S3IDF and waste workers at monthly meetings organized by Hasiru Dala

Our first article in this series, Sector Update: The changing landscape of Bengaluru’s waste management systems, highlighted the challenges faced by many waste workers and specifically how S3IDF and our partners have envisioned and enacted changes on individual, community and national levels. This next article builds upon that narrative and provides updates on our most recent successes in our work.

Vijaya Bank and New Financing Opportunities

In the past few months, Hasiru Dala (HD) and S3IDF have begun to take advantage of government schemes, leveraging new opportunities for financing through national banks. One such scheme, the National Safai Karamcharis Finance & Development Corporation (NSKFDC), allows the informal waste workers (who range from the waste pickers who collect on the streets to the traders in specific recyclable commodities) to receive loans at only 6% interest (as opposed to rates from local informal lenders that are often above 25%). HD successfully advocated with NSKFDC to include informal waste pickers as a part of the definition of “Safai Karmacharis” (sanitary workers).  Subsequent to this, the NSKFDC loan scheme could now be applied to the waste pickers.  HD and S3IDF reached out to the banks linked with the scheme, Vijaya Bank and Syndicate Bank, to engage them in conversations about how we could help them identify waste picker entrepreneurs who could take advantage of the funding they were looking to provide.

Since June of 2017 we have enabled a process to bring this scheme to bear for waste picker entrepreneurs running DWCCs so that they may access these very low interest rate loans. And while the process of loan disbursement for waste entrepreneurs under this scheme is underway, S3IDF continues to explore additional financial products that all waste workers could utilize. S3IDF has been engaging with the banks to apply their priority sector lending, small business loans, to all informal sector waste workers, not just the waste pickers.  This process change is expected to begin with loans that will be disbursed to the more broadly categorized waste workers, who operate waste collection centers and engage in other waste management activities.

Our efforts have had two recent breakthroughs on this front, the first is that we’ve enabled waste entrepreneurs’ access to overdraft accounts. In the coming months, over 40 targeted entrepreneurs are expected to have overdraft accounts, which will address their enterprise needs more flexibly, as an overdraft account allows for “rolling credit” rather than a one-time credit.  The second breakthrough is the recognition of segregated waste as viable loan collateral by Vijaya Bank. This recognition is an important hallmark on the path towards broader financial system mindset transformation, because lack of appropriate collateral is regularly cited as a critical barrier inhibiting formal financial access for waste workers, who often do not own property or other recognized assets.

Now, through the efforts of HD and S3IDF, Vijaya Bank recognizes the economic value of ‘trash’, and thus the financial soundness of waste entrepreneurs, facilitating a crucial systems-level change with potential to transform both the financial and waste management sectors.  This recognition of trash as collateral was designed by S3IDF and was enabled by a “comfort letter” provided by Hasiru Dala Innovations (HDI), a social enterprise that manages waste of large waste generators, which emerged out of HD’s work.  In this “comfort letter”, Hasiru Dala Innovations reassures the bank that in case of default, the inventory of segregated waste in the Dry Waste Collection Centres will be bought by HDI at prevailing market rates, thus allowing the bank to monetize the inventory and making it viable collateral.

As S3IDF facilitates the bank’s disbursal of loans to these informal waste workers, the challenges emerging lay in the details of the “know your customer” documentation banks expect.  Given that many of the informal waste workers are migrants from different parts of India, details of identification, residence-proof and other such documentation do not necessarily conform to the bank’s business-as-usual compliance requirements.  Engaging with the bank to help them become more flexible around these issues and to extend other useful financial products with less stringent compliance needs, is a dialogue that S3IDF is in now. Further, these types of dialogues are part of our larger mission of systems-level change, enabling formal financial institutions to have more inclusive lending practices.

S3IDF Project Development Officer, Nitin Gopalakrishnan’s take on these developments is that, “what we see as trash is inventory for the waste workers. The overdraft accounts are a new concept for them. Our partner consortium intervenes to give them necessary financial training so that they can make the best use of financial resources to run their enterprises more efficiently. This provides a financing option for the waste workers other than “loan sharks”. In the coming months, the entrepreneurs will be able to share with us what it really means for them to be bankable.”

Keep visiting this page for more updates and feel free to reach S3IDF for a conversation.

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Studies show that by 2050, India will need New Delhi-sized landfills to “dump” its trash. People produce waste, it’s no secret. Similarly, it’s no secret that the popular practice of using landfills for all waste is unsustainable. Landfills occupy valuable space, catch fire, release methane, carbon dioxide and leachate, and leach these and  other harmful chemicals into our groundwater. The landfills themselves are a reflection of the myriad of systemic challenges facing the municipality, as the process by which waste is collected formally, informally, or perhaps not at all, reinforces a dysfunctional system.

Municipal solid waste in Bengaluru (Bangalore) is broadly categorized into three types wet (eg: compostable kitchen waste & garden leaf litter), dry (eg: paper, plastics etc.) and hazardous (eg: household biomedical wastes such as syringes or tablets) – by law, households are supposed segregate their waste this way before disposal.  All of this is handled through one of two ways: the municipal collection and disposal system (i.e. through the formal system) or by the informal sector for recycling and recovery of materials, particularly for the dry-waste.  The informal system is an entire value-chain of waste worker players beginning with waste pickers who may be picking up waste from as-yet uncollected roadside garbage piles, to traders in specific recyclable commodities.

A more in-depth understanding of Bengaluru’s informal sector is here:

Informal Waste Workers Contribution in Bengaluru: Read Full Report

Of the estimated 3,000-4,000 tonnes of municipal solid-waste generated by Bengaluru, the informal sector workers are estimated to recycle around 1,050 tonnes.  While municipal waste is almost entirely dumped in landfills, the informal waste workers segregate and recycle (as appropriate) the waste they collect. An individual informal waste picker earns her living by trading her recyclables to dealers (more popularly known as “scrap dealers”) for a fee on a daily basis – and up to 50% of the waste-pickers are women!  The waste picker typically earns between 100-200 INR a day.

