Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
A Social Project Finance Model
by
WILES, Kevin Peter
(South Africa)
ABSTRACT
The essay acknowledges at the outset the challenge of securing development funding solutions for
social projects.
Examples are provided of real projects that highlight funding problems. Using a case study approach,
the ideas and principles are identified on which a new development funding model is proposed. It
has been named “A Social Project Finance Model.” The words in various combinations speaks to its
essence.
Three key principles and a co-ordinated approach to their application form the crux of the proposed
Social Project Finance Model.
First is the identification of those elements of a project that can attract commercial funding.
Second is the re-planning of a project to a sustainable first phase and securing committed funds for
this phase rather than for the whole social project.
Third is the pursuit of “socially-friendly” financial instruments. These comply in form with known
market instruments, but are adapted to replace the stringent commercial terms with returns or
outcomes that are aligned with the social objectives of the projects.
The practicality of implementation is discussed and a recommendation presented to make the Social
Project Finance Model a reality.
A Social Project Finance Model, Kevin Peter WILES
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
A Social Project Finance Model
The Development Funding Challenge
The lack of funding solutions for social projects is probably the biggest single reason they don’t move
from the planning stage to implementation. The proposal set out in this essay suggests a practical
approach that could target turning 25% of these “failed” projects into working ones.
The potential magnitude of the development aid funding target to be met using this approach could
be measured as follows: Total social project value that falls within the target market over the next
ten years – perhaps $1billion. If 25% of these projects meet the criteria for some commercial
funding, it would be realistic to forecast that the grant aid funding element would approximate
$400m and leverage $600m of commercial funding.
I have given a name to the proposed funding solution – A Social Project Finance Model – and set out
below how the ideas were first identified and then crystallised over time.
Ideas learned
Perhaps like many business ideas an exposure to a variety of failures first prompted the quest for a
new approach.
These failures happened in the course of my work as an employee within a regular investment bank.
Note 1
Our division was the first port of call for projects requiring unconventional funding solutions. My
reference projects were principally those in the infrastructure and housing area for low-income
communities.
Most proposals did not make it to the stage of credit committee evaluation and those that did were
all turned down. It struck me that project promoters put the emphasis of their funding requests on
the positive social objectives. Yet, a commercial bank’s credit committee simply does not approve
commercial funding on anything other than its normal commercial criteria. There is no room for
sentiment.
One glimmer of hope emerged for those projects which had more than one funder. Working on
certain projects with development financial institutions such as the IFC and FMO (the Dutch
Development Bank), it was apparent that their appetite for risk was sufficiently different to allow a
co-financing approach between the development and commercial banks. This made it possible to
fund a project that neither institution would have done on their own.
This principle had quite quickly to be expanded into 3 or more funding layers. Certain projects were
eligible for sponsor grants (initial sponsors being Local Authorities and large employers - such as a
mining company for a rural development project). In some cases projects attracted Government
related subsidies. Even where a few projects were able to proceed with a combination of these
features, they turned out to be unique solutions for each project and not replicable.
Note 1- Reference information of my name and the bank not provided in accordance with the essay
requirements
At that point we adopted a principle that future effort needed to be focussed only on those projects
where the solution would be sustainable and could be replicated.
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
For social projects it is therefore important to first establish which elements are bankable or what
portion of an element is bankable. By the word “bankable” I mean here the ability to attract
commercial funding on regular commercial funding terms. This determination of layered funding is
the first key element in the so-called Social Project Finance Model.
The second important planning tool which emerged, largely from a trial-and-error approach, was to
re-plan projects into a sustainable first phase with a roll-out plan for the balance of the project.
Exactly how much to put into a first phase was initially only guess work. After a while certain
principles emerged as follows:
-
-
There had to be sufficient scale to provide a level of sustainability eg a school cannot
operate with 1 classroom; however, a school does not have to house 500 pupils in a first
phase,
There had to be some element of commercial funding available for the elements included in
the first phase – not reliant on grant funding alone,
The first phase had to incorporate solutions for the project upon which the roll-out could
proceed. Such issues typically included:
o regulatory aspects,
o rights to land or other assets,
o an approved institutional framework for the stakeholders,
o incorporation of the operating entities which would conclude legal contracts and
which could be capacitated for the roll-out, and
o finalisation of the key legal contracts spelling out the conditions precedent to be
fulfilled to give effect to them.
