Impact Investing: Will Your Business Pay to Succeed?


Pay for Success (PFS) is an innovative new financing mechanism used to finance projects of social interest with high quality impact measures. PFS projects are popping up in every sector, from homelessness to health to education. New models prove that PFS projects can be used to drive investment in raw materials, as well as workforce development. What impact will this have on the private sector? Will your business pay to succeed?

Peruvian products:

The Common Fund for Commodities has unveiled a Development Impact Bond (DIB) to modernize cocoa and coffee production in Peru’s Amazon region, the Ashaninka. This first permanent DIB in the commodities sector crosses a new frontier of Pay for Success (PFS) possibility.

DIBs follow the main principles of PFS projects, but they involve a third-party end payer, rather than a government. In this case, the Common Fund for Commodities has agreed to reimburse the investor, the Schmidt Family Foundation, once the predetermined target results have been successfully achieved.

Rainforest Foundation UK is the project’s service provider and the organization has already started experimenting with leaf rust resistant strains of coffee. Last year, leaf rust disease affected nearly 70% of coffee growing areas in Ashaninka.

Due to global recognition as a premium commodity, Peruvian cocoa has seen a substantial increase in demand among overseas consumers. Boosting supply to meet demand, more efficient cocoa production methods are being implemented in due course.

This Peruvian coffee and cocoa project raises the question of whether DIBs can be used to upgrade other types of raw material production. Could a DIB be used to supplement exports of quinoa, corn and salt from the Peruvian Andes?

Sustainable technology and water:

During the social entrepreneurship conference at AVU Pay for Success, a participant raised the question of whether or not PFS projects could be used to finance sustainable technologies and water conservation. The possibility exists. Based on the Peruvian model, a California commodity fund could pay an investor when a nonprofit produces widespread adoption of sustainable planting methods. Would you invest in water conservation in California?

What about climate change? A clean energy fund could reward an investor, conditional on service providers spreading the adoption of sustainable technologies. PFS projects are about aligning interests, so as long as you have a problem, partners, and paying results, PFS opportunities exist.

Entrepreneurship and Art:

To carry out a PSF project, you need a fund, a trustee and a non-profit service provider. Venture capital funds could act as end payers, investing in non-profit entrepreneurship accelerators. If the accelerator achieves some success, private investors, potentially well-connected angels, will be paid. Success could be measured in number of businesses to achieve a pre-growth rate, target revenue, or social impact metric.

Dual-corporate businesses with a not-for-profit branch may be able to internally experiment with the PSF model. Village Capital, which is a non-profit, self-sustaining fund, could essentially structure an in-house DIB. If private investors wanted to invest in the association, they could enter into a PSF agreement with VilCap Investments.

From the perspective of art accelerators, they could scale their operations with a PFS project, similar to entrepreneurship accelerators. If art investors wanted the McGuffey Art Center to expand its arts cooperative model, investors could provide upfront money and a fund, even the local government, could step in as the ultimate payer. This PFS model could easily be piloted in Charlottesville, Virginia, if art-supporting investors step up.

Source by Conor Flynn

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