Waste pickers are unsung heroes who help in keeping the cities clean by subsidising the municipality’s solid waste management infrastructure services, usually without recognition, extremely low pay, working under unhealthy, often treacherous conditions and with very limited access to social and financial services.   

The waste workers are exposed to hazardous conditions when collecting high value trash like plastic, metals, and glass from the unsegregated waste in the city, and they often return home to informal settlements where there is a shortage of basic services like clean water, electricity and sanitation. They may be exploited by waste contractors and intermediaries, and lack the authority and clout to mitigate these challenges and demand fair and transparent business practices.  Many of them are detained or interrogated by the civic authorities, because they don’t have municipal identification, which legitimizes their work within the city waste management system.

Brief History of Civic Activism:

The efforts to address the formalization of informal waste workers to mitigate some of these challenges, hardships and environmental degradation, while simultaneously making the municipal waste system more efficient, started in late 1980s. In 1989 Center for Environment Education (CEE) started the Committee for Clean Bengaluru in partnership with various organizations, to promote segregation at source, which allows for downstream sorting efficiencies. But it was not until 2009 when citizens formed the Solid Waste Management Round Table (SWMRT), a group dedicated to utilizing the court system to enable waste management restructuring. SWMRT engaged with the Lok Adalat (People’s court), a system of alternative dispute resolution (non-adversarial system) starting in 2010, which led to certain significant directives to the BBMP (governing body charged with managing city waste) to implement decentralized waste management across the city. This was a significant step, as the direct involvement of the citizens put pressure on the municipality.

More recently in 2011, Hasiru Dala (also known as  HD – and whose name in Kannada means “Green Force”), began working on behalf of the waste workers, enabling them to receive social and financial benefits such as health insurance, identification cards and government pensions. HD is a member-based organization of waste workers in Bengaluru and they have helped over 7,500 informal waste workers to receive government-issued identification cards. As a result, 7,500 informal workers now have access to better working conditions as they can collect trash in the city with much less harassment by government authorities such as the police, than they had previously faced. Bengaluru has now made policy changes to institutionalise the contributions of the informal waste workers – by issuing operations contracts to the waste workers to operate the city’s Dry Waste Collection Centres (DWCCs-left).  These operations contracts are written as Memorandums of Understanding (MoUs) between the city, the waste worker, and Hasiru Dala as a mentor organisation.

HD began this change by helping the informal waste worker communities to redefine themselves as waste management professionals and training them to be entrepreneurs, creating jobs and providing education loans for their children.

In this journey of reinventing the informal waste workers to identity as waste professionals and entrepreneurs, HD faced many challenges.  One of the critical challenges was access to credit.  The needs that credit could help meet for the informal sector waste workers were many.  Small loans could help in children’s education, tiding over a medical emergency or assisting with a special social occasion such as marriage, but they had limited utility.  Access to credit was also critically important and lacking for their waste businesses to help them sustain and grow.  Waste entrepreneurs effectively bought and sold recyclable material, thus there was a need for both working capital and investments to enable their businesses.

S3IDF’s Role:

In 2015 S3IDF began its dialogue  with HD in the context of research it was involved in, commissioned by the International Water Management Institute, on “Resource recovery and reuse” businesses in Bengaluru.  This dialogue evolved into a partnership with HD, in which the partners worked together to recognise and frame the problem of access to credit for the informal waste workers.  They jointly developed a vision of enabling the informal sector to finally become bankable for all their credit needs, and charting a pathway to this bankability.  It was also recognised that along with access to credit, business mentoring support would be necessary to ensure credit is used effectively.

S3IDF convinced Rang De, a crowdsourcing platform, to provide low interest micro-finance for the poor, to create an online portfolio for the credit needs of Bengaluru’s informal waste entrepreneurs.  S3IDF also provided a partial guarantee (along with Hasiru Dala) to address some of the risks of this portfolio.  Hasiru Dala was the partner through which repayments from the waste workers were routed and S3IDF conducted due-diligence on all the entrepreneurs to receive loans.

Prior to S3IDF and HD enabling this additional financing, waste workers were forced to reach out to local money lenders, whose minimum interest rate was usually 24%, which often went up to 40% depending on the nature of the loan. This relationship with Rang De has also enabled access to around 150 education loans for informal sector waste workers.

The relationship and engagement with Rang De was planned to understand and create credit records for the informal sector workers. This was an essential stepping stone towards formal bankability.

Ongoing Work:

The latest set of changes is a reform to allow the Dry Waste Collection Centres – now largely being run by informal waste workers – to undertake door-to-door collection of waste.   In February of 2017 it was mandated that all DWCCs in Bengaluru will be managed by the waste workers themselves and will receive support from the municipality to undertake door-to-door collection of waste in their respective wards. As Nalini Shekhar of HD was quoted in the recent Hindu article, BBMP Plans to Turn Waste-Pickers into Entrepreneurs, “this is a huge step to empower waste-pickers in the city. Bengaluru is the first city in the country to engage with waste-pickers following the SWM Rules 2016.”

This ‘empowerment’ will not happen overnight, but the work that HD, in collaboration with partners like  S3IDF, does with the waste worker enables waste workers to not only have access to the services they require to strengthen their enterprises, but also to re-imagine themselves as formal entrepreneurs with the confidence and skills to run a municipal waste management system.

This recognition of the informal waste workers is a critical step towards re-imagining Bengaluru’s municipal waste management system, into a more inclusive, efficient and productive operation that may be scaled beyond city-limits and across India.

