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Early Lessons Learned in SIINC Pay-for-Success Projects

Nov 29, 2017

An innovative financing mechanism, known as Social Impact Incentives or SIINC, has begun to take form and test its first experiences in Latin America, through the collaboration between the MIF, Swiss Agency for Development and Cooperation (SDC) and the German firm Roots of Impact.  SIINCs are financial incentives paid to emerging, high-impact social enterprises for reaching selected results and impact goals that are negotiated between the social enterprise and the outcome payer (in this case, MIF). The payments allow the company to improve revenues and profitability and thus attractiveness to other impact investors in exchange for achieving social impact, measured and verified by an independent evaluator.

In 2016, MIF signed the first two SIINC agreements in Latin America: withClínicas del Azúcar in Mexico and Village Infrastructure Angels in Honduras, for a total of US$475,000 in impact incentives to the two companies.

Clínicas del azúcaroffers a network of low-cost "one-stop-shops" that treat and prevent diabetes. The SIINC premiums will be awarded if the company achieves expected impacts in decreasing sugar levels in low-income patients and increasing the number patients from the C and D economic sectors.  Village Infrastructure Angels (VIA) is expanding a pilot program in Gracias a Dios, Honduras, that uses an innovative pay-as-you-go service to bring solar energy to off-grid communities for household lighting, phone charging and grain milling, financed by long-term loans from impact investors. SIINC payments will reward VIA for the number of solar lease contracts signed with women entrepreneurs, the number of milling hours saved by using electric grain mills, and the amount of additional economic value created for end-users.

Although these first two pay-for-impact initiatives are just getting started, some lessons have begun to emerge regarding their design, negotiation and early implementation. Among others, these include:

Simplicity is critical

The key performance indicators (KPIs) negotiated between the funder, outcome payer and social enterprise need to be straightforward and easy to measure, yet demanding enough to demonstrate real social and/or economic results and impact for the target population. Donors and investors often underestimate the extra level of effort and data collection complexity that could burden the social enterprise and detract from its operational capacities. These companies need to find the right mix between pushing themselves to measure better and more, and not getting bogged down with too many complicated metrics and data collection procedures. Through these first two SIINC initiatives, MIF has begun to learn about how to select KPIs that match simplicity with rigor.

Commit impact co-investors early on

One of the key assumptions of SIINCs is that the additional revenues and clear demonstration of impact provided by the premium payments will attract other impact investors to the company. For this reason, SIINC contracts may include as a condition that premium payments for results will be disbursed pari passu with the securing of additional outside investment in the social enterprise.  However, if this additional investment is slow to materialize, SIINC disbursements could be delayed, further affecting expected cash flows and operations. That’s why the design phase should include getting early commitments from impact investors interested in participating in the SIINC arrangement.

Develop a solid capacity to generate quality deal flow and pipeline

Although it may seem easy to find companies that want to receive SIINC payments for results and impact, it’s a lot harder than you’d think. MIF, SDC, Roots of Impact and its partners in the region carry out calls for proposals, promote the SIINC at impact investing events, and actively search for potential social enterprises that could benefit from a SIINC arrangement. Dozens of applications are reviewed and we then use assessment scorecards that measure the proposals received for impact and scalability potential, financial indicators, the business model used, management capacity, additionality and other criteria.  But after filtering out the most feasible opportunities, very few companies remain. And only a small portion of these truly have the systems, capacity and resources to comply with the demands of adequately tracking results and impact. So, we need to continue to expand and bolster our network of contacts, promotional materials and tools and day-to-day efforts to generate a larger pool of interested and capable social enterprises for the program.

The financing gap for emerging social enterprises in Latin America and the Caribbean is huge.  But our experience indicates that it is due more with the problem of linking impact investors to eligible companies, than to a lack of resources or investment opportunities. While this pilot program to test and refine the SIINC mechanism is merely a drop in the impact investing bucket in the region, it is a first small step toward learning how to align positive impact with profitability in a simple and practical fashion, attracting additional external investment for scaling social enterprise.

 

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