Foundations support new ways of financing humanitarian aid
In September 2017, the International Committee of the Red Cross (ICRC) issued the world's first Humanitarian Impact Bond (HIB), in which the Swiss Fondation Lombard Odier and the Spanish La Caixa Foundation participated as investors and refinancers, respectively. On the government side, the governments of Belgium, Italy, Switzerland and England are involved.
The aim of this HIB is to establish and operate three physical rehabilitation centres for people physically damaged by war and crises in the Democratic Republic of Congo, Mali and Nigeria. This is specifically with the aim of providing these people with orthopaedic care and (re)integrating them into their communities socially and economically through various accompanying initiatives, such as involvement in sports activities and assistance in setting up their own small businesses.
In terms of its structure, the HIB is similar to the Social Impact or Development Impact Bonds, which have been used for some time and which traditionally consist of cross-sector cooperation between a social service provider, an institution or organisation and the state. The partners regulate their cooperation through a contract that defines the obligations of the individual contracting parties, financing mechanisms, risk distribution and effects.
In total, private investors have invested the equivalent of 16.5 million euros over five years in the ICRC's HIB. The repayments depend on how successful the planned project activities are with regard to the people receiving help through the project. In the best case, the investors receive the capital invested back after five years and up to a seven percent return per year if the project receives a positive evaluation. In the worst case, the investors can lose up to 40 percent of the capital invested – hence HIB belongs in the class of clearly risky investment opportunities.
In an interview with the Association of German Foundations, Christian Tohmé, Sector Head of Strategic Philanthropy at the ICRC, reflected on the benefits and risks of the first HIB for all parties involved. In a second interview, Lucy Schweingruber, expert in foundation cooperation at the German Red Cross, discussed another new way of financing humanitarian aid.
Christian, what is so special about the ICRC's HIB?
Christian: Our HIB is the first financing mechanism of its kind in a humanitarian environment – i.e. in conflict and crisis-hit regions. The framework conditions for investment and impact assessment in fragile contexts are fundamentally different from those in politically stable countries. This work requires a long-standing presence on the ground and trustworthy contacts with official institutions and influential non-governmental groups. This is where our HIB comes in: against the background of ongoing conflicts and often unresolved humanitarian crises, we wanted to implement a pilot project that would provide indicator-based, impact-oriented and success-dependent financing of our activities for disadvantaged population groups in high-risk countries.
You say that HIB provides indicator-based, impact-oriented and success-dependent financing of your activities for disadvantaged population groups in high-risk countries – that sounds quite abstract on the face of it. As an investor, can you explain exactly what this means for me?
Christian: Together with investors and refinancers – including foundations, financial institutions and governments – we aim to measurably improve the quality of life of the people receiving help in the three new rehabilitation centres. Due to the fact that in conflict and crisis countries only a fraction of the people physically damaged by external influences have access to adequate rehabilitation services, it was logical to place this aspect of our work at the centre of our HIB.
Why did you introduce the HIB?
Christian: With a view to securing our long-term commitment, we aim to continuously improve and diversify our offers for donors and partners. Against this background, we wanted our HIB to attract an audience interested in investing in a new and long-term initiative. The guaranteed financing of our HIB activities over five years also allows us to concentrate on our core business without financial pressure, i.e. providing continuous humanitarian aid to people in conflict and crisis situations.
The impact measurement is indeed decisive for the repayments to the investors. What are the concrete indicators? And how can you ensure reliable impact measurement in war and crisis zones (as that is usually very difficult)?
Christian: In the past 40 years, our project portfolio has grown from two implemented rehabilitation projects in two countries (at the beginning) to around 150 projects in more than 30 countries today. During this time, we have learned a lot and have been able to constantly refine our benchmarks for assessing efficiency and impact in difficult contexts. Against this background, we have defined realistic basic values for measuring the success on the basis of the rehabilitation centres that we have already supported. The new centres financed by the HIB are assessed on the basis of these benchmarks and the amount of the performance-related payments is based on these.
What do I have to consider if I want to invest in this HIB?
Christian: The HIB tender phase was concluded last year, with investments of EUR 16.5 million and refinancing commitments of up to EUR 23 million. As there is a great dependence between the amount of the capital contribution and the radius of the impact targets, our financing initiative was sealed with the agreed amount over the next five years.
In this context, it should also be emphasised that, from a legal point of view, the HIB is not a bond but a type of loan with a performance-related reimbursement mechanism. Furthermore, the HIB is not listed, which is why, on the one hand, it cannot be traded, and, on the other hand, it also remains unaffected by market fluctuations. Due to the volume of capital required, it has also been specially tailored to the needs of institutional investors and refinanciers.
A 40 percent potential loss of capital would be a very high risk for a German foundation with legal capacity. On what basis could an investor, such as the Fondation Lombard Odier, decide to invest?
Christian: This point was indeed a subject of our discussions with our partners on both sides of the financing spectrum, with our investors ultimately weighing the risks carefully against the expected financial benefits on an individual basis. In the decision-making process, we certainly also benefited from our many years of experience of implementing such activities, our easier access to governmental and non-governmental agencies in our countries of operation and the close involvement of our partners in the course of the project.
What do you plan next?
Christian: The expansion of our portfolio with new financing models is currently in full swing. So, by taking into account our experience with the HIB, we are currently considering, together with our long-standing partner Lombard Odier, the design of a new derivative impact investing instrument. Furthermore, we are currently working with a German company on an indicator-based insurance instrument that can bridge financing bottlenecks in the implementation of our activities in regions that receive little media attention. In addition, we are currently cooperating with a coalition led by the World Bank on the development of financial instruments to enable us to respond more quickly to food insecurity in crisis situations. We are also in contact with Sir Ronald Cohen, the inventor of the Social Impact Bond, on a programme to improve children's access to education in conflict regions. Finally, we are working with an agency specialising in innovative financial instruments. With all our initiatives, we aim to further diversify our funding sources and make our commitment to children, women and men in conflict-affected regions even more efficient and effective.
Lucy, does the German Red Cross carry out work in a similar direction?
Lucy: The generation of additional funds for humanitarian aid via innovative financing mechanisms is also a major issue for the German Red Cross: since 2014, with the support of the German Federal Foreign Office, other institutional partners, companies and foundations, we have been developing the so-called “Forecast-based financing” approach, in which aid is bindingly committed even before a disaster occurs. Thanks to technical progress, extreme weather conditions can be predicted more and more accurately, enabling anticipatory disaster prevention measures to be initiated at an early stage: anticipation instead of reaction. Foundations participate in the approach through funding for the individual main components, which are, on the one hand, programme development, in which the predictability of extreme weather events is worked on in cooperation with financial institutions and scientific organisations, and, on the other hand, the implementation of pilot projects in various high-risk countries around the world, and also the establishment of the so-called DREF (Disaster Relief Emergency Fund), which finances disaster prevention measures.
The ICRC and the German Red Cross emphasise that financial investments and grants from foundations support the sustainability goals of the United Nations’ 2030 Agenda. How so?
Lucy: Within the framework of international cooperation, the entire Red Cross and Red Crescent Movement is making an important contribution to the implementation of the Sustainable Development Goals. A very important cross-cutting theme is adaptation to climate change, i.e. Goal 13: combating climate change and its consequences. In addition, we contribute above all to the most fundamental objectives of Goals 1 to 3: ending poverty and hunger and promoting a healthy life for all.