Keep visiting this page for more updates and feel free to reach S3IDF for a conversation.

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Where are We Today?

Instiglio is an open-source aggregator that tracks Social Impact Bonds (SIBs) and Development Impact Bonds (DIBS) in the design and implementation stage for public review. When we last checked in (June of 2016) Instiglio listed roughly 80 SIB/DIB projects, today 120 are enumerated on the website, a 50% increase that promises at least some interesting movement in the sector. Of the 120 listed, 115 are in the ‘implementation stage’, of those 115, 15% are being implemented in the US, 36% in the U.K and only .8% in the Global South (1 project in India). Leading us to the general conclusion that although there are alternative pay for success projects not accounted for in Instiglio’s count that go by other names, such as the innovative Yunus Social Business/Rockefeller Social Success Note Program, or some of the World Bank’s Pay for Results Financing projects (52 approved as of October 2016), thus far the pay for success models are usually finding implementation status in developed countries.

Pay for Success Facilitators’ Updates

At the SECON panel, Innovating Finance to Create Social Impact, a number of salient points were raised by panelists from the following organizations: Accion/CFI, Government Performance Lab, World Bank, Global Strategy Partners, and Social Finance. Their insider perspectives (each of them are directly engaged with facilitating aspects of the pay for success models) are certainly valuable, and worth disseminating more broadly to the S3IDF community for consideration and education.

Standardizing the Language:

DIBs, SIBs, Green Impact Bonds, pay for results, pay for results financing, pay for success, pay for performance, evidence-based funding, results driven contracting, outcome funding. These are just a few of the terms in the cluttered word-scape used by the panelists presenting and others to describe the space of innovative financial mechanisms that seek to leverage private sector capital and tie funding disbursement to impact metrics.

The SECON 2017 presenters and others certainly are a diverse set of actors using a diverse set of terms to discuss what is ostensibly a diverse set of financial models that all stem from a unified general methodology. And while this lack of unified language is not unfamiliar to those of us working in the non-profit and social financial spaces, it does deeply hinder our ability to source information on the evolution of the pay for success models (I’ll use ‘pay for success’ to keep the language consistent with the last blog) and discuss the constraints and opportunities of the models across implementing and facilitating organizations. This laundry list of terms begs the question, would the benefits of streamlining pay for success language help overcome the concept’s high barrier to entry and enhance its reputation, or would it oversimplify a concept which thrives on nuance, flexibility and variation?

“Trying to Find an Outcome Where Everyone’s Equally Happy and Unhappy”

Shu Dar Yao’s (Social Finance) description of the deal negotiations intrinsic to pay for success models represents the essence of any business deal, but can be particularly frustrating when trying to innovate. One major impediment raised by the panelists to finding a balanced ‘outcome’ in the construction of these pay for success deals is the high implementation costs, comprised of high fixed input costs and not-yet reduced transaction costs. The panel’s optimistic, perhaps logical, thinking was that as these models continue to be constructed on the foundation of demonstrable past successful models, the willingness of a variety of investors to initially engage in these conversations and financially commit to the projects will rise, thus lowering the transaction costs.

Further, paired with the burgeoning pay for success model awareness, project facilitators have established innovative methods for engaging otherwise tentative investors. As posited by Danielle Piskadlo of Accion, it is worth pointing out to impact investors that may currently be supporting their own social-first investments through cross-subsidizing their finance-first investments, that they can reduce their dependence on that design through utilizing a pay for success model in their social-first investments. And eventually (when actionable), even finance-first investors may be able to be convinced to invest  in smarter, more socially-minded ways, shifting from traditional markets to broader participation in pay for success models.

Shu Dar Yao and Shanthakumar Bannirchelvam (of Global Strategy Partners) also suggested that until more conventional markets, investors and governments are willing to engage with the SIB/DIB model, philanthropic and patient capital is best positioned to act as a catalyst and leveraging tool, helping pay for success models to proliferate. While philanthropic and patient capital enables more immediate pay for success project implementation, the panel grappled with the question of the long-term sustainability of potentially cannibalizing the philanthropic pools to build projects that should be inherently designed to leverage previously un-tapped private and government funding.

Incentivizing (the right and measurable) Behavior

Practitioners operating in the social impact space are familiar with the challenges associated with incentivizing behavior. And every panelist at the session agreed that this was a fundamental challenge innate to the pay for success models, because on the scale that these models are operating (from $250,000 to upwards of $34 million), and within the more rigid pay for success model, you cannot afford to incentivize a wrong and/or unsustainable behavior. There is room for project realignment in traditional impact programs, if something’s not working you change it, but as Ryan Flynn of the World Bank noted, the pay for success models’ outcome funders don’t disburse unless pre-selected specific results are achieved. This has the positive repercussion of drawing people’s attention to those results, but as he also noted, they need to be the right and measurable results.

The pay for success project facilitators face a number of up-front conceptual challenges that were also noted by the panel. They’re tasked with 1. Identifying what activities should be incentivized (to which every party can agree) for the short-term duration of the program, 2. Defining how to measure those incentivized activities, 3. Deciding what metric benchmarks are appropriate for disbursal of funds, and 4. Accounting for how all of this activity could impact the broader community in the long term.  The difficulty of tasks 1-3 obviously cannot be ignored, but the importance of task 4 should be further emphasized.

Danielle Piskadlo expounded briefly on the challenge and critical nature of positioning the pay for success program in the design phase within the broader context of potential community impact, national impact, even global impact. The pay for success models are behavior-changing, but if you are creating a project intending to monetize that behavior change, you should be as certain as possible that the behavior you’re incentivizing will drive positive growth and development for the participants, their communities and countries both in the short and long term and will not negatively impact the participants, their communities and the countries both in the short and long term.