It will be clearer to understand these principles – and their development funding impact – using an
actual example of a social project.
The project initially presented was an integrated community development for an African township
on the outskirts of a city.Note 2 Its development components included housing, retail shops, gas
station, bus/taxi rank, sports field, swimming pool and civic services buildings. The funding required
totalled some $100m.
The profile of community beneficiaries were lower-income rather than the very poor. The
beneficiary pool were those with existing employment whose family income levels were around the
$35 per day (approx. $1,000) per month mark. Generally this was reached with at least two income
earners but sometimes a third where a parent with a small pension formed part of a household.
Commercial banks were approached to take up all or part of the $100m. Despite applied effort
during the next nine months no commercial funding was secured – even from a combination of
different development and commercial banks.
A first phase was re-planned with the following components - a retail centre, the gas station, nine
houses (to reflect the variety and quality of the proposed housing to be delivered), the taxi rank and
some of the infrastructure (mostly road access and easy access to the nearby railway station). The
project value of this first phase was reduced to 20% of the total - $20m.
Note 2. Information about the project can be readily provided but has not been described herein as
author references which would be contrary to the essay rules would be evident.
Of this sum commercial funding of $15m was secured (linked largely to the retail shop element). This
reduced the grant funding to $5m.
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
The power of leveraging aid funding through phasing is evident. Only 5% of the original project size
was required in the form of pure grant aid and commercial funding of three times this amount was
secured. Perhaps exceptional for a social project, but even with more modest leveraging factors, the
principle of aid funding being an enabler of additional funding rather than the “total” funding
solution is clear. An additional objective achieved during this first phase was that the entities
required to guide the roll-out of the balance of the project were established; as were the key
contracts securing the assets and management services agreements. In short, the initial capacitation
milestone was reached.
I left the employ of the bank shortly afterwards and became involved in the funding solutions for a
more diverse range of projects within the space of “lower-income” communities. These included by
way of example urban agriculture, solar energy, basic insurance and financial services. The diversity
of sectors for such social projects has made no difference to the development aid funding
challenges.
It was during this phase that I became aware of the wider range of financial instruments used in
development projects. Working outside a commercial bank provides more opportunity to work with
equity funding. Within a bank equity funding invariably refers to the most expensive funding portion
as it is planned to earn the highest rate of return in recognition of the greater risk borne by the
investor. In the social project area equity funding often refers to grant funding – at no cost to the
project. The fact that it is often contributed by way of shareholder equity or shareholder loans
would seem to be behind its reference as equity. This provides the first clue as to how to approach
the funding solution when it comes to the topic of financial instruments – start with maintaining the
form of financial instruments already commonly found in the commercial market.
Two examples will further highlight these principles which are incorporated into the “Social Project
Finance Model”.
The first example relates to a European development financial institution that provided funding for
the re-construction of housing destroyed during the conflict in Kosovo. At the last minute the
funding was changed from a pure grant to a loan instrument – albeit without interest or the usual
demanding terms of a commercial loan. The head of credit of the institution explained how, contrary
to their expectations, 100% of the loan was repaid – and all within 3 years. It would seem that the
home “owners” had been able to access normal mortgage finance once their homes were rebuilt
and the incentive to gain full ownership prompted them to do so and repay the reconstruction loans.
There is an important underlying principle evident in the example. Re-focussing at least part of grant
aid from a “hand-out” to a “hand-up” approach can extend the impact of the development aid
funding significantly. The principle should be that if a project is successfully implemented there can
be further use, at least in part, of the grant capital. These repayments could rather be re-used during
the expansion or roll-out of the balance of the project.
The second example comes from understanding the principles behind financial instruments such as
Development Impact Bonds or Social Impact Bonds. More information on Development Impact
Bonds are available from
http://www.cgdev.org/page/development-impact-bond-working-group
where reading the working group report is most informative.
