Sirohi district in Rajasthan is unkind to girls. Going up the school ranks, the proportion of girls to boys keeps dropping, placing Sirohi among the bottom of the heap in gender-gap districts in India for girls' education.
Safeena Husain of the NGO Educate Girls is looking to change that. She has had an envious track record in neighbouring Pali and Jalore districts, where 48,000 girls have been bought back to school since 2010. Sirohi will be different at least in one way. Here, Educate Girls has embarked on a novel payment-by-results initiative across 200 government schools, which has the potential to overturn the manner in which social programmes are designed, financed and delivered. "The Sirohi pilot has the potential to change service delivery and implementation standards across the social sector in India," says Husain, executive director of Educate Girls.
India Inc — which, starting this year, will have to mandatorily direct at least 2 per cent of its net profit to corporate social responsibility (CSR) activities — would do well to watch this pilot. It's not just about just bringing back girls to school, enrolment or retention, or how many individuals have gone through a programme; it's not about inputs or mere activities, as is the existing norm in the social sector. In the new scheme of things, the government or donor pays up only on the improvement in learning the programme achieves; for instance, in terms of reading and math skills among girls.
"The model ties funding to social outcomes as closely as one can ever imagine," saysMichael Belinsky, founding partner, Instiglio, a Harvard-incubated financial consultancy that is designing the Sirohi framework. The rigour on outcomes, not outputs, makes the model stand out.
At its heart lies a concept called 'social impact bonds'. This complex and innovative financial instrument comes to India without much of a time lag as it's still in the pilot stage even in the US, where it is being championed by investment bank Goldman Sachs, the UK and elsewhere.
Emphasis On Performance
SIBs are actually a misnomer. They are not bonds or debt instruments in the true sense of the term, but an alluring appellation for multi-stakeholder partnerships in which philanthropic funders or commercial investors — not governments — take on the financial risk of expanding social programmes. The model has three principal actors: the government, donors or investors, and service providers (NGOs or social enterprises). A fourth player, a financial intermediary or consultancy, designs the framework, identifies and brings all the parties together, and oversees the project through its lifetime.
Take the first SIB, launched in 2010 and being implemented in UK's Peterborough prison, with the objective of reducing short-term prisoners from committing a crime again. Social Finance UK, the intermediary, raised £5 million from philanthropic sources to help rehabilitate 3,000 short-term prisoners to be released over a period of six years. Under the contract, four NGOs are working with the prisoners on skills, education and confidence building, during and after confinement.
At the end of six years, the re-offending rates of Peterborough prisoners will be measured against a control group of prisoners from other jails not receiving these services. If the re-offending rates among Peterborough prisoners is 7.5 per cent lower than that for a comparison group, the UK government pays the investors (the philanthropists) 7.5 per cent on their investment; this can go up to 13.5 per cent depending on better results. However, if the outcome, of 7.5 per cent reduction is not met, investors lose all their money (See graphic).
The key here is: taxpayer money is not wasted on failed programmes; the risk is transferred to investors in the private sector. Commercial investors in SIBs do expect financial returns. "The expectation of returns band from 7-13 per cent," says Belinsky.
Fit For India Inc
Theoretically, the outcome payer can be anyone: corporations, multilateral organisations, or large philanthropic foundations. "The World Bank, keen on cobbling partnerships with private sector involvement, can possibly be an outcome payer too," says Husain. Philanthropies or individual donors who invest, may not want financial returns, and may be happy with the social returns; but would like to get their money back for ploughing back into other projects.
In the pilots being put together globally, a host of philanthropic foundations are being involved in the process to seed and promote the concept, even in the US. In India, the timing seems right. The new Companies Bill, passed by Parliament last week, mandates companies spend at least 2 per cent of their average net profit in the last three years on nine broad CSR areas.
This applies to all companies with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more during any financial year. It is estimated that this could result in about $2 billion (Rs 12,000 crore) of corporate money flowing into the social sector.
A lot of stakeholders, under the circumstances, would want to know what is the impact happening with all the money spent. SIBs seem apt under the circumstances.
Potential For Scale
In terms of programme evaluation too, the Sirohi pilot breaks new grounds. Schools will be divided into three groups: the schools under payment-by-results funding piloted by Educate Girls; schools that receive Educate Girls programme in the traditional upfront financing (mostly grants); and schools that receive no service from Educate Girls. An independent third-party agency will conduct impact assessment across-the-board when the programme ends in 2015.
Rajasthan is ideal grounds as nine of the 26 gender-gaps districts are in this state, where only one of two women can read or write, and for every 100 girls, only one reaches class 12. Husain of Educate Girls already has a set of investors in place, mostly of the philanthropic variety, but the SIB is still a work-in-progress as negotiations are still on to identify and finalise the outcome payer.
Impact investors with expectations of financial returns have yet to warm up to SIBs in India. "This is an ideal model for an organisation going to scale; ones that are tackling large societal issues," says Belinsky. Educate Girls is confident the initiative has the potential to reach out to over 30,000 schools and 3 million children within five years in Rajasthan alone.
Maya Vengurlekar, senior director, marketing and investor outreach at Crisil, a leading credit ratings and analytical agency, is also enthused about the scalability inherent in SIBs. But, she concedes, cobbling together many stakeholders, aligning their interests, and putting together a SIB ecosystem, makes the whole endeavour expensive. "It will therefore need projects done on a particular scale," she explains. "The model allows for multiple investors to come together, pool resources, and achieve scale that may not be possible singly."
Crisil, along with Instiglio and others, is beginning to promote SIBs in India. "It aligns with our goal of making markets function better," says Raman Uberoi, COO of Crisil. "It also fits in with our desire to introduce new financial instruments and enhance transparency."
New Capital, New Rules
The question, however, being asked is: will SIBs work in India? "When you implement a new idea, there is no guarantee that it will work," concedes Belinsky, "The SIBs pilots in the UK and the US are progressing well and our attempts to adapt the model here should succeed."
The global SIBs pilot began in the UK in September 2010 and the one in New York City was launched in August 2012. While the model lacks a substantial track record to go by, it is seen as welcoming in a situation where too much money is chasing too few opportunities, even in the social sector. SIBs create new investable opportunities that never existed.
"We are getting a new set of people to start investing in the sector who are not there," explains Uberoi. "It improves the flow of money into the system." Lloyd Blankfein, chairman and CEO of Goldman Sachs, had echoed similar views in a statement issued by New York City's mayor on the launch of SIBs in the Big Apple. Goldman Sachs has invested $9.6 million in the pilot project at Rikers Island Prison to reduce the likelihood of repeat offenders among adolescents. "This investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Blankfein had said then. It has been apparently received with much enthusiasm in financial circles. "If Goldman Sachs can understand SIBs, it opens up avenues for other large banks to step in and take this from an esoteric novel idea to something that can become a new asset class," says Belinsky.
The excitement around the new instrument is quite palpable, but it is also being recognised that not all societal challenges can be addressed by market mechanisms. Only where results are clear, measurable and tangible can SIBs be meaningful. This also brings to the fore the critical nature of impact measurements and possibilities of things going wrong. Since payments are tied to outcomes, if disputes on performance audits happen, it can jeopardise faith in the new model itself.
"Ability to identify what will be achieved, and the right metrics, is going to be very critical," warns Uberoi. "If there is fuzziness here, then you will lose the plot." The other challenge is the quality and capacity of the NGOs or social enterprises implementing projects. "There are over 3 million NGOs in India and where is the impact?" asks Husain. "Nonperformers should be out of business."