The question then becomes how can we take the SIB/DIB model even further to prioritize long-term behavior, examine the behavior change durability and ensure (with all possible agency) that there’s no negative externalities or unintended consequences? And, as one session attendee queried, how can we foster the model and ‘pitch’ that long-term time frame to inherently short-term government/elected official attention spans? A potential solution put forth (and implemented) by Shanthakumar Bannirchelvam is to build in after-program research funding and metrics tracking that help inform both the project long-term impact and future project development.

7 Years to Re-Engineer a System

An attendee question raised during the session drew the panelists to comment on the time for which these bonds have been in operation and judge the expected and met impact relative to that time-frame. It has been roughly 7 years since the first development impact bond was announced. The response from the panelists regarding the perceived success of the model was essentially unified; the incorporation of the pay for success models into the mainstream philanthropic and social sector is a systems-level change. Those take time. And, while there are certainly individuals who say that the pay for success models should demonstrate their own successes within this time-frame to justify their continuing utility and massive investment (over $1 billion at this point), is it not fair to allow the pay for success idea more time to demonstrate proof of concept? Or, alternatively, should we be demanding a near-term expected timeline for a shift towards greater impact results and expanded use of previously untapped private capital in lieu of philanthropic resources (as mentioned above as a catalyzing tool)?

The re-orientation of systemic investments in the social and financial space is no small undertaking. And programmatic impact on this scale is measured in years and decades, not months. While this post may have again have raised more questions than provided answers, it is part of a necessary system to both remain informed of innovation trends, and allow new ideas the space to flourish without undue time constraint and scrutiny.

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Whilst every time I drove down to work and back, one looked on at the poor unfortunate souls who were standing in the queues waiting for their hard earned money to come back via ATMs to them like some distorted theory of karma, spouting through the metallic orifices that dispense this cash. One glance though at the queues portrayed a myriad of backgrounds – housewives, executives, young software engineers, small time shopkeepers, students, senior citizens and a motley crowd of what is a snapshot of our typical street microcosm. The banks’ vehicle parking spaces spelled chaos also indicated crazy parking so characteristic of us Indians- haphazard two wheelers on footpaths and strewn all over in the bye lanes next to the ATMs.

Try hard as much one could, I couldn’t fathom in those queues nor in the modes of transport they came in, any ‘typical’ black money hoarders who flaunt their stinking mostly ill -gotten wealth at grandiose family weddings and birthday parties in glittering solitaires, Gucci’s and Versace’s. None in the queues seemed to look like the typical, gaunt black money hoarders one imagines and none came in in big SUVs. They looked like ordinary hassled men and women in two wheelers or public transport attired in what looked like middle class, lower middle class clothes. No politicians in starched white jabba kurta in the queues, no billion-dollar conglomerate promoters lining up for Rs 2000 per day cash limit, no fancy cars and no bulging sacks of black money. Just plain, ordinary, harried mostly tax paying middle class, lower middle class citizens soaked in sweat and dunked generously in a sense of manufactured faux altruism.

As one sees how small businesses are being affected by this decision with small ticket cash transactions trickling like much of the water in our municipal pipes, one can ’t help and wonder how the poor – are both urban and rural are coping up with this drama. Much of ‘below the radar’ small time businesses operate in cash as it is the same government policies that do not allow them to access capital from the formal banking system. Imagine a poor subzi wala or a kabadiwala going to the bank manager in any bank to ask for a loan and the sort of treatment that is meted out to him. No wonder that   in this country of traditional micro entrepreneurs (much before the venture funded cash burning start-ups became fashionable), there is a parallel system of money market that’s operates with money lenders charging exorbitant rates and micro entrepreneurs eking out their living, sidestepping the formal system that ignores them, rubbishes them, abuses them  and discards them. And this is simply because the formal system refuses to acknowledge these micro entrepreneurs for the value they get to the economy and society at large.

My current work engaging with small time entrepreneurs’ gives me a rare, deliberate proximity with the class of people that most people would shun to associate with. And when I mean most people, I don’t mean just the grand wedding –  SUV class, yacht hopping burgundy class but even the class that makes up for a large part of the hoi polloi that are current ly standing in the ATM queues. Why so? Because many of the people I work with now, are waste workers, rag pickers and mostly Dalit’s who are shunned for their caste, class and socio economic lineage.  It a different matter that they keep our streets clean by scavenging (unlike the mostly defunct municipal bodies whose job it is in the first place) by picking up what we wantonly throw from our car windows and classy apartments garbage  bins – fed daily  by this frenzy  called  e -commerce  and the  hyper steroid packaging they generate.

Geeta (name changed) is an entrepreneur in Bangalore   who lends lights on rent to the street vendors, vegetable sellers, etc. She makes a business transaction of approximately Rs. 1000 per day, all dealt in cash on a daily basis. On demonetization of Rs.500 and Rs.1000 Notes, she shares that it is has affected her business transactions for each day ever since because of the scarcity of smaller denominations for exchange. She also adds that it is a good step as people holding huge amount of cash in form of black money will have to come out. Does she have black money? Of course not – she has barely enough money to send her small kids to school and run her meagre household. So, the propaganda seems to be working. Another entrepreneur, Abdul (name changed) had a different version on the seminal move by the government. He narrates that even though his business is not much affected by the move because he has a monthly payment cycle with his clients. However, the personal lives and transactions for daily necessities are the worst affected. He adds t hat even when they have money, they do not have food because of the unavailability of smaller denominations; people are managing from the neighbours for food and other things. Also, some households around him do have bank accounts and even debit cards but they have hardly ever used it, unlike the middle class and neo middle class who are resorting to make cashless transactions to avoid pain through this transition.

