Blended Finance Bulletin

Q1. The blended finance ecosystem in India has witnessed sustained though gradual growth, and is now at a tipping point, poised for accelerated adoption. As the pandemic creates pressure on overall developmental resources, what are your views on the relevance and scale of blended finance transactions in India?

• Blended finance, as the name says, blends the benefits of philanthropic capital's social impact to strategically leverage and mobilise large amounts of commercial capital in sustainable development. Instruments like concessional debt, credit guarantees, and impact bonds bring together different types of funders playing to their strengths to drive impact at scale. India has been witnessing a growth in the use of such instruments and the resultant ‘blending' of stakeholders for the last few years.
• The relevance of these tools increased during the pandemic. No single funder or type of capital was designed for the scale and nature of the problem that we witnessed. This required all of us to rethink how development resources are deployed. During lockdowns, millions stayed at home and lost their livelihoods and required urgent sustenance support. Philanthropic capital could be deployed quickly to bring immediate relief, but rebuilding the sector needed sustained effort and more capital. Therefore, blending philanthropic capital to provide credit guarantees to de-risk NBFCs lending to MSMEs and leverage commercial capital. We also used returnable grants during this period, with ~85% return rates and reaching two to three times more beneficiaries in the process.
• Overall, in the last five years, we have seen two to 20 times leverage and one and a half times more achievement of impact targets in blended finance instruments we have used.

Q2. Can you describe blended finance transactions or products that your organisation has been involved in? What can you tell us about your approach using blended finance, and how it has evolved over the years?

• The Michael & Susan Dell Foundation uses four types of blended finance instruments across our portfolio: junior equity, impact-linked debt, guarantee, and impact bonds.
• Junior equity involves taking on high risk in exchange for higher social impact. With companies like Vivriti, our contribution to the fund played a catalytic role with a three times leverage on capital in attracting risk-averse investors to the debt fund, which unlocked credit for over 12,500 customers, who were in deep need due to COVID-19 lockdown.
• Impact-linked debt has been used to provide financial incentive to the borrower for achieving specific impact outcomes. For example, we have funded school financing companies like ISFC and Varthana through variable interest rate debt, where achievement of learning outcomes in schools is used to reduce the interest rate for the company as well as the end borrower thereby, creating a reward system for performance improvement. In both these programs, we have seen the initial targets being exceeded and the impact hypothesis being met across the programs.
• The foundation is involved in partial risk sharing to attract comparatively risk-averse investors, opening the market in deep need areas. Through guarantee schemes, the Dell Foundation has been able to unlock credit access for over 50,000 micro/ nano- entrepreneurs over the last two years with a leverage ranging from three to 20 times on the amount of the guarantee.
• WIth impact bonds, the contract is among three different types of parties. The service provider provides education/skilling to children and youth to achieve a predetermined outcome; a risk investor assumes performance management risk and provides upfront working capital to these service providers; and finally, outcome funder guarantees repayment to risk investors if pre-determined social outcomes are met. On the longer running education impact bond, the providers have been able to meet and exceed the outcomes significantly in both years, thus indicating that the outcome orientation of such instruments provides a strong incentive for the service providers. On the still nascent (6 months in operation), Skill Impact Bond, with over 4,000 candidates enrolled across sectors such as apparel, retail, logistics and manufacturing in cohort one, the early indicative results are extremely promising with majority of the service providers exceeding (b/w 100-120%) the outcome targets (on placements) set for them for cohort one.

Q3. Given your wide experience, what are the emerging / priority areas or sectors (like healthcare, climate action) which you anticipate will attract greater investor attention in the next five years?

• From our experience, we have observed that sectors that have a clear, measurable, and compounding social impact have greater investor attention.
• Along with other like-minded investors, we have been able to use blended finance in education, skill development, and credit financing for nano-entrepreneurs.

Q4. Dell Foundation's work on impact bonds has shown the importance and role of innovative finance and pay for success structures in improving education program outcomes. What role do you see for similar models in other sectors like livelihoods, MSME?

• The power of impact bonds lies in its focus on outcomes instead of outputs. Outputs are a result of an effort, while an outcome is a result of an effort which is driven by purpose, making it geared toward higher impact. At the same time, it offers moderate returns to the commercial investors as risk investors.
• QEI impact bond has worked well in improving education outcomes, as the results have shown over-achievement in both the years with a strong focus on performance management. We believe that this approach can be used in sectors like financial inclusion and livelihoods as well because these two sectors have the inherent potential of creating a compounding impact.
• Such tools are also important in signalling to the industry to pay for outcomes rather than inputs, which has been the typical approach. The strong focus on outcomes via instruments like impact bonds has helped to move the conversation away from inputs across sectors (attendance to learning levels in education and enrolment to placement & retention in skilling).

Q5. What are the benefits of deploying blended concessional financing using a programmatic or platform approach (as opposed to a project-by-project basis)?

• Blended finance transactions are still highly customised in nature in India, and require complex legal structures for fund flows between different sources of capital. This leads to high administrative costs and long timelines, taking away dollars and time which can be used to focus on the beneficiaries. Platform approach can mitigate some of these challenges which project-by-project financing faces today. Availability of pre-tested templates to design such instruments can significantly reduce the time and cost required in designing them with more funds being allocated to beneficiaries.
• A platform approach can also help in building a pipeline of organisations that can absorb impact-linked funding. It has huge signalling value to the market to help organisations prepare themselves for rigorous outcome measurement and delivery.
• Governments adopting a pay for outcome-based model based on the learnings from philanthropic capital-based projects are another way in which it can benefit the market.

Q6. What can the blended finance and impact ecosystem do better to engage and receive funding support from India's CSR and philanthropic investor community?

• Blended finance instruments are usually complex in structure and impact metrics are not standardised across different instruments. Addressing these two challenges will go a long way in increasing participation of India's CSR and philanthropic investor community.
• Templatization of these structures and reduction of administrative costs will increase the efficiency and attractiveness of blended finance.
• Secondly, there is a need for common metrics for impact measurement. In India, there has been a lot of public sector discourse around indices across several sectors and adoption of these by the blended finance community can lead to higher CSR participation in the short term and the government in the medium and long term.

Q7. There is a greater need for capacity building and collaboration in the blended finance ecosystem given the multiple stakeholders in each transaction. Can you give an example of a transaction highlighting the following - What unique capabilities and expertise did each participant bring to the table? How were participants brought together?

• Impact bonds have the potential to leverage the unique capabilities of each partner to maximise and achieve the common shared vision of impact for the end-customer.
• For example, in Skill Impact Bond, we aimed to create sustained improvements in the quality and efficiency of service provisioning in the skilling ecosystem by shifting focus from just training completion to placements, salaries and job retention and payment for these outcomes.
• Outcome funders, like JSW, HSBC, with their CSR mandates, provided a guarantee of returns when these outcomes were met. Training providers, like Learnet, Magic Bus, IIT Alumni association, provided their expertise and historical outcomes data to make sure that the risk investors (NSDC and Dell Foundation) were able to measure and price the risk involved. Technical partners like USAID, and Dalberg, provided additional support to put together a collaborative structure with tight and ongoing monitoring.