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Korea pioneers a way to scale up Social Impact Bonds in a post-COVID world

This brings us to private capital to close this gap in social development financing. Innovative instruments like social impact bonds (SIBs) hold key as they can incentivise private capital.

The Covid-19 pandemic and lockdown has impacted vulnerable regions and communities the most. With the funding of the pandemic’s challenges being prioritised, many fear social developmental spending may recede when it is most needed. Resources needed for development were mammoth even before Covid-19 hit us. The UNCTAD World Investment report estimated an investment of USD 5-7 trillion per year is needed globally to achieve the Sustainable Development Goals. Developing countries need half of this. The official development assistance from the OECD, which reached a peak of USD 143 billion some years ago, dwarfs vis-à-vis this requirement. With volatile economic scenario causing fiscal stress, governments cannot suffice. Philanthropy remains a small piece. So how do we close this gap?

This brings us to private capital to close this gap in social development financing. Innovative instruments like social impact bonds (SIBs) hold key as they can incentivise private capital.

Unlike public/philanthropic funds who underplay the element of financial viability, private capital must combine returns and impact. The outcome-based structure of SIBs places them well for this purpose. In this model, the interest and/or principal is repaid by a government, philanthropy or CSR fund if the investee achieves pre-defined outcomes, which are measured by independent evaluators. This pay-for-success model ensures robust credit underwriting and measurable social impact is possible while delivering on returns, thus incentivising private capital.

SIBs still face one handicap, but Korea shows a way to overcome it

But while the unique structure of SIBs makes them practical to fund social development in a post-Covid scenario, there is a challenge to scale them in their current form.

In practice, SIBs are not like traditional bonds. They are executed as private investment (or loan) contracts between the parties, unlike bonds tradable in the market. This lack of a securitisation implies SIBs are tough to liquidate and trade, which makes investments in them risky for private capital managers. This limitation is hindering SIBs from growing to its full potential.

A way to overcome this is to leverage new technologies like blockchain. For the layman, blockchain stores data batches called blocks in distributed ledger networks in a decentralised manner. It needs independent verification from network participants to record data in a block, making it secure and tamper-free. A lot has been written how blockchain databases are helping post-pandemic recovery and healthcare through efficient tracking, diagnostics, etc. But blockchain can also revolutionise social impact by helping overcome the limitation of the social impact bonds.

A blockchain-enabled solution for Social Impact Bonds

South Korea has led here, pioneering the world’s first blockchain-enabled SIB, aka Smart SIB.

Pan-Impact Korea, Korea’s first SIB design/intermediary agency, launched the country’s first SIB with the Seoul Metropolitan Government in 2015-16 to help 100 borderline  intellectual functioning children by improving their learning abilities, and thus create a more inclusive society. In 2018, it focused on using blockchain to overcome the SIB’s limitation of being non-securitised in structure.

It built a SIB smart contract on the Ethereum blockchain platform-based programming language and transferred its SIB’s contracts to the investors via the blockchain. A smart contract is a programme registered in the blockchain which helps implement functions.

By securitising the contract, its investors could trade and liquidate the SIB units, i.e. their shares of money invested. They could view investment accounts and trading records. After the evaluator measured the impact, the investor could check his final income, computed automatically and accurately. Pay-outs were immediate. Investors could prove their identity and the intermediary could verify the former’s identity before paying out. It did not require trading in cryptocurrency, freeing it from price fluctuations. All information was recorded transparently. It was secure, accessible and immutable.

Others can emulate Korea’s example

Most importantly, the blockchain-enabled Smart SIB structure can be easily replicated by others. The use of blockchain to enable social impact, and especially with SIBs, is still in infancy. But the imperatives of a post-Covid world shows how critical it can be, to fund both pandemic recovery and social development. The advantages augur well for both the investors and the intermediary, thus creating an enabling environment for social impact bonds, and evince more private capital to look at SIB instruments.

Pan-Impact Korea itself is now working with the country's Buyeo County government to launch another SIB that addresses adults’ cognitive impairment.

Similar examples of a blockchain-enabled SIB are possible with existent bonds in India and the US. For example, India’s Haryana HSSPP early-literacy outcomes DIB or the USA’s Utah early-childhood education SIB can use blockchain to create the securitisation of those SIBs.

At the end, diversification into more sectors and areas of outcome by innovating smartly will help scale up private capital for social good. That will only benefit people’s life – the ultimate purpose of technology!


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