Real inclusive growth would mean that all sections of society benefits from the overall economic prosperity. A primary metric for inclusion is financial inclusion (i.e. the access to basic financial services and affordable financial products such as loans, basic accounts and deposits for all individuals and small businesses). When the really poor have access to credit facilities, this translates to their financial security. The smarter and resilient amongst them can potentially grow their businesses, manage their own finances better and plan for the future. They become self–sufficient and not dependent on the state’s largesse or doles and contribute more to the GDP as well.

Don’t get me wrong. I am for eliminating black money. This country desperately needs it. But the means are as important as the end. If the Geeta’s and the Abdul’s of the world turns upside down to manage this disruption, whilst a certain bunch still makes merry at Mt. Titlis, maybe it is time do some deep thinking. As for me, I am more humble than smarter for now.

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To include the poor and marginalized households and enterprises in the formal financial sector, a market systems approach requires collaboration between government, financial sector infrastructure and supporting services, and key supply and demand players to identify and address constraints to financial inclusion, including doubts on the part of the unbanked or underserved and unwillingness on the part of financial service providers to serve these market systems.

The facets of the market systems approach that they enumerate above closely resemble the three parts of S3IDF’s Social Merchant Bank Approach (SMBA): business development, leveraged co-financing, and technology access and knowledge. These intricate interlocking components are not easily aligned, they demand constant attention and hard work, but the end result is the banks’ willingness to serve these previously unbanked clients, clients who are in turn more confident in their own ability to serve their community’s important infrastructure needs such as access to clean water, electricity or waste management. But, as S3IDF is familiar with and the article briefly touches on, the hard work of simultaneously addressing many facets a complicated system in order to facilitate sustainable change for the poor isn’t sexy, it isn’t as easily captured in a single metric, and therefore it has historically been neglected by donors and practitioners alike. But through increased awareness and discussion of financial inclusion, which has proven to be successful in sustainably helping the poor, we can promote interest in, and funding and development of financial inclusion in market systems.

Jepson and Raja go on to say that, “financial inclusion should be promoted widely for what it is: a tool for unlocking opportunities in economic growth and stability in marginalized places.” S3IDF believes that helping the poor enter the mainstream economy, using financial inclusion as part of a holistic and contextualized approach is what will ultimately, and most sustainably, benefit the poor and underserved. In order to do this effectively we analyze the community problem before suggesting a solution that uses a combination of our SMBA tools, thus fitting the technology, financing and business solutions to the needs of the entrepreneur and community. Often parts of a model which worked in one community are principally replicable in another community, and thus we can achieve scale through duplicating our projects, while always ensuring that we are addressing the unique community needs, not applying an inflexible model. In this way, we use financial inclusion as a tool to build more inclusive markets, while simultaneously addressing specific infrastructure needs.

One final point, although there are many more which could be made, Jepson and Raja write that, “by accessing more financial services, households and businesses can benefit from more predictable, stable, secure and relatively low-cost services such as saving, borrowing, and playing on credit, including for necessities such as school expenses and farming supplies.” Banks and financial institutions are not pre-disposed to lend to poor clients who don’t have a formal credit history in amounts which will truly address the client’s financial needs. But S3IDF, similar to DAI, will go to the bank with the entrepreneur’s business plan, will partially guarantee the bank loan, will arrange for a technology buy-back agreement in case of default, and will sit down with an entrepreneur and help them understand how to manage a business. It is this hard work, this facilitation and alignment of each moving part, which enables the greatest impact for the poor and underserved communities, and eventually allows the entrepreneur to demonstrate their credit-worthiness without the help of an NGO or guarantor, which is the true hallmark of a sustainable solution.

Financial inclusion can mean many things, it can mean a farmer who can borrow the capital he needs against his expected crop, thereby increasing his planting and processing capacity and eventual sale value. Or a waste picker who can apply for credit to lease a truck, increasing his pick-up radius and thus number of individuals he can employ. Or it could mean a business-woman who charges and rents out batteries to market vendors and households, eliminating the need for kerosene lamps, and benefiting evening vendors’ sales and children’s education. DAI and S3IDF’s efforts in the financial inclusion sector lead to increased quality of life, allowing individuals who have been historically underserved, to transform their lives, and the lives of those in their community.

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The Social Impact Bond is one of the more widely known ‘pay for success’ models that allows the private sector to inject needed capital into the social impact space by prioritizing the double bottom line of positive fiscal performance and social benefit within the deal structure. The models, briefly explained further below, theoretically satisfy all parties involved in the arrangement, capitalizing on what has traditionally been seen as an inherent contradiction between the private sector and social impact programs – profitability. But will these models achieve their goals in a replicable manner? Can they overcome the dichotomy of that contradiction without losing sight of all involved parties’ objectives?

The ‘Simple’ Model

The simplest model of these ‘pay for success’ Social Impact Bonds is as follows: the government contracts an intermediary (usually) who then facilitates the relationship between the investor, a service provider, and the government. The investor supplies the capital for the program, the service provider is contracted to run it and, if certain agreed upon benchmarks (success measures) are met as determined by a third party monitor (usually), the government (also known as the broader ‘outcome funder’) pays the investor the cost of the initial project, plus interest and/or additional success incentives. If the project fails, and/or it does not meet expected benchmarks, the government does not pay the investor. The roles of players in the SIB model are fairly straightforward, but the intricacy of the structural details, and the variety of SIB deal models do not yet allow for a normalized methodology. Given SIBs relative newness to the social impact space (the first SIB was announced in 2010 and today roughly 80 are in the design and implementation stage), a lack of faith and comprehension is not unexpected.

