Charcha 2020: Fundraising and Philanthropy Track, 14 –16th May 2020
Speakers: Vikram Gandhi, Asha Impact; Shantanu Ghosh, Social Finance India
About the Session: Where are grants most suitable? Where and how can philanthropic capital be leveraged to scale impact? Will we be able to tap into global capital markets/commercial pools of capital to fund development outcomes — will commercial capital bite in a post covid world?
Watch the video recording of the session here
Key takeaways from the session:
- Blended Finance definition: Blended finance can be simply defined as the coming together of philanthropic and commercial capital to achieve development outcomes. The most widely spoken-of example is an Impact Bond, however, blended finance instruments can take the shape of:
- Discounted Cost Instruments: Low-cost debt, equity investments
- Results based financing instruments: Impact Bonds, Pay-For-Success contracts
- Risk Reduction Instruments: Default guarantees, FLDGs, Insurance
- Others: Revenue-based loans, Advanced Market Commitments
- Globally, ~$130bn has been deployed across ~500 blended finance transactions between 2007–2018; $15–18bn is flowing through annually in these transactions. However, this is still a drop in the ocean.
- The bulk of the transactions have been in Africa, followed by India (14–15% of world total), Asia, and Latin America.
Has Blended Finance come of Age? How has Covid catalyzed this space?
- SDGs and Blended Finance: While we have made some progress, there is a shortage of $4 Tn to achieve SDGs which requires blended finance structures to scale.
- The success story of China: China has leveraged Blended Finance — public-private partnerships and government programs — a mass-manufacturing model to achieve its millennium development goals in the shortest span of time, pulling millions out of poverty.
- India faces a shortage on all the17 SDGs and needs to pull its weight for the SDGs to be achieved by 2030. Post-covid, there is a heightened sense of uncertainty and higher risk therefore
- De-risking of transactions will bring in private capital successfully.
- COVID-19 has accelerated the process of bringing different stakeholders — corporates, investors, government, and the non-profit sector — together to consider blended finance structures.
What is the role of government in scaling Blended Finance in India?
- Blended Finance is not a new concept for the Indian Government. DFIs were set up ~70 years ago. For example, Indian Tollways projects are also a form of blending between public and private funding. Another example is that of skilling where NSDC has been funding programs. Similar examples can be seen in education and healthcare where the government has provided infrastructure and access.
- We cannot talk of scale without partnering with the government: The government recognizes the role of working alongside different public and private sector stakeholders including philanthropic foundations and nonprofits. We need to take larger transactions to them rather than bespoke ones.
- The bailout package announced by FM is also geared to keep afloat essential participants such as small and medium enterprises.
- Champions within the Govt need to be identified to advocate to make blended finance more mainstream.
- We need to solve for some of the challenges in these structures — highly complicated, costly— before bringing the government in.
How do you solve for risk-return-impact? Where is blended finance needed?
- This is an evolving topic. There is no standard answer — even if one were to compare companies in the same sector, their assessment of risk would be very different. Therefore adding impact into the mix adds another layer of complexity.
- Investors are realising that ESG isn’t just a fad but impacts long term value creation of a company. The environmental and social impact that a company generates helps it mitigate certain risks that helps it create the desired returns over time. Hence most large investors are paying attention to these factors and this is being reflected in valuation.
- In the initial stages in high impact deals/ interventions, where the risk-adjusted returns are low, you need development/ philanthropic funding to buffer the returns.
For example: There isn’t enough capital supporting climate change initiatives that are impacting innovation needed to mitigate climate change. Gates Foundation is supporting innovation in this area, though the returns on a risk adjusted basis are low, to de-risk these models, and create a market for this.
- Blended Finance can help drive innovation in scaling up and service delivery. Covid is driving innovation on the product front too.
How do we make Blended Finance scalable?
- There hasn’t been enough money behind this because of structural issues — can govt money be used for paying returns, procedural hurdles, cost hurdles, etc.
- We need a few successes at scale to get more money supporting these structures. Pooled funds supporting a specific outcome such as learning outcomes could be one way to catalyze the space.
For example: The Education Outcome Fund in Africa. Similar pooled funds can be explored for skilling.
- Never waste a crisis — Covid can bring together innovation in these areas like never before. There is a need to figure out how to make every philanthropic dollar count for more.
- We need to educate philanthropists, investors, government to help more structures come to the forefront.
How does one catalyze commercial capital?
- Family offices: Global data shows that in the next two decades, ~$40trillion of wealth will shift hands from older to the newer generation who thinks more proactively about these development issues. Family Offices have been at the forefront of being creative in blended finance structures because they express their values through their portfolio. This needs to be a focus area in India too.
- Pension plans and endowments: Fiduciary responsibilities do not allow them to invest in opportunities with sub-par returns. They focus on ESG for risk reduction and for better financial performance. They also need opportunities at scale.
Emerging examples that India can look at
- Career Impact Bonds piloted by Social Finance US, a student-focused income-share agreement (ISA) that expands access to high-quality, industry-recognized career training to people from marginalized communities.