challenge is of metrics and data, for you can only fund what you can measure. How do you consistently screen for, evaluate and report social impact at the beneficiary level in terms of quality of life within a sector like education, healthcare or agriculture? At the enterprise level, how can you compare service delivery across not-profit, for-profit, and government providers as well as across diverse user groups and geographies? Building on the work that has happened in creating global consensus on impact measurement principles, what is needed is equal emphasis on practice and a greater push on common industry standards.

Even before Covid hit us, the blended finance market was at an inflexion point, with increasing recognition in the development if not yet the wider business or policy communities that tri-sector collaboration between public, private and philanthropic capital is critical to unlock the development gains neeeded to overcome our biggest challenges. The virus has put this in even sharper relief. Blended finance gives us a new toolkit to collaborate: to raise the new private capital we need for development, and deploy it as productively as possible.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


Pramod Bhasin

Pramod Bhasin

Pramod Bhasin is co-founder of Asha Impact an impact investment and policy advocacy platform for Indian business leaders. Pramod is the Chairman of Clix Capital ...

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Vikram Gandhi

Vikram Gandhi

Vikram Gandhi is co-founder of Asha Impact an impact investment and policy advocacy platform for Indian business leaders. Vikram is faculty member at Harvard Business ...

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