The Social Impact Bond is the most replicated pay-for-success/impact model thus far, but its structure is fluid and its applications are defined much more by the details of the transactions between the different parties than by the core principles of the SIB model. While that fluidity allows for necessary nuance particular to each deal, it also inhibits the approachability of the structure, limiting its replicability, and ultimately, its utility. The infographic above, How Social Innovation Financing Works by Dan Stiles, offers a basic representation of this model, which illustrates the central transactions between the parties and intentionally skips over the many and often rather complicated transaction details that are found when the SIB is actually applied.

Why Engage in an SIB Partnership?

What do you offer often silo-ed funders (public and private) so that they’ll step out of their established practices and engage in a pilot program whose multiple players raise the risk of mission creep? Risk transfer. Risk transfer is fundamental to any SIB structure because it gives frontier capital funders (often the SIB investor) an opportunity to make back their loan, and for the more traditional mid-stage lenders (SIB outcome funders), the security of only becoming financially responsible for success.

One of the variations on the SIB model is the Development Impact Bond (DIB), a structure that makes the ‘pay for success’ model more viable in developing countries whose governments have shallower pockets and less capacity to implement innovative programs. The DIB replaces (at least in part) the role of the government as the outcome funder, with a private sector entity, although as originally envisioned the government is still meant to be involved on some level. A pilot DIB, launched in 2014 is being implemented in Rajasthan, India, brings together the Children’s Investment Fund Foundation (CIFF – outcome funder), Educate Girls (service provider) and UBS Optimus Foundation (investor). This pilot, whose programmatic efficacy has yet to be determined, was successful in overcoming the implementation barriers still daunting many ‘pay for success’ enthusiasts through risk transfer and leveraged capital.

CIFF – who in this case represents an entity who may have been hesitant to fund a million-dollar pilot – has the peace of mind that it is only financially responsible for a successful program. UBS Optimus – who represents an organization that may be more likely to invest in riskier enterprises at an earlier stage, thus accepting inevitable occasional loss – gains a welcome higher guarantee return on investment capital. Further, CIFF and UBS Optimus together provide capital that Educate Girls, a service provider, might not have otherwise been able to mobilize. Ultimately, this partnership benefits the underserved in Rajasthan, jointly aligning the collaborating organizations’ missions. The three entities together divide the risk of failure and share in the spoils of success through a leveraged capital structure that introduced new funding into the sector.

While this successfully implemented model does not formally incorporate the local government, it has the potential to serve as the proof-of-concept needed to galvanize the public sector into subsequent DIB iterations/replications. If the public sector becomes more active in these arrangements, the associated complications will necessitate another round of DIB piloting and extensive logistical reframing.

But, what should also be considered is the more controversial question of whether the government really must be involved in this type of work or if it is “enough” to mobilize private sector investment that would otherwise have been inaccessible? Although public sector involvement is integral to the ‘pay for success’ models in countries with higher capacity governments, it may not be necessary for developing countries, and may impede the agreement evolutions and iterations which will allow practitioners to develop a set of situational best practices.

How to Create ‘Pay For Success’ Deal Replicability?

How can practitioners drive these deals forward and help them evolve to become more ‘user-friendly’ without losing their strategic fluidity, which allows them to adapt and address a variety of developed and developing countries’ challenges? These models would ideally drive social impact financial innovation, forcing an exploration of new opportunities for ‘pay for success’ utilization, concurrently drawing productive conclusions from successful applications, with particular regard for circumstantial differences that allow for favorable outcomes.

Propelling the social impact sector’s involvement with the ‘pay for success’ models has already led to intriguing developments in the space. Fellow ANDE member Yunus Social Business and the Rockefeller Foundation are pioneering the Social Success Note, which de-prioritizes government involvement, incorporates private sector investment and still transfers risk from the investor to the outcome funder. This approach continues to uphold the fundamental ‘pay for success’ tenants while also ultimately alleviating the needs of underserved populations in developing countries, and additionally serving entrepreneurs who are unable to access traditional financing to help grow their businesses. Again, the Social Success Note has not been extensively tested, it is unclear how many outcome funders will be willing to accept what may be a lower than market rate return on investment, but its potential is promising, particularly for the missing middle social entrepreneurs seeking soft loans.

So What Now?

Tracy Palanjian, the CEO and Founder of Social Finance (the US sister to the SIB creator – Social Finance UK) asked the fundamental question in an address at the 2016 Classy Collaborative, “how do we standardize the work without losing the nuance?” Can the pay for success impact bond pipeline evolve into an approachable mechanism for sustainable development impact capital? Or will the SIB and related spin-offs, which have so many moving parts that need to be redressed at every juncture and within every new deal, complicate themselves out of functionality?  Not to mention the implementation challenges of these deals for service providers, such as mission creep, continued partner financial viability, and unforeseeable natural, governmental and human hazards which are often inevitable in the social impact sector.

Organizations like Social Finance and Instiglio are optimistic and working to mitigate those deal structuring challenges, developing reputations as intermediaries who will facilitate the process and ease the frustrations. It now is the sector’s responsibility to actively engage with the arrangements, implementation and results of the ongoing ‘pay for success’ models so that a situation-specific set of best practices can be assembled to relieve the burden of perpetual structural novelty and increase collaboration probability.

As a group, non-profits, social enterprises and social service providers hold a hardscrabble, optimistic, “we-can-do-better” attitude and proliferate the challenging in order to help the underserved. If anyone has the impetus to push this financial model into replicable existence, it is the practitioners who have intimate knowledge of the scope of the global challenges and weigh those against the available capital. The ‘pay for success’ impact bonds don’t just represent an innovation, they represent a lifeline, for service providers and beneficiaries alike.

