Global Observer

Social impact bonds gear up for Mozambique

Social impact bonds gear up for Mozambique

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A new financial tool called a "social impact bond" promises to change the future of development. Will malaria-prone Mozambique illustrate the benefits of investing over donations?

Entomologist Alberto Philipe Machava examines dead mosquitoes extracted from a window trap in a village outside of Maputo, Mozambique

JOHANNESBURG--For generations, non-governmental organizations have depended on donors to fund their activities. There was no promise of a return on investment, and many of the programs they funded were unsustainable and died when the money dried up.

In the last few years, a number of companies and governments have worked together to form what's been called a "Social Impact Bond" (SIB), which uses the money of private investors to accomplish socially beneficial goals. The Economist calls these bonds "a big financial experiment," and some think that they may be a new way to look at investing in social programs around the world. Global consulting firm Dalberg is preparing to unroll the new instrument -- initially designed in England in 2010 -- on the African continent for the first time, and Dalberg hopes to reshape the way people look at development.

James Mwangi, Dalberg's Global Managing Partner, says that this type of investment would make "a lot of difference to the lives [of people in these communities], and it's fundamentally good business sense. Not charity. Good business sense."

In 2010 the British firm Social Finance unveiled SIBs that aimed to fund preventive social programs with private money. It was first used to combat recidivism with prisoners in Peterborough in the East of England. Since then the bonds have been rolled out elsewhere in the UK, New York and a number of other cities around the world, all working to fund programs that save the state money in the long term.

[caption id="" align="alignnone" width="620" caption="A McKinsey motion graphic that explains how SIBs would work in the U.S."]

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SIBs work more like loans than traditional bonds. With a traditional SIB, government contracts a group to administer the bond, and the administrator raises funds from private investors. That money is then distributed to service providers (usually NGOs who used to go to private donors or the government directly for funding). These groups scale up the work they've already been doing, hopefully increasing their impact across a community. If certain targets are met -- in the case of Peterborough if enough former prisoners stay on the straight and narrow -- the government will repay investors with interest.

Dalberg is the first company looking at using SIBs to invest in African development. Its first target is malaria in Mozambique, a debilitating disease that the former Health Minister Ivo Garrido called the single largest health care problem the country faces.

A textile mill in Tanzania that produces long-lasting, insecticide-treated mosquito nets

Malaria is a disease caused by a parasite spread through mosquito bites. Even in mild cases it can knock an infected person out of commission with chills and flu-like symptoms for weeks. Worldwide, malaria is estimated to cost billions of dollars in lost productivity a year.

"As a general rule of thumb, where malaria prospers most, human societies have prospered least," write prominent economists Jeffery Sachs and Pia Malaney on the economic impact of the disease. Poverty and malaria are intertwined, and nowhere is that clearer than in Mozambique. The World Health Organization found that in 2000 two-fifths of all outpatients in the country were treated for malaria. In some areas 90% of all children under five are infected, and throughout the country, malaria is responsible for the majority of pediatric visits. Nearly a third of all hospital deaths are caused by the disease.

The effects of malaria multiply in a developing country like Mozambique. Sick children need to be looked after by parents who could be working. Sick parents become burdens rather than breadwinners, and struggling households are pushed further into poverty. This results in a loss of productivity throughout the Mozambican economy, one that's nearly impossibly to quantify.

The lost productivity is where Dalberg sees an opening. It's far cheaper to equip a household with insecticide carrying bed nets and spray at-risk communities with safe pesticides than it is to deal with sick citizens.

Like most other SIBs around the world, Mwangi is working with government partners on his malaria-fighting bond. But Mozambique doesn't have the public funding of Britain or the US, and Dalberg is looking elsewhere in the country for resources to fund the bond. Mwangi thinks that mining companies may provide enough funding in the short term in order to prove the effectiveness of the programs and attract long-term investment from the government. Resource-rich Mozambique is dotted with new mines, and many mining companies are starting to bear the burden of a workforce that has to deal with malaria. An investment in SIBs that target malaria would mean a healthier, more profitable workforce throughout the country.

"[If] you address malaria, it allows your working population to be productive, they make more money, they fight malaria more," said Mwangi. "Over time you have the resources to fight it and eradicate it."

Photos: Flickr/Gates Foundation

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Dave Mayers

Correspondent, Johannesburg

Correspondent, Johannesburg Dave Mayers has written for The New York Times, the Financial Times, the Committee to Protect Journalists and the World Picture Network. He has taught multimedia journalism at Wits University and the Columbia University Graduate School of Journalism. He holds degrees from St. John's University and Columbia. He is based in Johannesburg, South Africa. Follow him on Twitter. Disclosure