Exclusive | Interview with Mathieu Cantegreil on World's First Humanitarian Impact Bond  Part Two

Editor's Note

In the last chapter, we talked about the Humanitarian Impact Bond’s (HIB) fundraising strategy with Mathieu Cantegreil, senior analyst at the International Committee of the Red Cross (ICRC). Many readers are interested in how the ICRC evaluates their performanceand reports to their donors including social investors, governments and foundations.

For a social impact bond program,how to measure its outcome and performance which define the program’s impact and financial returns is a crucial question, especially as this can come at a high cost. So in this chapter, the ICRC will share its practical experience on impact measurement.

Interview on World’s First Humanitarian Impact Bond Part One‍

CASVI: We talked about fundraising from outcome funders. So as an outcome-based program, how will the ICRC measure the program outcomes?

MathieuC.: The HIB is a five-year project. We are building Physical Rehabilitation Centers in three countries affected by conflict – Mali, Nigeria and the DRC (Democratic Republic of the Congo), to provide physical rehabilitation services to people that require prosthetic limbs (knees, arms etc.) or wheelchairs to recover their mobility. In addition to building the centers, we will managethem and train the staff who will deliver the services.

From Year1 to Year 3, we will build the centers, train the staff that will operate them,and work on developing new efficiency measures to improve our services. In Year3 to Year 5, we will run the centers, applying the efficiency measures.

We operate about 120 centers around the world which makes it possible for us to develop a benchmark against which to evaluate the performance of the new centers on their second year of operation. That is the outcome on which the HIB is based.

With an impact bond, you are linking financial returns toperformance. This requires data and we need to base the bond on an activity that strikes a good balance between the ease of collecting data to monitor ongoing activities and historical data to set benchmarks.

Figure 1 Overview of HIB’s 5-year Plan

Source: ICRC

So why are we focusing on physical rehabilitation? There are two reasons. The first one is that we have solid data, including historical, on this type of activity at the ICRC. The second is linked to our willingness to involve private sector investors.

We wanted to focus on an activity that would be more relatable. There is a direct link between restoring someone’s mobility and ability to live an independent life, with their ability to go to school or earn an income for themselves and their family, and thus contribute to society and the economy.

On the fifth year of the HIB, which corresponds to the second year of operation for each of the centers, we will measure the efficiency of the services provided. We will then compare it with historical performance at other comparable Physical Rehabilitation Centers run by the ICRC, also on their second year of operation.

We have developed a formula to calculate the efficiency of the centers, as well as a formula for calculating the corresponding return or loss for the investors in the HIB.

While the formula appears simple at first, there are two important components to it:

1.    We consider that a person has regained mobility only once they have received their prosthesis, orthosis or wheelchair, that it is properly fitted and that the person concerned has successfully undertaken the appropriate rehabilitation.

2.    We give a different weight to the type of service a person needs, so as not to create perverse incentives. In the formula to calculate the efficiency of a center, giving a wheelchair has much less weight than investing time and effort to properly fit a new leg or knee to someone who needs it. We want to encourage our teams to deliver the most appropriate service to an individual, not the fastest. The philosophy is to maintain high quality service while serving more people.

Figure 2 Performance Calculation Formula on HIB   

Source: ICRC

CASVI: Talking about data collection in the field, how will that work?

MathieuC.: We do two types of work. The first type is in very dangerous contexts, we have to constantly think about protecting our teamsand the people we serve. This is not conducive to the diligent and time-consuming data collection necessary for the HIB. Fortunately,in the countries and areas where we operate the HIB, we have the flexibility and time for proper data collection.

On apractical level, we are developing IT tools to systematize and facilitate the collection of this data. This has a cost which is paid for the HIB, but once the HIB is finished, the plan is to roll out this tool to our other centers thus extending the positive impact ofthe HIB on our activities.

Data collection and management rely on computers and the internet, which rely on electricity. Sometimes electricity or data connectivity is not always available in the countries where we operate, this will be a factor in the development of the IT tool we will use.

Construction Phase of Physical Rehabilitation Center

Source: ICRC

CASVI: HIB is a five-year long investment operated from 2017-2022. It is in its second year now. How is the program going?

(* According to online reports, the ICRC plans to establish 3 new PR Centres, offer services to 5000 patients and improve 80% employee efficiency in the 5-year program.)

Mathieu C.: The bond isnow in the second year of the construction phase, the training of the staffs is ongoing, and so is work on developing the efficiency measures we will implement. We are working in difficult zones, and you can read in the news how difficult it can be. All the partners in the HIB know it. For the moment, things are progressing well and our hope is that this continues.

CASVI: What are the learnings so far?

MathieuC.: When we talk about impact investment, of which the HIB is an example, we must remember that they can generate extra burden for the organizations they support. Such investments rely heavily on data. This can add extra layers of administration and reporting, sometimes more than is required to support standard decision making and management of an organization.

