Pacific Impact Bond Fund A Strategy for Private Sector Reform" Russ Altenburg! Amish Chande! Jake Ramey! Lysbet Verlenden!

Transcription

1 Pacific Impact Bond Fund A Strategy for Private Sector Reform" Russ Altenburg! Amish Chande! Jake Ramey! Lysbet Verlenden!

2 Pacific Islands (Background)" More than 20 Pacific Island Countries (PICs) spread out over 20 million sq. miles and 30,000+ individual islands" Distinct Melanesian, Polynesian, and Micronesian cultures" Population over 10 million" Low-lying coral atolls to lush volcanic islands" Economies driven mostly by subsistence agriculture, fishing, forestry, and mining" 2"

3 Pacific Islands (Development Context)" Five PICs (Kiribati, Samoa, Solomon Islands, Tuvalu, and Vanuatu) classified as Least Developed Countries by UN" 2010 per capita GDP ranged from approximately $900 in Papua New Guinea to $10,900 in the Cook Islands" Region faces considerable development challenges due to:" Geographic barriers to trade" Lack of natural resources" But region holds strategic importance to world powers including US and China" Heavy reliance on foreign aid! 3"

4 Foreign Aid to PICs is Substantial" Vanuatu Tuvalu Tonga Solomons Samoa PNG Palau Micronesia Marshall Islands Kiribati Fiji Aid as % of GNI Developing PICs receive per capita aid 3x the average for all other developing countries" Over $1 billion in aid to region annually" Largest bilateral donors include Australia, New Zealand, US, China" Largest multi-lateral donors include ADB, World Bank, UN" 0% 20% 40% 60% Source: World Bank, Pacific Islands Forum, ADB 4"

5 Yet Largely Ineffective " Despite high levels of aid, the Pacific is off-track to meet its Millennium Development Goals! Aid has diminishing marginal returns and at sufficiently high levels has a negative marginal effect on growth! Broad-based private sector-led growth is essential for economic development and poverty alleviation! State-owned enterprises (SOEs) continue to constrain the economies of Pacific island countries through their absorption of large amounts of scarce capital on which they provide very low returns.! Source: Pacific Islands Forum, ADB 5"

6 State-Owned Enterprises in the Pacific Islands" State-owned enterprises (SOEs) play significant role in economy of every PIC but many operate in purely commercial ventures and generate extremely low or negative returns" Fiji RMI Samoa Solomons Tonga Number of SOEs Average ROA 0.4% (5.9%) 0.1% (4.5%) 3.6% Average ROE 0.7% (13.2%) 0.2% (13.9%) 6.0% Asian Development Bank (ADB), NZAID, and other aid orgs have made SOE reform key priority" SOE reform efforts underway in Papua New Guinea, Tonga, Kiribati, Solomon Islands, and Vanuatu and being discussed elsewhere" Source: ADB 6"

7 The Proposed Solution: Pacific Impact Bond Fund" Foreign Aid Organizations! (multilateral and bilateral)" Private Borrowers! (e.g. privatized SOEs)" Institutional Investors! (e.g. pension funds seeking social exposure and financial returns)" Combining private investorsʼ for-profit incentives with aid providersʼ goal of generating sustained social impact! 7"

8 Key Features: Pacific Impact Bond Fund" Derived from Social Impact Bond concept" Beachhead strategy targets newly privatized SOEs" $45 million target fund size & $200K average loan size" Fund consists of regional portfolio of bonds" Bond interest up to 20%:" Market interest at 12%, paid by borrower" Social supplement up to 8%, paid by group of aid orgs" Borrower clawback potential up to 8%:" Borrowers incentivized to achieve social impact" Aid orgs subsidize borrowers" No social interest paid unless principal returned to investors" 8"

9 How Pacific Impact Bond Fund Works" Institutional Investors! (Limited Partners)! 1 2 Intermediary! Funds! (General Partner)! Loan! Return! 5 (origination and underwriting, works with local bank partner)" Borrowers! (e.g. privatized SOEs)" Foreign Aid Orgs! (e.g. AusAID, ADB)" principal plus 12% interest minus clawback! 3 0-8% social interest! 4 9"

