By Priyanshi Chauhan, Ria Sinha, Lopamudra Sanyal
The social impact sector once again, finds itself in challenging and interesting times. The WHO recently announced the end of the COVID 19 pandemic globally. And yet, India, like the world, is navigating the inequities of the post pandemic world, the global economic slowdown among many other emergencies. The country faces a deficit of $94 billion to achieve the SDG goals, which is expected to increase to $152 billion in 2027. This creates the need to explore innovative and alternative financing models to finance the social sector and create social impact.
One of the ways to finance social impact efforts is by channelling funds from the private sector towards the social sector. However, these are riddled by uncertainties including longer gestation period and below market returns. There is thus merit in private sector capital being complemented with innovations in structuring the investments to mitigate risks and enhance social returns along with the financial returns. On the other hand, it is vital that social purpose organisations as recipients of private capital have the required knowledge, information and capacity to not only access the new sources of funds, but to use that capital efficiently, fulfil expectations of their funders along with the associated reporting and compliance norms.
This article, whilst not being the first by miles on elucidating or showcasing concepts of innovative finance from the perspective on both sides of the table, argues for innovative finance strategies to align with the realities of the social sector in India, and incorporate measures to reduce the information asymmetries that exist between the private sector and the recipients of private funds in the social impact space.
What is innovative financing?
The meaning, scope and definition of innovative financing vary at present, depending largely on the interpretations derived by stakeholders of this universe, based on their interests and applications.
Innovative financing is complementary to traditional sources of finance including public sector funding, philanthropic and charitable contributions, and Official Development Assistance. The objective is to provide a sustainable pool of funds complementary to the public spending in the social sector.
Innovative finance offers opportunities to forge new partnerships between various stakeholders. This not only helps in mitigating risks and ensuring returns for the private sector but also connects investors with credible social sector projects and initiatives in need of financing but not appropriate resources and information to reach out to the investors themselves. For example, the Government of India launched a Social Impact Initiative called SAHYOG, a CSR Network that connects companies looking to spend their CSR funds for social sector projects.
Innovative finance also emphasises undertaking impact assessment of the social sector projects. It allows the investor to assess the value of investing in the social sector, and also enables better management of projects, evidence-based decision making and promotes transparency in implementing the projects.
Innovative Finance for the Social Sector: Information Asymmetry and Limited Capabilities
For India’s highly underfunded social sector which is also dominated through public funds, innovative finance offers an opportunity to unlock private capital along with traditional sources of finance to the social sector. This will allow organisations in the social sector to develop new tools, technology, management strategies, leadership etc. and scale up their interventions.
With its emphasis on impact assessment, innovative finance creates an opportunity to build an evidence of efficacy of their interventions, undertake evidence-based learning and decision making to create a continuous feedback loop into project planning and implementation, and assess the impact created through their interventions. This also creates evidence for the investors which creates a crowding-in effect where more private investors are attracted to the social sector, and create a sustainable pool of funds for the social sector.
However, there are concerns regarding organisations’ accessibility to innovative financing instruments and the costs of executing complex finance deals. Accessibility to innovative finance instruments is limited for many organisations in the social space due to lack of awareness and skills, information asymmetries between the funder and the funded, lack of technical know-how in implementing these deals.
Innovative finance requires rigorous data collection to take evidence-based decisions, performance management, and assess the impact of private funding to the social sector. The type and quality of data collection will vary depending on the organisation’s capacity in terms of people with expertise, knowledge of what data to collect and how often, technology, and how to use that data for reporting and decision making.
To overcome these challenges capacity-building efforts should be executed to augment organisations’ knowledge and understanding of innovative financing instruments.
This comprises delivering the necessary training and support to foster the skills for navigating complex financial transactions and improving partnerships with credible financial intermediaries who can furnish guidance and expertise.
It is also imperative to emphasise bridging the information gap between financers and recipients in the social sector. Transparent communication concerning the requirements, expectations, and procedures associated with innovative finance instruments can enable organisations to overcome information asymmetries.
What needs to be done? Key Action Points
The viability and ease of access in the use and optimisation of innovative financing structures and derived instruments rests primarily on the social impact sector’s access to understand these and to build their capacities to apply for the use of these non-traditional financing routes.
Innovative financing agencies and regulatory bodies cannot be blind to the lived realities and operational challenges within which the social impact sector operates.
There is a need for a lot more opportunities for inflection to be initiated within the social impact space as well as with donors, markets, regulators to bring more visibility on the landscape and potential of innovative financing for development. The ethics of collaboration against competition, of community centricity against pure metrics need to continue to inform the work of social impact organisations whilst we upskill ourselves to identify and tap the right financing instruments to augment our work.
The authors are research associate, CIFSI, Indian School of Development Management (ISDM), research lead, CIFSI, ISDM, associate director, dissemination and publication , ISDM, Views are personal.
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