For Social Impact Bonds I suggest reading more on http://www.socialfinance.org.uk/services/socialimpact-bonds/
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
which provides many reference examples under its “Global Fact Sheet”.
These financial instruments are growing in popularity in the world of development projects. An
explanation of this new form of instrument is needed to properly identify the principle to be
incorporated into the proposed development aid funding solution.
Research would indicate that the first application of a Social Impact Bond was in the United Kingdom
(for the prisons authority) but has spread to North America and Australia. Variations in the naming
of the instruments are to be found. For example, in the USA the initiative is often referred to under
the Pay for Success concept. More information on the scope can be found at
http://payforsuccess.org/ which gives a feel for the scope of interest in this form of financial
instrument. Essentially though these instruments bear the same characteristics as described below.
Non-government investors (including big donors) provide the initial investment capital for a project
on the principle that they will only earn a return and repayment if a particular social objective is
achieved. So, for example, in a youth job creation project, the initial capital to set up operations and
to provide training for the job-seekers will only be rewarded if the programme actually places a
given number of youth in jobs. Failure of the programme would result in a financial loss for the
programme investors – rather than a government body. On the other hand, the success of such a
programme warrants repayment by the State as it may only be a fraction of the cost it would
otherwise bear in relation to unemployment benefit payments.
The important underlying principles can be identified as follows: the form of financial instrument is a
loan instrument. However, the conventional clauses dealing with interest payments are replaced by
different measures of repayments and making them conditional upon the achievement of the
particular social objective. Other conventional clauses in a loan agreement can also be done away
with or simplified. For example, conditions related to the provision of collateral security for the loan
may not be needed at all if repayments are made entirely contingent on future performance.
So the key part of my proposal relating to financial instruments is not to focus on any specific
financial instrument nor to formulate new ones but to choose from the many available existing
financial instruments and put the effort into adapting only those clauses that promote the social
objectives. These financial instruments can include bonds, debenture, equity instruments, loans,
instalment sale and lease agreements - and others.
For example, in a rental contract there is wide latitude to structure the profile of rent payments with
grace periods and stepped payment profiles. Recently I have seen the innovative use of a so-called
“rent-to-buy” contract for social housing. This latter contract is in fact a combination of two separate
legal concepts - an “option-to-purchase” agreement at a pre-determined price housed within a
standard rental contract. The spin-off benefits achieved in the social housing project was a dramatic
reduction in rent defaults while lowering the maintenance spend on the housing units. It would
seem that the incentive to enjoy the benefits of ownership and the value created for the occupant,
influenced the behaviour of the tenants to act as owners from the outset.
More recent success stories in the development project area make extremely good use of existing
business models suitably adapted for the lower-income target market.
For example, the Bridge International Academies’ concept of an Academy-in-a-Box successfully uses
a standard franchise model. (More information at
http://www.bridgeinternationalacademies.com/approach/model/). The curriculum and operational
process, including management system back-up, has been centrally determined so that each
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
separate “school” does not have to re-invent the wheel but simply uses the franchisor material. This
has allowed for school fees to be a fraction of the stand-alone school models otherwise found.
Similarly the Living Goods network marketing approach - which unashamedly acknowledges that it is
based on the Avon sales approach - relies on incentivised “agents” educating and building customers
without the need to employ a costly salesforce nor to fund a large advertising budget. More
information at http://livinggoods.org/what-we-do/mission2/ - in particular the comments on
“Sustainability”.
I have included these examples as evidence of the soundness of building a solution around known
business models but customising them to serve the needs of projects with a social focus.
I would summarise the principle here as pursuing “socially-friendly” financial instruments where the
legal form is retained but the onerous commercial terms are replaced by “socially-friendly” clauses.
It is my proposition that, by incorporating the principles explained above in a co-ordinated way,
there can be a dramatic benefit in the reach of development finance. This will manifest in seeing its
function as an enabler or catalyst for the securing of matching commercial funding. This coordinated approach provides structure to the “Social Project Finance Model”.
Implementing the Social Project Finance Model
To my knowledge the ideas proposed herein are not in widespread use and are not combined or
pursued in a structured way. I strongly believe that it is only through a structured “model” approach
that they will prove to be an effective solution in the world of development aid funding.
