Impact Investment

Impact Investment: What problems arise when public goods are provided?

Introduction

Across continents and political systems, there has been a shift towards solving the delivery of social and environmental services through non-governmental funding. It is evident that the direct market mechanisms will not solve the delivery of these services. The question remains, in what ways can we improve and deliver better public services for society? There is a shift, governments are not able to handle the growing demand for social and environmental services. Impact investment could provide that solution to the shortage from government funding.

Impact investment

In June 2013, at the G8 meeting, an international effort was undertaken to explore the possibilities of Impact Investment[cm_simple_footnote id=”1″]. This was not only to accelerate growth but to acknowledge
some of the most important issues facing society through private capital. Private capital does come at a price, private investors initially are looking to receive financial returns[cm_simple_footnote id=”2″]. The Majority of the world governments it seems are unable to fund new innovative ways to improve social outcomes. With shrinking departmental budgets, it means that governments do not necessarily have all the funds.

Furthermore, there are few alternatives, governments are looking for Impact Investing as a way to fund social and environmental projects. It can promote innovation, saving the environment, economic growth on a local level, and apprenticeship, whilst all at the same time through private capital. With private capital, the possibilities seem endless as it can reach across industries and regions, it links small business financing in Sydney with social and community development in the Gaza city. It links the social consciousness of philanthropy with the market principles of business. It is about market power which can help with solutions for some of our most urgent problems. While this type of investment not only boosts the local economy, it will provide the public with greater access to collective goods. It can fund and support local initiatives a lot better, than the central governments.

Child Poverty Action Group and the Oak Foundation

For example, Child Poverty Action Group’s (CPAG) partial online activities are funded by the Oak Foundation, which is a private philanthropic organization that supports not-for-profit organizations to address social and environmental issues[cm_simple_footnote id=”3″],[cm_simple_footnote id=”4″]. The main service funded was the LWAS (Local Welfare Assistance Scheme) to help local claimants and welfare rights advisers, who wish to know more about different local schemes that replace the discretionary social fund in April 2013 [cm_simple_footnote id=”5″]. It was a new innovative way to deliver LWAS advice to advisers and claimants.

The LWAS pages are listed as a directory/postcode finder tool, with all the local welfare assistance schemes available via each council in the UK[cm_simple_footnote id=”6″]. This service is very popular among claimants and advisers alike, as it helps them to pin-point the exact LWAS information needed when direct help is not available from the DWP. However, this service is no longer funded by the Oak foundation as of January 2016. The pages remain to live on the site, but the dedicated person responsible for updates has been made redundant. This has now posed a huge problem for CPAG, as the private Impact Investment has seized, claimants and advisers alike, are not able to access up to date information on the latest welfare assistance in their area. The pages will soon be outdated in the coming months due to the ever-changing laws in the social security system. It is unfortunate that this useful collective good for the most vulnerable has seized, due to the lack of funding from private investors.

This is just one example on a small scale what can happen further down the line if governments rely ever heavier on Impact Investment. Organizations such as the Oak Foundation are also seeking a return on investment. It was relatively hard to measure success in terms of financial numbers, which seems to lead the way for the foundation to discontinue funding for this project. The downside of Impact Investment in this particular case was that the rent-seeking/rent never materialized for the Oak Foundation.  It seems there was too much free-riding from the general public and welfare rights advisers.

Furthermore, could we rely on this type of investment to boost/fix more important issues such as building hospitals? This type of investment could be a bigger burden on smaller poorer local communities. One such example is the Cayman Islands, tax heaven where the government does not invest in major public goods but rather relies on Impact Investment from abroad[cm_simple_footnote id=”7″], [cm_simple_footnote id=”8″]. One such investment has almost failed the local community regarding free health care. The new hospital was funded by an Indian multi-millionaire, which serves as a money-making business venture, catering predominantly for medical tourists from the U.S.[cm_simple_footnote id=”7″], [cm_simple_footnote id=”8″]. The locals of course can use the hospital, but what at what cost? Unfortunately, the BBC documentary which reported the story on the Cayman Islands had not discussed it. We can presume it is in the same expensive price bracket as buying food on the island[cm_simple_footnote id=”7″], [cm_simple_footnote id=”8″].

The biggest obstacle for implementing Impact Investment

It seems Impact Investment only partially serves its true purpose in the communities it is intending to help. Of course, rent-seeking could be the biggest obstacle for implementing Impact Investment on a larger scale. Especially, when it comes to major public goods such as healthcare, hospitals, and education. Not to mention, national defense systems relying on private investment for military equipment. What if the investors eventually become the enemy nation, or indirectly involved with the enemy state? Such investments could be a national disaster. We have already seen similar investments from the U.S. government, funding certain African military’s and their equipment under the guise of Foreign Military Financing (FMF), to predominantly combat terrorism[cm_simple_footnote id=”9″].

This type of investment in public goods can set a dangerous precedent for the local citizens of that community. In such cases, investment always comes at a price, not necessarily through direct financial rent-seeking, but through the vast reserves of natural resources. On the other hand, Impact investment on a smaller scale i.e. not major public goods can have positive effects if focusing on small/medium-sized private investment, which the governments may not be able to spare after covering major public goods. Of course, jobs are just as important as hospitals and national defense systems, but investing in that particular area has fewer implications on national security.

Revitalizing specific poverty-stricken regions in certain countries through innovation and small/medium-sized Impact investment can generate new jobs for the local community, thus lowering unemployment rates. This in particular not only re-generates the region but also offers a return on investment for investors. Especially, if it is innovative in industries such as Information Technology. In countries with high unemployment rates such as Greece, Spain, and many others in the EU, this would be a welcome investment in the current climate.

Furthermore, regional governments who pursue policies of Impact Investment on the public goods i.e. creation of new jobs can enhance the identity, culture, and the local economy of the region. It would include the institutional capacity to attract and construct a competitive advantage over other regions in the country. Innovation and entrepreneurship through collective measures and promotion of cooperative practices among key actors could give regions a distinctive trajectory. The problem which may arise from this sort of investment is, specific institutions that may need to support innovation to re-generate the area to create public goods, may shun away from the prospect of pushing out local small businesses in favour of larger private investment.

However, by not addressing local economic deficiencies in the job market, there will be fewer jobs created, fewer taxes to be earned by local governments, higher unemployment with more expenditure. Regions that have constructed such advantages by supporting innovative enterprises can act in a meaningful way to support local economic interests. It can also define the flow of economic activity, and take advantage of linking different economic actors together for a better return on investment. Some of the regions which have already benefited from Impact Investment are predominantly BRIC countries[cm_simple_footnote id=”10″].

In order to further improve the prospects of Impact investment, and free up public funds by the government, some further points would need to be addressed:

  • Central and local governments should remove the regulatory barrier, to further unlock the
    the potential of Impact Investment.
  • An increase in government program effectiveness, due to departmental cuts, withholds
    government agencies and institutions from re-investing into innovative programs.
  • It is also imperative to provide incentives for the new private Impact Investment, which could
    unify the diverse actors.

Conclusion

These are some of the major barriers which would need to be addressed by governments. As ever, we have the opportunity to help bridge the important set of innovations at the intersection between public goods and private capital. Impact Investment tools can help scale innovative solutions to our most pressing social and environmental problems. Governments can play a major role in encouraging impact investment by reducing bureaucratic barriers and providing incentives for private-public relationships.

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