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A recent article posted on Devex, Foundations team up to help tackle the SDGs by Bill Hinchberger, highlights one aspect of this ‘de-sectoralization’ – an emergence of interwoven development capital resources through foundations actively participating in the broader development space. Traditionally, foundations have recused themselves from (and been overlooked by) cross-sector partnerships with development finance banks and governments, focusing instead on a narrower and less holistic scope of prioritized initiatives. Now, the foundations that belong to the Network of Foundations Working for Development (netFWD) and the SDG Philanthropy Platform (Hilton, Ford, MasterCard to name a few) are signaling a willingness to prioritize the SDGs through collaborative partnerships, which will help to redress the currently silo-ed capital from the unilateral streams customarily dedicated to a single foundation’s priorities.

Hinchberger quotes Bathylle Missika, Senior Counselor and Head of the Partnerships and Networks Unit at the OECD Development Center, as saying that, “[Philanthropists] need to understand the multilayered [nature of] development challenges…it takes partnerships to go from innovation to scale. If you want to impact a lot of lives, you have to partner – usually with governments.” The coupling of these coalitions with the expanded SDGs shows progression towards the re-calibration of development funding. The SDGs can be more fully addressed through merging the capital silos and coordinating blended capital structures with partners.

The process of reshaping aid in conjunction with the SDGs from the international development agencies perspectives’ is second aspect of the ‘de-sectoralization’ of development funding and goal targeting. Bill Gates indicated frustration with the current global structure of development finance, as seen in his recent article, A New Map of Poverty, a New Approach to International Aid. The article published in the Wall Street Journal highlights that, when the system was established post WWII, “major donor countries like the U.S. and international finance institutions such as the World Bank viewed poor countries and poor people as synonymous.” Thus the average income of a country was used to determine its allotted development support from other nations and institutions. But as Gates highlights, that is an outdated evaluation, and to withdraw aid (as is done once a country achieves a certain average income) based on a shaky presumption of a country’s domestic economic equality further isolates the poorest individuals within those countries. SDG 10 directly engages with this question of inequality “within and among countries,” and Gates suggests in his article that governments should seek innovative ways to increase their revenue, while donors should discuss, “adapting the aid system to account for shifting patterns of poverty.” Reevaluating broad institutional aid, as Gates posits it, is another positive step towards a recalibration of aid which is more inclusive, collaborative, far-reaching and ultimately capable of achieving the SDGs.

While Gates seeks to redefine institutional aid with the help of the SDGs, the goals themselves demonstrate the international recognition of the necessary intersection of the priorities, such as is outlined in Target 2.3:

By 2030 double the agricultural productivity and incomes of small-scale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to and, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment.

Where the MDGs fall short, the lack a co-mingling of single targets to address multiple goals, the SDGs flourish. Target 2.3 illustrates the SDGs ambitions’ to distinguish the necessity of including objectives like financial services, markets and gender equality within an agricultural production goal, thereby expanding target and goal focus. This previously overlooked aspect of international development in the MDGs, the ‘de-sectoralization’ of goals, is as important as the ‘de-sectoralization’ of funding streams and restructuring of international aid evaluations.

S3IDF’s trademarked Social Merchant Bank Approach (SMBA), reflects these ‘de-sectoralizations’. Core to S3IDF’s process has been the use of philanthropic and development funding as a tool to mobilize local private and public capital for community-level to national-level programming that works across a range of sectors (e.g. energy, agriculture) and issues (e.g. poverty alleviation, economic growth, climate change mitigation and adaptation). The resulting blended funding structures and multi-target goals allow for cross-cutting partnerships – including governments, on-the-ground practitioners, local financial institutions, development finance banks, technology suppliers and others. S3IDF’s SMBA recognizes the importance of leveraging financing to ensure the greatest rate of social return on every dollar, impacting the most pressing social needs highlighted in the SDGs and superseding outdated country-development designations. Our work doesn’t compartmentalize funders, it includes them; it doesn’t depend upon average national income, it looks for those isolated impoverished populations globally; and it doesn’t exclusively focus on a single priority, it engages with the majority of the SDGs and more.

There is no single way to create universal financial inclusion or gender equality to end hunger or ensure universal energy access, to build global sustainable infrastructure, or make cities safe. But the SMBA is a unique method which addresses many of the SDGs through leveraged co-financing, effectively mitigating the challenges of silo-ed funding, overlooked national inequalities, and ‘sectoralized’ goal targeting.

If you’d like to learn more about our past Programs and Projects utilizing the SMBA please visit our website here.

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India is a country comprising 28 states that are further divided into many districts. The largest district in the country is Kutch, located in the state of Gujarat. Kutch means something that alternates between being wet and dry, a condition that reflects its largest section, known as the Rann of Kutch. This area is famous for its marshy land that is completely covered with salt deposits after the shallow water dries up each season before the monsoon rains.

Many of the remote areas in this beautiful region have not reaped any of the benefits available to the rest of fast-growing Gujarat. One such village is Therawand. Therawand is a barren land marked by only a few scattered huts. SEWA Bank in Ahmedabad provides poor women working in the informal sector with tailored financial services that help to promote socio-economic empowerment and self-development. SEWA came forward offering straightforward loans to help electrify the houses of Therawand. Based on the needs of the residents, SELCO and S3IDF decided on a single light LED system. The cost of the system is Rs 7,400. SEWA designed a loan package of Rs 6400 and SELCO and S3IDF provided the gap-filling funding of Rs 1000 from the Applied Materials Foundation (AMF) support. The monthly installment is Rs 500 and collection is done by an agent from the bank. SELCO, S3IDF and SEWA have installed solar systems in fifteen houses in this community. As a result, there is now a huge demand from the others living in the region to install solar lighting systems.

