Innovation in Blended Finance to Drive Development
July 31, 2019
The current development financing environment is primed for innovation and alternative investments that more effectively target those in need. Flexibility and creativity are required to leverage a limited amount of capital to create large-scale impact. The Overseas Private Investment Corporation (OPIC) has begun to experiment with a myriad of financing tools - development impact bonds and the Portfolio for Impact, creating a precedent for future investments, and serving as an example for other investors.
Development Impact Bonds
Development Impact Bonds (DIBs) bring together investors, implementing organizations, and outcome funders to increase private sector engagement. Investors provide start-up or growth capital, which implementing organizations use to deliver services. Outcome funders (typically aid organizations or foundations) repay investors their principal plus a return based on realized performance in delivering social outcomes. By placing a greater emphasis on outcomes as opposed to inputs, DIBs foster innovation, local problem solving, and adaptation all while incentivizing deeper engagement from investors as the success of the project influences their payout.
The Cameroon Cataract Bond was launched in 2018 as a new way to fund healthcare, bringing together public and private investors, health donors, and eye care delivery experts. Providing a $2 million loan to the Magrabi ICO Cameroon Eye Institute (MICEI), OPIC became one of the first development finance institutions to commit funding to a project using this kind of innovative financial instrument.
The DIB support MICEI, a for-profit provider delivering low cost, low margin, high volume cataract surgeries to provide as many as 18,000 cataract surgeries in Cameroon over 5 years. The loan enables low-income patients to receive sight-saving surgery for free or at a subsidized cost, while also helping the hospital to become self-sufficient. The financing structure measures and rewards based on the number and outcome of cataract surgeries, and adds a bonus for equity in provision. In the first year alone, 50,000 patients were screened and over 2,300 cataract surgeries were completed.
OPIC’s foray into DIBs signified a pivot towards results-based financing and a push to drive greater private sector engagement in emerging markets. The success of the Cameroon Cataract Bond, as well as other DIBs, must continue to foster greater demand and interest in DIBs. Most recently the creation of a Rhino Impact Bond was announced, the first pay-for-results financing focused on species conservation.
Portfolio for Impact
“The Portfolio for Impact unlocks private capital to unleash human potential and it demonstrates that smaller deals can produce outsized impact.” – David Bohigian, OPIC Acting President and CEO
In 2014, OPIC launched the Portfolio for Impact (PI) to support promising impact-focused investments that–given their small or early stage–might struggle to raise capital. Since its creation, PI has enabled OPIC to commit over $100 million to companies delivering solutions to persistent challenges around the world. Through targeting small, early-stage companies, OPIC is helping to develop innovative products that serve regions and populations that are overlooked.
Through each of its 20+ PI investments, OPIC has spurred innovation and focused capital in places where the private sector is uninterested and unwilling to go on their own. PI recipients address a wide range of need, from economic empowerment to education to financial inclusion; in each sector the impact is resounding.
For example, a $5 million loan in Uganda to Tugende spurs economic empowerment through lease-to-own financing for motorcycle taxi drivers, and provides training to improve driver and passenger safety. While in India, an investment guarantee facilitates on-lending to schools serving low-income populations, which frequently lack access to education. Another PI loan is helping Tiaxa, which provides credits as small as two cents to prepaid mobile users to support seamless bill payment and commerce, to expand from Latin America to sub-Saharan Africa and Southeast Asia.
PI’s innovative financing and smaller ticket price facilitates companies to innovate and grow to the scale where they are attractive to less risk-tolerant private investors. While small in value, the impact has been large, highlighting the power of finance – at whatever the dollar value – to create and drive impact.
The time for innovative finance is now. Only through bringing together partners, being flexible with our financing tools, and investing in innovative companies at earlier stages will we be able to achieve our SDGs. By continuing to iterate and deploy innovative finance mechanisms, we will be able to reach more disenfranchised communities and drive growth.
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