Bonds the answer to financing gaps

Friday October 14 2016

Council of Governors Chairman Peter Munya speaks to the press at his office in Westland’s on October 5, 2016. Social impact bonds would be a great opportunity for the county governments that are struggling to deliver development initiatives due to budgetary constraints. PHOTO | DENNIS ONSONGO | NATION MEDIA GROUP

Council of Governors' Chairman Peter Munya speaks to the press at his office in Westland’s on October 5, 2016. Social impact bonds would be a great opportunity for the county governments that are struggling to deliver development initiatives due to budgetary constraints. PHOTO | DENNIS ONSONGO | NATION MEDIA GROUP 

Social innovation, according to Stanford University’s centre for social innovation, is a novel solution to a social problem that is more effective, efficient, sustainable, or just.

More importantly, the value created should accrue directly to the society.

In the current global economic environment, counties are finding it difficult to allocate sufficient development funds and this has delayed the implementation of many crucial social initiatives.

A review of Kenya’s 2016/2017 financial year budget shows that only 34 per cent of government expenditure has been set aside for development.

There is a growing need for both the national and county governments to explore innovative financial instruments as alternative sources of funding for socially relevant initiatives.

Such alternative financing would allow both the national and county governments to continue to support priority developmental goals with ever tighter budgets, broaden the base of financial sources, and reduce their dependence on traditional sources of funding.

Social impact bonds are an example of alternative sources of project financing that Kenya should consider.

Such a bond allows private investors to pay for a certain intervention to improve an outcome that is of social or financial interest to the government.

Such bonds are commonly referred to as “pay for success” instruments because an investor puts up the funds for a certain intervention, which the government pays back if the agreed upon outcomes are achieved.

Some 60 social impact bonds have been issued globally, with the first implemented in the United Kingdom in 2010.

Several countries have implemented social impact bonds with great success.

FUNCTIONAL ALTERNATIVE

However, few developing nations have explored this instrument — only India and Peru have issued a social impact bond.

Social impact bonds would be a great opportunity for the county governments that are struggling to deliver development initiatives due to budgetary constraints.

With the repeal of the Public Finance Management Act 2012, county governments now have the capability to independently source for investment.

Social impact bonds would be good for a number of reasons.

First, the county governments would be able to achieve key policy priorities and long-term savings even after repaying the investors.

Second, investors would earn back their money with a return depending on the success of the investment.

Finally, the people in the counties would enjoy a measurable difference in their standard of living after the successful implementation of the project.

In June, 2015, Rajasthan, India’s largest state by land area, faced challenges in education.

Some 40 per cent of girls were dropping out of school before reaching the fifth grade and the quality of learning was low.

Only 15 per cent of children in primary school could read a simple story in Hindi.

The government issued a social impact bond funded by a non-governmental organisation whose aim was to enrol more girls in school.

In the first year, the bond has seen impressive results, having enrolled 44 per cent of the girls identified as being out of school across 140 target villages and achieving 23 per cent of the target learning improvement outcomes.

The investors are expected to earn a return of between 7 per cent and 13 per cent over three years.

Social impact bonds could transform the manner in which county governments approach the financing of public initiatives because they would base payment on social outcomes achieved rather than the simple execution of a service.

TIME FOR CHANGE

They would also improve value for money on public expenditure as governments would only pay for interventions that are successful.

Finally, social impact bonds would drive innovation in the county service delivery model since payments would be based on outcomes rather than the process.

This means more room for innovation and solutions that work.

Since the bonds would require the county governments to employ the expertise of players in different areas, it would also result in the pooling of knowledge and ideas to deliver successful outcomes.

We are a country that prides itself on innovation leadership.

This is the right time for our national and county governments to lead and be the first in Africa to utilise social impact bonds to deliver more effective, efficient, quicker, and sustainable solutions.

As Nobel laureate Shimon Peres once stated on innovation: “The most important thing is to dare.”

Mr Shako is the chief executive officer of Tsavo Innovation Labs. [email protected]