One of the current users, Shamjibhai Mohamadhrin, is considered the leader among the group in Therawand. He was one of the first people to opt for the solar lighting system. Prior to solar lighting, kerosene lamps were used that would cause irritation to the eyes and the nose. “As you can see we are secluded from society and need to travel as much as 20 kilometers even to fetch water, which comes in huge tankers,” he says. Mohamadhrin mainly works as a dairy farmer but he and his family also weaves blankets. “With our nights now bright, we can weave more blankets during the night. This will definitely help improve our income,” he explains. “But it is my children and their friends who are benefiting significantly. They all come to our house to study. It’s like a small tuition for them to gather and learn together,” he adds, thanking SEWA, SELCO, and S3IDF for the assistance.

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Located in central Karnataka, Chitradurga is the center of the district’s rich cultural heritage. It houses the famous Chitradurga fort, built by King Madakari Nayaka who ruled the region during the 17th century. The district is also known for its dense forests, caves, cotton mills and groundnuts.

Upon arrival, the massive windmills that dot the hills leading to the city are immediately noticeable. Although these windmills function smoothly, not everyone in the district has the privilege of receiving electricity from this renewable source. Jogihatti is one such village. Located on the outskirts of Chitradurga, very few residents have grid connections and even those that encounter long hours of power cuts, especially in the evenings when they need electricity most.  As a result, Jogihatti residents primarily relied on kerosene to meet their lighting needs until SELCO and S3IDF became involved.

SELCO and S3IDF were introduced to the residents through MYRADA, an NGO focusing on rural development. MYRADA already used Self Help Groups (SHGs) to assist people from marginalized and low-income groups, such as laborers belonging to scheduled castes. Together, SELCO and MYRADA have been working in partnership for the last few years to provide solar lights to households and in common areas. SELCO andS3IDF play a critical role in bridging the financing gap by providing linkages and credit conditioning support. MYRADA supports residents interested in the solar lighting systems by providing needed guidance on managing their finances, including the repayment of loans taken for the systems.

MYRADA was able to secure a loan from National Bank for Agriculture and Rural Development (NABARD) which they could lend to their SHGs to fund solar systems.

Based on a needs assessment, SELCO and S3IDF recommended a single light system costing Rs 6750. In order to maximize the reach, using the limited loan funding, SELCO and S³IDF contributed 20% of the funding through support from Applied Materials Foundation (AMF). The collaboration covered 100 households with each getting a one LED light system.

“My work changes from one month to another. If I earn for 3 months then the next few months I am unemployed. It is because of this that affording a solar system with a high capital cost seemed impossible. But now that SELCO and MYRADA have provided us with the needed funds, I can concentrate on paying the monthly instalments of Rs.100” says G.B. Balaraj, one of the Jogihatti residents, who lives with his family of four and works as a wedding decorator. Due to the seasonal demand for wedding decorations, he earns just Rs.4000 a month, a sum he says is insufficient to provide for his family. SELCO and S3IDF also provided him a solar charger, an added bonus for him. “I can now text my friends and relatives, read the daily news, receive calls from customers and more!” he says delightedly.

Through tailored end-user financing arrangements, supported by AMF funding, SELCO, S3IDF and MYRADA electrified 100 houses, giving a new hope to this once un-electrified village.

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The following snapshot is the eighth in a series of stories from the Electrifying Households and Schools project, which is a yearlong project that is supported by the 

Saris are the traditional clothing worn by women in India. One town known for its unique handloom saris is Ilkal, which lies in the Bagalkot district of North Karnataka. The name is derived from two Kannada words – “ilu” (slope) and “kallu” (stone) – referring to the terrain which slopes down from Bagalkot to Ilkal and to the predominance of granite in the surrounding regions. Ilkal originated as a weaving center sometime during the 8th century AD. The saris here are usually woven using either cotton or a mix of cotton and natural or artificial silk.

Three kilometers from the Ilkal bus station is a small community named Gurlingappa Ashraya Colony, which contains 300 houses. Secluded from the rest of the town, a majority of the people living here are sari weavers who struggle with many challenges, such as a lack of electricity and drinking water. Kerosene lamps had been their only option for lighting until a SELCO staff member, in collaboration with S³IDF, identified their problem and provided a demonstration of solar power in few houses. The demonstration proved useful, exhibiting the potential of solar energy not only to the residents but also to the Manager of the nearby Karnataka Vikas Gameena Bank (KVGB) who was invited by SELCO and S3IDF for the evening demonstration. The bank manager was so impressed that he immediately suggested formation of Joint Liability Groups (JLGs) of five members each to facilitate faster loan processing and subsequent repayment collection. SELCO and S3IDF proposed a 2 light LED system that cost Rs.7200 along with a mobile phone charging station for each of the houses. However, the weavers found it difficult to pay the Rs. 1500 of down payment, which KVGB required before it would issue loans. As a result, SELCO and S3IDF, through Applied Materials Foundation (AMF) funding, provided Rs 1000 to households to subsidize a part of their down payment.

During initial discussions, the weavers said that they use kerosene in the evenings to work but that this causes their eyes and noses to burn. “We faced the problems together and now we want to change it together.” After receiving his lighting system, Ramesh a sari weaver, stated, “The main threat of using kerosene lamps is that they can burn our precious saris anytime. We were always hesitant to leave the house even for a few minutes as one small drop of kerosene can ignite and bring the whole house down, taking away the fruits of our hard work.”

SELCO and S3IDF’s provision of mobile chargers has also proved to be a boon to the weavers. “Before we had to walk 3-4 kilometers along rough and rocky roads to charge our phones. In the dark it was hard to see and one could easily fall, causing injuries. Now that we have the solar chargers we can smoothly charge our phones and needn’t worry about roaming out at night” claims an elated Ramesh. The weekly income of the weavers has improved as they can work through the night and make more saris. “The LED lights are very reliable, so working a few extra hours in the evening has helped us increase our productivity” the weavers sum up. With 37 houses now electrified in the colony, SELCO and S3IDF’s support has helped the sari weavers increase their productivity and security.

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