Social Impact Bonds– an option to address Africa’s most pressing challenges

The number of foreign direct investments (FDI) projects into Africa increased by 6% in 2015, according to the FDI report 2016. Africa also recorded 156 more FDI projects than the Middle East in 2015, a figure that has widened by 98% compared with 2014.

These foreign investors, foundations and trust managers are through their investment addressing significant challenges that Africa faces in respect of poverty, infrastructure development, healthcare, education and transport by supporting companies dealing with these issues on the continent. Initiatives in these sectors are considered to be viable impact investment opportunities, and investors are seeking them out. Impact investments are those investments that provide a measurable social or environmental impact, as well as a financial return.

Much of the work in impact investing markets is starting to look at how money invested in social and environmental good could be allocated in a way that uses data to determine the effectiveness of programmes and institutions. One of the innovative financing mechanisms to emerge from this process is the Social Impact Bond.

A Social Impact Bond (SIB) is a financing contract designed to drive commercially sustainable social outcomes. The bonds work by attracting socially motivated investors to fund social services up front. Repayments to investors are then made by government and/or private funders if pre-agreed outcome targets are achieved. SIBs enable governments and donors to allocate resources more effectively to address societal challenges particularly in the face of fiscal austerity, by way of public-private collaboration.

The use of SIBs stands poised for considerable growth in Africa. The magnitude and speed of this growth depends on the extent to which African governments create an enabling environment through policy. In this regard, South Africa has a relatively established social investment market, albeit small by international standards, facilitated to some extent by Regulation 28 of the Pension Funds Act, an example of how policy can be used to leverage institutional investment towards social outcomes.

Regulation 28 is the prudential investment regulation that governs how and where South African pension funds can invest, and it obliges pension fund trustees to consider environmental, social and governance factors in pursuit of a sustainable returns policy. It expressly incentivises institutional investment into the rest of Africa. Similarly, there are regulations in several African jurisdictions that allow, even compel, domestic pension funds to invest in other African countries.

Larger African institutional investors are quite familiar with other initiatives to strengthen awareness and implementation around ESG and responsible investing, for example, the UN Principles for Responsible Investment (UNPRI), the closely aligned Code for Responsible Investment in South Africa (CRISA) the Responsible Investment Ownership Guide for Pension Funds in Southern Africa published by the Sustainable Returns for Pensions and Society initiative in 2013. Zimbabwe also introduced responsible investment codes recently and Kenya implemented its stewardship codes last year.  The King Code IV has also placed emphasis on corporate social responsibility and has referred to CRISA.

The regulatory environment in South Africa has arguably led to the increased interest from foreign foundations, looking to invest or create investment opportunities in projects in South Africa and to expand them into Africa. These projects involve many industries, (although we have seen particular enthusiasm in the healthcare and agriculture sectors), with the need for legal advice on all levels.  Exchange control rules often have to be adhered to, when the funding initially enters South Africa, and for any subsequent investment abroad. These constraints dictate the structure of the deal and the flow of funds and make legislative advice a pre-requisite.

Foreign investors also frequently look for partnerships with local companies that have the expertise, the location and the know-how to address socioeconomic issues. In South Africa, the obstacles faced by load shedding as a result of energy capacity issues, for example, have given rise to many businesses offering renewable energy and solar energy solutions – which in turn offers more ESG friendly investment opportunities for local institutional investors.

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African Development Bank accelerates pace with ‘High 5’ priorities

The African Development Bank is stepping up the pace by focusing on five priorities that are crucial for accelerating Africa’s economic transformation. The Bank calls them the “High 5s”: Light up and power Africa, Feed Africa, Industrialise Africa, Integrate Africa, and Improve the quality of life for the people of Africa.

“To prosper, Africa needs a massive, concerted, ambitious effort to transform our economies,” Akinwumi Adesina, President of the African Development Bank Group, said. “We need growth that benefits everyone. The High 5 priorities will get us there more quickly.”

The High 5s and the Bank’s recent progress are highlighted in the Annual Development Effectiveness Review 2016 — the latest edition of the Bank’s key monitoring and tracking tool — which was released Monday, June 27, 2016.

This year, the Bank has revamped the review to give greater attention to Africa’s fundamental challenges and how the Bank is addressing them.

The Bank is also reorganising itself to become more agile and responsive to the continent’s needs. A new business model has been adopted and three new vice presidencies established: on power, energy and green growth; on agriculture, human and social development; and on the private sector, infrastructure and industrialisation.

To increase its efficiency and carry out its work more quickly, the Bank is moving closer to its clients by establishing five regional integration and business delivery offices.

