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A New Paradigm For Public-private-partnerships: Development Impact Bonds And Monetising The Sdgs And The Human Right To Water

Congress: 2015
Author(s): Julie King
Galileo Agency1

Keyword(s): Sub-theme 5: Financing, investment and pricing schemes,
AbstractINTRODUCTION UN General Assembly Resolution 64/292 for the Human Right to Water and Sanitation formalises the fundamental life-component of water. It does not, however, extend to the right to water for free. Bridging the chasm between recognising this fundamental human right and the financing required to accomplish it in practical terms, is critical to successfully achieving the Post-2015 Sustainable Development Goals (SDG), including those involving water. In this context, governments are experiencing increasing levels of sovereign debt and aid agencies are facing shrinking budgets. Private donors have tired from the "revolving door syndrome" where significant societal problems -- at home and abroad -- stubbornly remain, in spite of the billions of pounds given to reduce or eliminate them. At the same time, infrastructure projects aimed at delivering a broad network of services frequently run millions of dollars over budget, with results being of little to no benefit to beneficiaries, while developing countries are saddled with even more debt, which they are ill-equipped to take on. Still the dire need for the services increases. From this 'perfect storm' there has come the growing recognition from all actors -- private and public alike -- that 'business as usual' is no longer an acceptable way forward. New ideas, models and perspectives are required to effectively draw down mounting social challenges through manageable structures, collaborative approaches and measured results -- including financing. What has emerged is the rapidly growing Impact Investing sector. In 2010, Impact Investing was deemed to be an "asset class" in itself by major finance institutions, such as JPMorgan and Goldman Sachs. Now, armed with innovative ideas of how to catalyse, rejuvenate and recapitalise international development, donors, investors, governments and aid agencies are being given new data, ideas and tools to effectively address rampant societal challenges -- albeit from an informed and profoundly different perspective. METHODS With both research data and interviews with practitioners, this paper provides a general and legal assessment of a new financing mechanism and business model in international development called Development Impact Bonds (DIB). In considering the characteristics of a DIB, they appear in fact to represent a new paradigm for public-private-partnership. Designed to create a win-win scenario for all stakeholders, DIBs incorporate the rapidly emerging Impact Investing sector; that segment of philanthropic, high-net wealth and institutional investors who are increasingly committed to expecting both a financial -- and social -- return on investment. Included in the assessment will be the overall "Impact Investing Continuum", identifying the actors involved and the 'sub-categories' of investors, as recognised by the G8 Taskforce on Impact Investing. The structure of DIBs will also be dissected, including the financial, collaborative and management-design and the core component of achieving measurable results, which are corroborated by independent evaluation. Within the DIB structure, this paper will also identify the ways in which DIBs create a business model that combines private investment, philanthropic resources, government funding and profit and not-for-profit service providers to deliver public service projects -- and to scale the impact of those services -- through the project contract. These areas include the optimal contractual structures for imposing the market discipline of private investors and the principles of commercial project management and best practices to implement and achieve the social objectives of not-for-profit and philanthropic stakeholders. Another area to be considered will be the "milestones achieved", which are the contractual-triggers for the release of payments to impact investors. Additionally, and not insignificantly, the paper will look at how DIBs provide governments and donor organisations with a tool to impose a more effective, accountable and verifiable structure on the spending of public resources by funding assets, only after they are demonstrated to function sustainably to a pre-established commercial standard. RESULTS The implications to the international water sector of incorporating DIBs as the paradigm for PPP project finance, can be significant. Not only does it tap into additional and significant sources of private investment, the commercial water sector can be a leader in driving the accomplishment of both the Post-2015 Sustainable Development Goals and the UN legal recognition of the human right to water and sanitation. Additionally, from the research and interviews, this paper will seek to demonstrate the practical value of Development Impact Bonds as a tool to facilitate the effective communication and collaboration between all for-profit, not-for-profit and public stakeholders in water infrastructure projects -- and importantly, the community and project beneficiaries. CONCLUSIONS PPPs are a widely used project finance mechanism for infrastructure projects worldwide. National legislation, which legally authorises a government to engage in PPP projects, is already in place in many developing countries around the world. Development Impact Bonds are a paradigm of PPPs and represent a potential 'sweet spot' for creating broad-based, commercially viable collaborations between the commercial water industry, government, and the not-for-profit sector, as well as for shareholders, Impact Investors and project beneficiaries. DIBs tap into the not-insignificant financial resources skill-sets within the Impact Investment sector, which is becoming a well-organised force in funding social programmes -- including water and sanitation. Sir Ronald Cohen, Chairman of the G8 Taskforce on Impact Investing believes the Impact Investing movement will create a "second revolution", achieving social impact results in ways, which will revolutionise society, not unlike the introduction of new technologies has done over the past 30-years. DIBs are also a business model. They incorporate into PPPs the added dimension of leveraging and integrating private investment, aid donors and government funding with not-for-profit and philanthropic mandates, programmes and investments -- funnelled into contractually agreed project goals. Within the water sector, DIBs also offer the credible project and financing infrastructure required to attract institutional investors, which are actively seeking out viable Impact Investment opportunities. Finally, but not less critically, DIBs offer a means for all actors to collectively accomplish the Post 2015-Sustainable Development Goals and to achieve the human right to water in practical terms: the provision of potable water and sanitation systems to individuals in developing countries with limited or no access to either -- the Beneficiaries of DIB-financed water-projects. 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