Visionary approach through social impact bonds and inclusive financial innovation
Social impact bonds redefine finance for positive social outcomes
Pay for Success: invest in results to transform lives
Pay-for-Success (PFS), also known as Social Impact Bond (SIB) and Social Benefit Bond in other places, is an innovative financing model for social services that has been gaining widespread interest across the globe. Pay for Success is a set of innovative outcomes-based financing and funding tools that directly and measurably improve lives by driving resources toward results.
These tools centre on four core principles:
* Clearly-Defined Outcomes
* Data-Driven Decision Making
* Outcomes-Based Payment
* Strong Governance and Accountability
Pay for Success is applied across the public, private, and nonprofit sectors. From helping governments efficiently allocate taxpayer dollars to programs that better serve constituents to leveraging funds from impact investors to scale effective interventions that build community resilience, Pay for Success encapsulates a range of approaches designed to accelerate social change. Pay for Success can be applied across many different issue areas, including children and families, public safety and reentry, economic mobility, homelessness, and more.
Early intervention
Social Impact Bonds provide a funding stream to support innovative ideas that can help tackle complex social issues through prevention and early intervention.
In times of limited budgets and austerity, governments find it increasingly difficult to spend taxpayer money on prevention and early intervention, even though such programs often cost less than future crisis intervention to social issues. On the one hand, a bond-issuing intermediary promises to deliver improved social outcomes that generate future cost savings for the public sector if a public sector agency agrees to forego a pre-determined price – a proportion of the cost savings resulting from a particular improved social outcome. Notably, the government entity would only be required to make the payment if the agreed-upon performance targets are achieved. In this instance, tax remission through qualifying payments amounting to a maximum of 30% of taxable income of individuals and corporates. If the targets are reached, the government agrees to provide investors with interest on their principal by way of remission on tax.
Justification
The poorest of the poor living below the poverty line and low-income families have problems owning houses, accessing credit from financial institutions to improve their income, and supporting the means for higher education for their children. A related important factor in all is access to low-cost finances.
In order to address these challenges, it is proposed to use Social Impact Bonds as a means to raise funds from citizens nationally and globally to offer the following:
- Credit for low-cost homes;
- Loans at affordable low rates of interest for families for small enterprises for the unbanked poor;
- Health Insurance premiums to meet specialized outpatient healthcare for elders among the poor, children below five years of age, families with more than two children below, for family cover, and disabled poor.
The list of usage options can be changed.
Concept in practice
*The interventions must have sufficiently high net benefits.
*The interventions must have measurable outcomes.
* The target group must be well-defined upfront.
* Impact assessments must be credible.
* Unsuccessful performance must not result in excessive harm.
The initial objective could be to attract contributions of a minimum of Rs.1,000 from 6 million citizens annually. The government could make it voluntary for all taxpayers to contribute 10% of their Assessable Income to the Social Venture Bonds. As an incentive, the government could grant special relief by permitting the investment made in this connection as a deduction from the Assessable Income in arriving at the Taxable Income. This contribution could be for the next five years.
On Rs. 1,000 invested, there would be tax savings of say, 30%, being the maximum rate of Income Tax. The net investment to the Taxpayer would, therefore, be Rs. 700, and at the end of ten years, the Taxpayer would receive Rs. 2,000 with Rs. 1,300 net income free of Income Tax (if given as a tax exemption).
Two to three leading corporates successful in floating IPOs and other Bonds could be invited to promote the issue. Social impact investors from overseas could also invest in this program.
Loan operation
The loans in this connection can be disbursed by selected Aswesuma staff and commercial banks. The Trust entity entrusted with managing would recover the total value of loans granted on a monthly basis at an interest rate of 6% p.a., repayable over a period of approximately eight years from the date of disbursement to borrowers.
One per cent would be costed towards the administration of loans. Beneficiaries can, within the allocations per housing unit, use it towards part payment for construction and purchase of land and for leveraging credit directly with lending institutions. Group borrower proposals could also be encouraged.
Current Aswesuma beneficiaries could be entitled to draw on loans subject to the due diligence of proposals by participating institutions with a license to lend and collect loan funds. Group borrowings could be entertained.
The education grant can be used by post-O/L and A/L students who need startup capital to enter higher education educational skills streams that provide employable skills and knowledge. Identified persons could also be provided with the health insurance premiums described earlier.
An important consideration is that the successful disbursement and accomplishment of objectives are the single criteria for granting tax remission. Thereby creating an incentive for all to succeed. A further incentive may be for the fund to earmark annual interest payments from borrowers to support local group lending by thrift and savings societies set up by borrowers.
A public, nonprofit, profit sector partnership as a Trust. Issues requiring further consideration: Tax benefits or dividends + return of capital to local investors? Is the concept attractive enough? Encourage and compensate international contributors – how? How do we show the win-win? Beyond an exit period, what do we do? Exit paths for each aspect of intervention.
Jeevan Thiagarajah
