A new bond taps private money for aid projects in war zones
Social investors, aid donors and humanitarian organisations join forces
Sep 7th 2017
INVESTORS might be expected to run a mile from a deal on offer in a conflict-torn part of Africa. At best, it will pay an annual return of 7%; at worst, 40% of the original investment is lost. But a dozen social investors have pooled SFr26m ($27m) to finance the world’s first “humanitarian impact bond”, issued by the International Committee of the Red Cross (ICRC). It will pay for three rehabilitation centres to be built and run in the Democratic Republic of Congo, Mali and Nigeria.
The ICRC’s obligations are backed by “outcome funders”, ie, donors, mostly governments. The bond is an example of “impact investing”, in which private investors seek out social and financial returns, and of “blended finance”, in which public funds help them to do so. Variants have included a bond aimed at educating girls in India and a World Bank-led initiative to raise money to respond to pandemics. The novelty in the ICRC’s bond is that the money raised will be used in conflict zones.
Of the 90m disabled people in the world in need of a mobility aid, the ICRC estimates only 10% have access to adequate rehabilitation. So centres that make wheelchairs, crutches and prostheses, and train people to use them, can have a big impact. The ICRC helps build and run such centres all over the world. But its budgets are set on an annual basis, and it has been hard to plan ahead. Bond markets can help.
The coming three years will be used to build the centres and train staff; by the fourth year they should be operational. In year five comes the reckoning. The efficiency of the new centres will be compared with a benchmark, based on other centres. If the new centres outperform, the social investors will get a return. If the centres do badly, they will lose money (as will the ICRC, which faces a penalty of up to 10% of the bond’s value). The balance will be repaid via the ICRC by the donors (although if the centres do disastrously, they have to pay only 50% of the original amount).
Having its own “skin in the game” is a culture shift for the ICRC, explains the organisation’s Yves Daccord, who thinks it high time it was more innovative in financing projects. The bond also appeals to donors. Alexander De Croo, Belgium’s development minister, likes the focus on results as opposed to the usual stress on inputs. (“You’re a good minister if you spend lots and you’re a bad one if you spend less.”)
This first experiment focuses on rehab centres because results are easy to quantify. Efficiency can be measured by counting devices fitted, adjusting for staff numbers and the different times needed to fit different aids; historical data abound. Independent auditors will check reported efficiency ratios. Mr Daccord dreams of finding ways to channel private capital towards projects that are harder to measure, such as improving water access or hygiene in unstable areas such as Syria and Yemen. He adds that the new instruments should also push the ICRC to collect more data, work more efficiently and apply lessons learnt to its other operations.
The bond’s history, however, shows how hard such innovations are. Its size is minuscule against the ICRC’s annual budget of $1.7bn. Yet it took years to get to this stage. One of the greatest obstacles was to convince the outcome funders; even well-meaning Belgium had to change the law to allow more variable, outcome-dependent spending. And public servants balked at paying private investors to profit from the handicapped. “Why don’t we just borrow cheaply?” officials asked Mr De Croo.
A similar culture clash is likely among investors. There are easier ways to make a return than investing in conflict zones. But Rebecca Cichon, from Munich Re, an investor, says she is comfortable with the risks, given the carefully modelled probable outcomes. And, she adds, “this is not just about risk and return.” But it is too much to hope that many moneymen will change their stripes and forgo the highest returns to bask in a do-gooder’s glow. If such bonds are to become more than tiny niche products, it will require a lot more support from official and private donors. And that means becoming less queasy about putting the words “profit” and “human suffering” in the same sentence.
This article appeared in the Finance and economics section of the print edition under the headline "Of humanitarian bondage"