It is important to approach the incorporation of the key building blocks in a particular sequence as
follows:
1. Identifying the “bankable elements” of the project.
2. Re-planning the project into a “sustainable first phase”- with a roll-out plan for the balance.
3. Pursuing the incorporation of “socially-friendly” financial instruments through which the aidrelated funding is routed.
Some comments on the need to follow this sequence are appropriate:
1. Identifying the “bankable elements” of the project are a must at the outset. The fact is that a
number of projects in the world of development aid are wholly charitable in nature. There is
no point in pursuing the funding solution proposed herein for such projects. By identifying
more carefully which elements are bankable will permit appropriate approaches to financial
institutions. There are, for example, significant differences between funders of
infrastructure and funders dealing with consumer finance. Any approaches to funders of the
commercial elements need to be appropriately targeted.
2. For those projects that meet the first principle, all effort needs to be directed to shaping the
smallest sustainable first phase. With the incorporation of commercial funding elements
project sponsors need to understand the importance of minimising or mitigating project risk
for the commercial funders. It is much easier to get additional funding from even the same
lender once milestones have been proven to be delivered. It is much more difficult to solve
the whole funding need at the outset as it is generally not possible to overcome the risk
elements of concern to commercial lenders. Of course, the scaling back of the grant aid
element to the first phase often simplifies the access to donor funds or grant aid support.
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
3. Once the first phase has been determined and a level of commercial funding identified,
attention can be given to pursuing the “socially-friendly” financial instruments available to
route the aid funding elements. Examples have been given of such financial instruments
above. Additionally more attention needs to be given to structuring pure grant funding
within the form of commercial funding agreements. This will allow successful projects to
further catalyse an expansion or kick-start other social projects.
The practicality of implementing a Social Project Finance Model
The question could be rightfully asked – Can the proposed Social Project Finance Model work in
practice?
There are undoubted challenges. The first relates to securing the required set of skills. Project
finance skills are abundant – but simply not available to social projects where they remain in the
employ of banks in the financial sector. Bank employees operate within the constraints of the profit
or commercial objectives of their employer organisations. They cannot be expected to work on a
charitable basis.
When it comes to project developers with relevant experience in delivering social projects there are
fortunately many who can be approached. The difficulty that I have encountered with social project
developers is that they lack knowledge of working with commercial funding.
The solution is overcome if a team approach is adopted. What is needed at the outset is a small
team to give effect to the Social Project Finance Model. To do so will require the support of a
sponsor for the incubator team.
There is a possible solution to this dilemma. An organisation like Global Development Network could
incubate the team that kickstarts the implementation of the model. On the face of it the scope of
this exercise falls outside the ambit of the “research” focus which Global Development Network
promotes. Perhaps, for such an exercise, Global Development Network would consider making it an
explicit part of their mandate or refer the project to a similar minded sponsor.
It is expected that the incubator team required would be very limited in number, comprising both
those with social project development experience and project finance experience. Such a team
would need to be paid fair remuneration. A bridge funding facility would need to be established –
but which should be planned to be repaid. What I have in mind is to ensure that the projects the
incubator team selects must be planned to provide a full recovery of the cost of such a team within
the project funding budget. In this way the incubator project itself would become fully funded.
Conclusion
It is important to start by pursuing social projects with bankable components and re-planning
smaller sustainable first phases to launch their implementation. Following up with the identification
of “socially-friendly” financial instruments that are responsive to the social objectives rounds out the
development finance solution, To do so in a structured and co-ordinated way allows a new
development funding model to emerge.
If a suitable incubator sponsor is willing to fund and establish a team to give effect to the Social
Project Finance Model it is practical to assume that the ideas can be implemented – and in a costeffective way.
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Global Development Network – Next Horizons Essay Competition 2014 – Winning Essay
Upon implementation it is expected that measurable targets for implementing the model could be
readily set and that the power of leveraging development aid would become apparent. Through
application of the Social Project Finance Model it is my confident belief that many more social
projects can become a reality.
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