All these changes will help achieve the structural transformation outlined in the Bank’s Ten Year Strategy. The High 5 priorities are an integral part of that effort:

Light up and power Africa — About 635 million Africans still live without electricity and demand for energy is rising rapidly. Through the New Deal on Energy for Africa, the AfDB is working to unify efforts to achieve universal access to energy. Its new Energy Strategy aims to increase energy production and access, and improve affordability, reliability and energy efficiency.

Feed Africa — More than 70% of Africans depend for their livelihoods on agriculture. If its full potential were unlocked, agriculture could vastly improve the lives of millions. The Bank is framing its agricultural operations within a business-oriented approach, based on a deeper understanding of the obstacles, potential and investment opportunities.

Industrialise Africa — A persistent lack of industrialisation is holding back Africa’s economies. Over the next 10 years, the Bank will invest US $3.5 billion per year through direct financing and leveraging to implement six flagship industrialisation programmes in areas where the AfDB can best leverage its experience, capabilities and finances.

Integrate Africa — Through its Regional Integration Policy and Strategy, the Bank is focusing its integration efforts not just on movement of goods and services but also on mobility of people and investment.

Improve the quality of life for the people of Africa — Africa’s economic growth has not been rapid or inclusive enough to create enough jobs and improve quality of life. The Bank is committed to building up the availability of technical skills so that African economies can realise their full potential in high-technology sectors. Acknowledging the urgent need to address climate change, the Bank will nearly triple its annual climate financing to reach $5 billion a year by 2020.

By AfDB

How Impact Investing can solve Africa’s trickle-down woes

With the experience of major African economies showing that the benefits of growth at the top are not trickling down to the poor, it is time for innovative economic alternatives such as impact investing to show the way forward for inclusive growth.

Trickle-down has no effect

There was a time when ‘trickle down’ was the favourite word in the lexicon of economists worldwide. According to this theory, as long as an economy is growing, the benefits will eventually make their way through the system.

For the proponents of trickle-down economics, the belief was that rising incomes at the top end of the spectrum would lead to more jobs, less poverty and higher incomes at the lower end – much like a rising tide lifts all boats. However, over time, it has proven to be a fallacy, just like any other belief in equitable wealth distribution as a natural course of events.

The Global Experience: The Rich get Richer

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Obama’s $1B Impact Investment Program Could Be Here to Stay

Nate Yohannes, his three siblings and their parents were exiled from Eritrea shortly after the country’s war for independence in 1991. They ended up in Rochester, New York. Every winter when he goes home to visit, Yohannes says, he jokingly asks his parents: Why such a seemingly random, bitterly cold city? But he knows the real answer.

“A lawyer sponsored us,” Yohannes says, through a refugee resettlement program of the Third Presbyterian Church in Rochester. Yohannes’ father, whose vision is mostly impaired due to stepping on a land mine in 1978, is now a board member of the church. “Being able to come to America and start over on humble beginnings even after stepping on a land mine is one of the reasons why our founders fought bloody battles,” Johannes adds.

His father now works in a probation office, managing cases involving domestic violence. His mother recently retired from a career in nursing. Yohannes went to law school in Buffalo, and clerked for a judge in Western New York. But thanks to another fortunate connection to a mentor in Washington, D.C., he got into the world of finance. “Finance was never in my language. My DNA is fighting for those who are in need and I got that from my father,” Yohannes says. Now, he can’t imagine himself in another industry.

President Barack Obama announced a new federal $1 billion fund for impact investing in 2011, and he eventually called upon Yohannes to finalize its design and make the program permanent. “This program makes sense to me because it fits my theme in life — make a dollar as well as create positive results for our country,” says Yohannes, whom the president officially appointed to serve as senior adviser to the chief investment and innovation officer at the Small Business Administration (SBA).

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Disruptive innovation: The most viable strategy for economic development in Africa

Without question, Africa is the poorest region in the world. The chart below shows the growth of gross domestic product (GDP) per person – an imperfect but widely used measure – for Africa and the rest of the world. Not only is the rest of the world six times richer than Africa, GDP per person has grown at a faster rate. These numbers are significant because they do not simply represent the macro-economic realities that governments in African countries must manage; they also translate to the circumstances in which millions of people live their lives. The numbers translate to the additional 50 million people in Africa living in extreme poverty today than did in 1990. They translate to the millions of babies, children, and mothers that die annually because they cannot afford life-saving medication. They translate to skyrocketing unemployment which reduces the barriers to youth involvement in terroristic activities. The numbers are very significant.

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