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Social impact bonds– an option to address Africa’s most pressing challenges

6 December 2016
– 5 Minute Read


The number of foreign direct investments (FDI) projects into Africa increased by 6% in 2015, according to the FDI report 2016Africa 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.

In the alternative energy market, measuring the return on investment is becoming relatively straightforward. However, it is less easy to put a price on investing in human dignity or cognitive development in children, for example. One of the sticking points in the impact investing movement has been how to gauge if funds invested in social good are having any measurable impact.

Earlier this year the Western Cape Departments of Health and Social Development in South Africa allocated up to R 24 million to trial three Social Impact Bonds (SIBs) aimed at improving the health, nutrition and developmental status of pregnant women and children, up to five years who live in low income communities. Two corporate donors have committed another R 24 million rand to bring the total amount of the bonds to R48 million.  The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s (UCT) Graduate School of Business, facilitated their development and Bowmans advised on the legal and tax structuring of these SIBSs.

These SIBs are the first to be initiated in an emerging market, and they will provide useful guidance and lessons on how these bonds can be implemented in other countries in Africa going forward. This innovative financing mechanism could be a powerful tool providing a practical and workable solution for Africa’s most pressing challenges, while at the same time offering worthwhile returns for socially motivated investors.

* David Geral and Kim Goss, of Bowmans South Africa, and Aunnie Patton Power, the innovative finance lead at Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s Graduate School of Business.