10 Example: Samoa Broadcasting Corp Privatized" Samoa Broadcasting Corp! Option A:! Local Commercial Bank! Firm borrows $0.5m at 12% market rate! Scenario 1! Principal returned" High social impact" Effective Bond Interest:! Borrower! Pays! Aid Orgs +! Pay! =! Investors! Receive! 4%" 16%" 20%" (private business receives up to 8% clawback on market interest)! Former SOE seeking $0.5m in financing! Option B:! Pacific Impact Bond Fund! Firm borrows $0.5m at 12% market rate " Scenario 2! Principal returned" Medium social impact" Scenario 3! Principal not returned" Undefined social impact" 8%" 8%" 16%" <12%" 0%" <12%" 10"

11 Fund Achieves 12.5% IRR over 5 Years" ($ millions)" 11"

12 Roles and Incentives" Institutional Investors! Intermediary! LPs invest in subordinated debt fund! Seeking both financial and social return on capital! Potential to earn a 20% financial return with social impact overseen by foreign aid providers! GP sources and oversees investments, distributes and collects funds! 1% annual management fee! Incentive fee of up to 15% of investor return! Local Banking Partner! Partner with GP to source and underwrite transactions, potentially provide balance sheet for regulatory purposes! Provide loan administration! 1% fee! South Pacific Enterprises! Privatized SOEs and other local businesses! Need capital to institute and grow efficient business practices! Required to pay back principal investment + market rate interest (12%) claw back for social impact (up to 8%)! Pacific Fishing Co Foreign Aid Orgs! Primarily government-funded organizations! Seeking social impact in target countries! Will pay (i) a social return (0-8%) and (ii) the amount of the clawback (0-8%) to provide the investors a market rate return! 12"

13 Adopt IRIS to Measure Impact & Determine Social Return" 1! Sample IRIS 3! Performance Report: Organization Description" Product Description" Financial Performance" Operational Impact" Product Impact" 2! Social Return Sliding Scale:! Social Impact Score! Social Return! ! 8%! 80-89! 7%! 70-79! 6%! 60-69! 5%! 50-59! 4%! 40-49! 3%! 30-39! 2%! 20-29! 1%! Calculate Social Impact Score: (Pacific Impact Bond Fund determines social impact metrics; auditor determines scores)! Sasape Marina (Solomon Islands)! Job Creation Financial Performance Product Impact Possible Points" 24/30 38/40 29/30 Social Impact Score:" 90 Fiji Sugar Corp! Job Creation Financial Performance Product Impact Social Impact Score:" Possible Points" 9/30 16/40 14/30 39 Social Return 8% Social Return 2% 4! Determine Results: Investor Return! = 20%! Borrower Interest Rate 12 8 = 4% Investor Return! = 14%! Borrower Interest Rate! 12 2 = 10%! 13"

14 Key Risks & Challenges" Buy-In from Aid Providers and Local Governments: This program requires aid providers to redistribute capital from or add capital to existing programs. However, in this program, they only pay for projects that achieve impact. It is also imperative that local governments support private sector reform and SOE privatization." Project Risk: Investors bear the risk of a borrower defaulting and not returning principal, much less a profitable return supplemented by social gains. Therefore, we recommend forming SOE baskets to diversify project risks across multiple investments." Misalignment of Social and Financial Goals: Borrowers must not be incentivized to pursue social goals in lieu of financial goals or vice versa. Deal structure and incentives must be carefully designed and communicated." Developing Intermediaries: Intermediary plays essential role in this process and must be carefully staffed and competitively compensated." Measuring Social Impact: The Pacific Impact Bond Fund will have to carefully select an independent auditor with experience in developing social impact metrics." Building Distribution Network: To overcome geographic challenges, we recommend partnering with local banks." 14"

15 Impact & Scale" Phase 1: Pacific Island SOEs! Ideal testing ground for concept! Finite number of borrowers and limited regional population" Phase 2: Pacific Island private sector! Leverage learning/ relationships from Phase 1" Capitalize on wordof-mouth marketing" Diversification away from traditional SOE businesses" Population impact still limited" Phase 3+: Expansion to new regions" Model will transfer where aid flows are substantial and private sector reforms are lagging" Potential target regions include Sub-Saharan African and Southeast Asian countries with stable governments" Much higher population impact potential" 15"

16 Thank You!" Questions?" 16