Waiting on the world to change: can impact investing in international development help solve the world’s aid problems?

In a climate of diminishing government aid and limited resources of non government organisations, there are significant challenges and opportunities for Australians interested in innovative international investment. Impact investing could be a way for Australian philanthropists seeking international development opportunities to create impact while achieving substantial returns.

Substantial cuts to the Australian aid budget

Australia is the second largest aid donor to East Asia/Pacific region and the largest donor in the Pacific Islands region.[1] The latest data from the OECD Development Assistance Committee demonstrates that Australia provides 60% of total aid from OECD countries to the Pacific Islands region.[2]

In December 2014 the Abbott Government announced cuts to Australia’s $5 billion foreign aid program as part of the general budget savings initiative in support of its Mid-Year Economic and Fiscal Outlook.[3]

The Government’s budget cuts mark both the largest ever multi-year aid cuts (33%), and largest ever single year cuts (20% and $1 billion in 2015-16), and will see Australian aid fall to 0.22% of Gross National Income in 2016-17.[4]  Further, the Government has integrated AusAID, Australia’s stand-alone aid agency, with the Department of Foreign Affairs and Trade with a view to enable the closer alignment of the aid and diplomatic arms of Australia’s international policy agenda.[5]

Impact investing: doing more with less?

The significant reduction to the foreign aid budget begs the question, how can we do more with less? Impact investment enables investors to intentionally create positive social or environmental impact as well as a financial return, and measures both.[6] This presents an exciting and innovative opportunity to utlise market forces to meet challenges in foreign aid. In the UK, the Centre for Global Development (‘CGD’) has piloted investment mechanisms called Development Impact Bonds (‘DIBs’) to address this issue.[7]

DIBs are an innovative financing mechanism designed to increase the efficiency and effectiveness of development funding.[8] DIBs fund development programs up front with money from private investors who stand to earn a return if the program is successful.[9] Private investors are able to make a return on their investment due to the improved outcomes that create large cost savings that an outcome funder (commonly government) can then redistribute as a return. The outcomes to be measured are agreed upon at the outset and the determination of success must be independently verified.[10]

The first DIB was launched in June 2014 with the aim of improving educational access and quality for girls in Rajasthan, India, where 40% of girls drop out of school before reaching Year 6.[11] As the investor, UBS Optimus Foundation  will fund the local NGO Educate Girls to expand its services, and an outcome funder, the Children’s Investment Fund Foundation, will repay the investors if educational outcomes improve.[12]

In 2014, the UK Department for International Development became the first major bilateral donor to announce its support of DIBs  and is funding work to develop a DIB to tackle sleeping sickness in Uganda.[13]

This sort of financial instrument creates an opportunity for public/private partners to collaborate to address some of the most pressing social issues of our time.

Could the diminishing Australian aid budget be an exciting opportunity?

In 2013 the New South Wales Government begun piloting two Social Impact Bonds (‘SIBs’) – a variation of DIBs.[14]

The $7m Newpin SIB funds UnitingCare Burnside’s New Parent and Infant Network (Newpin) program, working intensively with struggling families to keep them safely together. In August 2014, the NSW Government announced that the Newpin SBB had delivered a 7.5% return to investors in its first year, while improving support for parents of children in, or at risk of entering, out-of-home care.[15]

The second $10m bond funds the Resilient Families Service (RFS) provided by The Benevolent Society, aimed at strengthening family functioning, and ensuring children’s safety in order to prevent children entering out-of-home-care.[16]

These initiatives demonstrate the NSW Government’s willingness to engage with alternative financing solutions, and could represent a partial solution to the aid cuts and a future for foreign and development investment. It also provides a broader opportunity to attract new capital and previously overlooked investors. This is especially exciting for active philanthropists or trust and foundations with an interest in global development.

All is not lost: budget cuts and cutting edge investment models…

This focus on outcomes instead of inputs creates an opportunity for more innovation, local problem solving, and adaptation, which is especially relevant given AusAID’s integration into the Department of Foreign Affairs and Trade. These financing mechanisms have the potential to be extended into the Australian foreign aid sphere and, if promoted by the Federal Government, would allow private investors and philanthropists the opportunity to partner with the Government to create a tangible impact on development on a global scale.

Written by Anna Harley and Antonia Shuttleworth

 


[1] The Lowy Institute for International Policy, Australian Foreign Aid (December, 2014) < http://www.lowyinstitute.org/issues/australian-foreign-aid>

[2] The Lowy Institute for International Policy, Australian Foreign Aid (December, 2014) < http://www.lowyinstitute.org/issues/australian-foreign-aid>

[3] The Lowy Institute for International Policy, Australian Foreign Aid (December, 2014) < http://www.lowyinstitute.org/issues/australian-foreign-aid>

[4] Development Policy Centre, Biggest aid cuts ever produce our least generous aid budget ever (December 15 2014)  <http://devpolicy.org/biggest-aid-cuts-ever-produce-our-least-generous-aid-budget-ever-20141215-2/>

[5] Development Policy Centre, Biggest aid cuts ever produce our least generous aid budget ever (December 15 2014)  <http://devpolicy.org/biggest-aid-cuts-ever-produce-our-least-generous-aid-budget-ever-20141215-2/>

[6] Impact Investing Australia, Home (January, 2015) <http://impactinvestingaustralia.com/>

[7] Centre for Global Development, Impacts and Influence, (January, 2015), http://www.cgdev.org/page/impacts-and-influence>

[8] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[9] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[10] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[11] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[12] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[13] Centre for Global Development, Impacts and Influence, (January, 2015) , http://www.cgdev.org/page/impacts-and-influence>

[14] The Treasury, New South Wales, Social Benefit Bonds Trial in NSW, (January, 2015) <http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds/social_benefit_bonds_trial_in_nsw_FAQs#faq10>.

[15] The Treasury, New South Wales, Social Benefit Bonds Trial in NSW, (January, 2015) <http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds/social_benefit_bonds_trial_in_nsw_FAQs#faq10>.

[16] The Treasury, New South Wales, Social Benefit Bonds Trial in NSW, (January, 2015) <http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds/social_benefit_bonds_trial_in_nsw_FAQs#faq10>.

Jessica RothWaiting on the world to change: can impact investing in international development help solve the world’s aid problems?