Abu Dhabi bond offerings to use private cash to tackle social ills
The first 'social impact bonds' to be introduced in the Gulf were welcomed by Gordon Brown, former UK Prime Minister
Abu Dhabi is to launch an innovative new plan to use private sector finance to tackle complex social problems.
In a first for the Middle East, ‘social impact bonds’ will be offered to potential investors by government agencies.
By investing in the bonds, private companies or wealthy individuals will provide the capital to implement a variety of social schemes, some of which will be aimed at improving health and well-being.
Salama Al Ameemi, director general of Ma’an, the Abu Dhabi government agency which is developing the bonds, said the new collaborative approach could prove hugely successful.
Gordon Brown, the former UK Prime Minister who introduced the first social impact bonds in England in 2010, said the move was an “innovative development”, predicting it would “help transform social provision” in the Emirates.
“There are a lot of factors that make us think this will be a very successful approach here,” said Ms Al Ameemi.
“We have had some really interesting proposals, to address some hot topics which need to be solved.
“Due to the complexity of the challenges you need a collaborative effort from different bodies, whether they are government departments, the private sector or third sector.
“Social impact bonds are the platform that will connect the three sectors together.”
Under the scheme, investors who choose to back a particular social project will only see a return on their investment if the programme proves successful.
It is hoped that the first of the projects, which would be designed and delivered by non-profit groups or private companies, will be up and running by next year.
Around the world, social impact bonds have been used by governments to fund schemes aimed at tackling everything from homelessness to drug addiction.
In the UAE, proposals currently under consideration include projects to help those with disabilities and other programmes with a focus on health.
Officials hope the initiative will help drive innovation by inviting new ideas from charity and non-profit groups.
Government agencies would identify a problem and invite suggestions for ways in which they could be solved.
A successful applicant, such as a non-profit, would then run the project, financed by the private sector investors.
If the venture hit pre-agreed targets, investors would have their initial investment returned as well as receiving an additional interest payment paid for by the government.
If the scheme proved unsuccessful, the investor would lose their capital and forfeit the interest.
According to Ma’an, contracts would be drawn up on a case-by-case basis, with riskier projects attracting higher returns if successful.
A low-risk scheme would typically attract a return of between 2.5 and 5 per cent on initial investment, while an idea with a more uncertain outcome might return a profit of around 10 per cent.
The scheme would reduce financial risk for the government, as investors only receive a pay-out if projects work.
Ma’an also said it believed the bonds would help develop the non-profit sector in the UAE, as organisations would have a new source of long-term funding. Individual schemes could potentially last several years.
Seven projects have been shortlisted for the first bond, after 17 government entities submitted 25 suggestions.
The idea comes as socially responsible schemes are becoming more popular among wealthy individuals and investment groups around the world.
“There is a growth in appetite among investors to use their finance for social good,” said Faisal Alhmoudi, Social Contracting Director at Ma’an.
“The projects will provide clear, beneficial outcomes for citizens.”
Mr Brown, who was Prime Minister of the UK between 2007 and 2010, said: “Just as venture capital responded to the financing needs of the dot-com revolution a generation ago, social impact investment can help us reach the next stage of innovative social reform and the new UAE social impact bond represents an exciting and innovative development that will help transform social provision.”
What are social impact bonds?
Social Impact Bonds were first developed in the UK, launching in 2010.
They see contracts drawn up between three parties – the government, investors and a service provider.
The government will first identify a social problem it wants to address. It will then invite suggestions from service providers, usually non-profit organisations, on how the fix might be achieved.
If the government likes the idea, it will agree on a target for the provider. For example, if there was a scheme to develop training for disabled people, the target could be a defined rise in employment rates among those who took part.
Investors will also be brought on board, who will finance the project.
If the target is met, usually after several years, the government will pay the investors their money back with an additional payment.
This ensures that the government only pays for schemes that have worked. It also offers investors a chance to influence social change, while still having the chance to make a profit.
Advocates say the process drives innovation, as outside organisations are invited to pitch their own ideas.
Since their introduction in Britain, where a scheme to reduce reoffending rates among prisoners was the first ever backed by a bond, the idea has gained traction across the world.
As of May this year, there were 142 social investment bonds worldwide attracting investments of more than $420m, according to the Brookings Institute. Countries to adopt the model include the United States, Japan and Australia.
Updated: November 17, 2019 09:55 AM