We should think about how this affects social enterprises and NGOs. They need to invest in resources to collect the data and manage the new requirements that come with impact investments. This has human and financial costs that must strike the right balance between doing enough to meet the demands of investors and of the project management, while not diverting too many resources away from the social mission of the organization.

We need to start thinking about what are the basic elements of information that we need to make a decision and to monitor performance. Sometimes we ask for more data than we need or even could review. This adds unnecessary pressure. As a sector there is room for improvement.

When sitting in your office, thinking about the HIB or another impact bond, it might seem an elegant solution to a problem. But when you start implementing one, you discover the many challenges and dilemmas to resolve. Three that stick to my mind are:

-      Ethical questions. What objective to protect when aproject runs into difficulties and, as a result, the financial and social objectives start to diverge? We solved this by making sure all operational decisions for the HIB are made by the ICRC, with no input from the investors,and they respected that. Working with flexible and benevolent investors is portant.

-      Having the right expertise. We needed to have in-housebanking expertise to understand all the issues around the HIB, to help usstructure it, and to ensure that we could properly negotiate with the investors and outcome funders. Thankfully, a banker agreed to support us on this pro bono.We could never have done the HIB without him. Many NGOs and social enterprisesdo not have this kind of expertise in house. It is indispensable.

-      Auditing data. It is not as straightforward as people might imagine to find an external auditor willing to go to the dangerous countries where we operate, check our data collection and the final numbers used to calculate the final payout of the HIB. The HIB is implemented in countries considered too risky for the large auditing companies, so we had to find a small independent auditor willing to go to Mali, Nigeria and the DRC to review the final performance of the HIB.

CASVI Interviewed with Mathieu Cantegreil

Source: CASVI

CASVI: Who will be the auditors?

MathieuC.: The ICRC internal auditing team will be involved in monitoring of certain elements of the HIB throughout the duration of the project. It is an independent structure within the ICRC which reportsdirectly to the Director General. The external auditoris a small company based in Paris that is experienced in working in difficult contexts.

CASVI:One of the biggest criticisms for any type of social impact bond would be its cost. How much in terms of percentage is spent on cost like procedures and measures?

MathieuC.:We are doing such a project for the first time, as a trial. A prototype is always expensive, but it is an importantstep in the learning and experience-building process. Once we have experience, once we can go mainstream, then it gets cheaper.

We worked hard to keep costs reasonable. On the legal front, for example, we had to work with 3 top law firms, we managed to negotiate pro bono services from top law firms. If we had to pay for these services, it would have been very expensive. Receiving pro-bono or low-bono support from experts can be a good way to keep costs low. Though in the case of pro-bono, it can be more delicate to put pressure on your supplier if you want them to deliver work quickly. The power balance is different than with a low-bono or full price supplier.

Similarly, we were able to get a banker to work full-time forus, in-house and pro bono, for the duration of setting up the HIB because we did not have this expertise in-house.

So when you are talking about what’s the cost, it’s hard to pin down. The investors and also the outcome funders have costs in relation to due diligenceon the HIB, on us. We have set-up costs (structuring of the HIB, securing outcome funders and investors, closing the deal) and new administrative costs linked to the implementation of the project and the data components which goes beyond our current standard procedures.

Safe Drinking Water Project in Syria launched by ICRC in 2018

Source: ICRC

CASVI: A lot of Pension Funds in Europe invest in impact investment. Is the appetite really there?

MathieuC.: Impact investments can be expensive. Imagine a fund that wants to invest in companies that create jobs, or provide services(health, education, power etc.) that have a social impact. To properly managethe investment, you need someone to go and find companies to invest in, to audit the companies, and to prepare the pipeline of investments. Then you need to monitor and collect the data, do the financial and social reporting for the investors. It is very expensive, and it gets more expensive the further you are away from your home country, and the more you find yourself in fragile contexts, which are the ones that need impact investing.

I believe impact investments can be a great way to mobilize capital. The AghaKahn Development Network which I mentioned earlier is a good example.

The way in which one manages a business can also be impactful, even if there is no proactive impact measurement process. In a previous job, we talked to a Chinese businessman. We asked him if he engaged in philanthropy or was interested in impact investment. He replied “No” rather categorically and explained that instead he provided good pay and health insurance for his employees and their families. I believe that this approach can be just as impactful as using his money for philanthropy or for impact investing. And maybe more efficient because it requires less overhead investment.

Introduction to ICRC

Establishedin 1863, the ICRC operates worldwide, helping people affected by conflict and armed violence and promoting the laws that protect victims of war. An independent and neutral organization, its mandate stems essentially from the Geneva Conventions of 1949. ICRC is based in Geneva, Switzerland, and employs some 16,000 people in more than 80 countries. The ICRC is funded mainly by voluntary donations from governments and from National Red Cross and Red Crescent Societies.

Special thanks to the ICRC Regional Delegation for East Asia for helping arrange this interview. There is no direct link between ICRC and the company mentioned in the article.

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