Around the world, sources of public funding are insufficient to provide all people with the essential social services required to live healthy lives. The role of the private capital has become increasingly critical, in order to bridge these social provision gaps. The private sector has grown bolder by adopting innovative financing mechanisms to address root social issues alongside the public sector.

Some of the recent approaches that philanthropists have taken go beyond traditional charitable giving. They are now engaging in new forms of results-based and blended financing models and offering a wide range of bespoke services alongside their investments. These new approaches promote innovation in service delivery, thereby allowing capital to be deployed more efficiently.

Going beyond grantmaking: how family offices can play an active role in their investments

One way that investors are scaling their investments for impact is by offering cross-functional, individualised support. Started by the founders of jewellery company Pandora, the North-East Family Office (NEFO) was created in 2013 to manage the philanthropic engagements of the family. NEFO goes beyond the traditional role of a grant-maker by ensuring that their early-stage investments become successful.

‘We, as private funders representing families, can carry higher risk. We can propel innovation, we can be more agile in our methods, and we can bring highly specialised competences to our partner organizations,’ said Mette Ekeroth, Managing Director and Group Head of Philanthropy of NEFO.

One of NEFO’s early-stage investments, a Dutch NGO called Mentorbarn, developed a highly bespoke method to match at-risk children with families. NEFO believed that the investment could pay back over 100 times the amount in public savings over the lifespan of each child helped. With a two-year grant commitment, NEFO supported Mentorbarn’s growth and development by offering support on organisational strategy, developing a business case, providing accounting and legal support, and launching a social media campaign that prompted over 600 families to volunteer. Since investing, Mentorbarn has been able to achieve its mission of minimising homelelessness, mental illness, and economic marginalisation, and has secured contracts with six municipalities in Denmark.

The role of Development Impact Bonds (DIBs) in closing the vision health gap in Southeast Asia

DIBs are another innovative financing tool that leverages the resources and collaboration of cross-sector stakeholders to achieve long-term outcomes. Public health funding is simply not sufficient to provide the 2.7 billion visually-impaired people access to eye care, especially given that 90% of these people live in developing countries with fewer resources to address vision inequality. Women also represent two-thirds of all blind people and are half as likely to receive eye care, indicating that eye care investment will also yield a positive gendered impact.

According to Jayant Bhuvaraghan, one of the founding trustees of the Vision Catalyst Fund (VCF), investing in eye health is a ‘no brainer,’ as uncorrected refractive errors cost a global productivity loss of USD$272 billion. While it will cost approximately USD$14 billion over 30 years to close the eye health gap, the increased productivity will generate over USD$19 trillion. This makes investment extremely attractive for all stakeholders. The issue is not the availability of eyeglasses, but the lack of awareness and equitable access.

The VCF was set up to deploy catalytic finance into vision care and aims to serve 1 billion people by 2050. Its partners include Essilor International, the UBS Foundation, James Chen (of Clearly), the International Agency for the Prevention of Blindness (IAPB), and Seeing is Believing by Standard Chartered (SiB). The partners will leverage financial tools to deliver proven eye care solutions to Southeast Asian countries. The VCF platform – which launches its first Vision Entrepreneur DIB Programme this year – will educate and empower 3500 ‘vision entrepreneurs’ to deliver vision services to 70 million people across rural parts of India. It is expected that these vision entrepreneurs will see their income increase by an average 64 per cent a year.

A New Tool in the Social Finance Toolkit: Social Impact Guarantees (SIGs)

The newest variant of results-based financing is the SIG, which differs slightly from a Social Impact Bond (SIB) in that it shifts the role of the government from the outcomes payer to the upfront investor. SIGs function by providing a ‘money-back guarantee’ on interventions that have a proven track record of success. The donor (the government) gives money to a service provider, and a third-party guarantor pays the money back only if outcomes are not met. This avoids the issue of ‘double capitalisation’ that is characteristic of SIBs, as the government usually earmarks funds for anticipated outcomes payments in advance, which makes the objective of relieving the spending burden obsolete.

Tri-Sector Associates is partnering with the YMCA to launch the world’s first SIG for an at-risk youth programme, to aid the 40,000 youth that are unemployed and at risk of social exclusion in Singapore. The SIG will empower YMCA to expand their services to reach more beneficiaries and will guarantee donors that their money is being spent effectively, or else it will be returned to them. As explained by Kevin Tan, Founder of Tri-Sector Associates: ‘When you go out to buy something expensive, you might be hesitant that it works. One way people convince you is by assuring that if it doesn’t work, you can give it back. So for SIGs, we can give a money back guarantee on interventions we really believe work.’

Another innovative financing mechanism utilised by Tri-Sector is an interest-free Recyclable Grant, in partnership with Maybank. Through the S$2 million grant fund, Maybank provides 4 months worth of operating expenditure to charities hit by Covid-19 in order to provide them with the cash needed to recover their business. Once they are back on their feet, they replenish the original fund, and the money is ‘recycled’ towards other causes that are in need of capital.

PFS models: an alternative, not an antidote for social problems

Despite the success of many PFS models, they are not a blanket solution for all social problems, and can pose many risks if ill-suited for the context. Tri-Sector’s PFS model to help People with Disabilities (PWDs) worked because it covered a gap that was not being currently met; many PWDs are highly-skilled but do not fit into existing programmes that provide low-quality jobs.

PFS models work best when they have the potential to address complex problems amongst underserved populations, by leveraging cross-sector resources and measuring specific and achievable outcomes. An ideal issue-area for a successful PFS is the VCF’s mission to drive vision health in India, as multiple stakeholders benefit from generating enormous economic returns due to the amount of people underserved.

Hear how leading practitioners are pioneering new tools for innovative finance by watching a recording of AVPN’s convening ‘Understanding the Role of Philanthropy and Social Finance in Innovative Giving Models’.

Danielle Todesco is a senior Master in Public Policy (MPP) student at the National University of Singapore, and is a junior associate with AVPN’s Sustainable Finance team.

This article was first published on the AVPN blog on 26 April 2021. It is being reprinted in Alliance with permission.