Proposed Solution
AAF has developed a financing model that will address this challenge. At the center of its model is ‘venture philanthropy’ targeted at private donors and corporate sectors.
This involves an interesting hybrid: combining –
1. a zero-interest loan with
2. a donation into a single philanthropic unit, together with
3. an interest-bearing loan.
The basic concept of innovative social investment model is by issuing charitable bonds to finance the development of its upcoming Residential care home, hospital, vocational and research center for the persons with physical and intellectual challenge at Aghamalai. Periyakulam, Theni District, Tamilnadu, South India.
In this model AAF invites donations and investments in exchange of charitable bonds aimed at donors. On maturity Repayable bonds can be encashed by the donor or his designee.
This Social investment plan offers AAF to pay for expensive infrastructure developments.
Background of social investments
The spectrum of financing options for AAF is broader; there is a whole range of non-grant finance (loan) available too. Sometimes collectively termed social instruments, they all require the AAF to pay at least some of the funding provided immediately, as well as generating social or environmental benefits.
AAF can also take out loans, mortgage with commercial banks. These are not generally regarded as social investments, however, as the social impact created is incidental, rather than deliberate.
Social investments can take a myriad of forms, including secured and unsecured loans, bonds; ‘patient’ capital (ie, long-term loans, often with favorable terms); equity or quasi-equity. It also includes providing AAF with standby or overdraft facilities, or underwriting particular projects.
But above all, the concept of ‘social investment’ is beginning to pierce the consciousness of more funders and investors looking at using social investment instruments either as a way to achieve greater social impact or as a way to diversify their financial investment portfolio, or both. So AAF intends to make use of this best opportunity available.
Opportunities for social investment
There are many instances where AAF can use traditional fundraising to pay for costs that might be funded more efficiently through non-grant (loan) finance. This is particularly the case with capital costs, where expenditure on a new building or on increased capacity, say, provides an asset or an income stream against which loans can be secured and/or repaid.
Non-grant (loan) finance can be used by amiableAID for several purposes:
- – Hard development capital, eg, a bridging loan to purchase a building;
- – ‘Closed’ working capital, eg, to tide our organisation over before a committed grant is paid;
- – ‘Open’ working capital, eg, to tide our organisation over to meet unfounded costs;
- – Soft development capital, eg, supporting start-up costs or periods of big growth
Advantages over fundraising
Social investment can relieve pressure onAAF’s cash flow. Fundraising costs are often paid upfront and projects with low levels of working capital may find these difficult to cover, especially when the returns are not guaranteed. With loans, interest only accrues once the loan is drawn down – hopefully once the loan materialized means a revenue stream has been established.
Balancing social and financial returns
Social investment aims to produce both financial and social returns. But the range of returns varies considerably between investment and this need to be balanced according to the motivations and priorities of the investor.
For some investors, sometimes termed finance-first investors; their main motivation is financial, meaning that receiving a market rate of return is a priority. This does not necessarily mean that they sacrifice the social impact of their investment but it does narrow the market in which they are prepared to invest.
For other investors, sometimes termed impact-first investors generating a high social impact is their primary motivation. While they may receive a handsome financial return on their investment, they may be prepared to accept below-market financial returns.
Opportunities for donors for social investments in AAF.
Very few philanthropists are engaged in social investment, indeed there are limited opportunities for them to do so. There are even fewer opportunities for the general public to get involved – aside from putting funds on deposit with banks.
AAF has been offering donors the opportunity to give loans either to complement donations or as an alternative to donations. When donors have become involved social investment is often an ad hoc arrangement.
Barriers to greater social investment by donors
Many donors perceive their philanthropically minded grants and donations as entirely separate from their other investments, which they see as driven by an entirely different and perhaps opposing motivation; a desire to see financial returns.
Many donors struggled to grip with the idea of receiving their money back on charitable project. Since they could usually afford to loose money, and it was going to a good cause, some simply were not interested in having paid back, let alone with interest.
Many donors embarrassed about the idea of making profit from a charity organisations like AAF. This is linked to a more general perception that loans and other forms of non-grant finance are somehow ‘uncharitable’ and so not something that Social institutions should take on.
Donors are sometimes reluctant to give because the Trust’s reliance on loan finance means that it is not seen as a proper charity.
Justification
AAF’s blended financial model will help to meet the pressing needs of its beneficiaries: developing appropriately adapted residential care home, hospital and research centre for the aggrieved persons.
Many of our donor’s perception are that Social Institutions with loans on their books are somehow not properly charitable. Overcoming this attitude is a major challenge for AAF with high capital needs.
For AAF’s capital needs, however, non-grant (loan) finance is often a more efficient way of meeting them than fundraising.
Donations are often thought as free money, but this is not the case. All fundraising has costs. Voluntary organization’s fundraising and publicity costs represent 15 % of total expenditures. These costs are comparable to those of loans from banks or even some commercial lenders.
The advantages to AAF of using this social investment are:
Speed: it is quicker to borrow funds than to rely on a lengthy fundraising appeal;
Amount: larger sums can be raised via AAF’s hybrid philanthropy product than through fundraising alone;
Allocation of resources: valuable unrestricted donations can be used for AAF’s other needs; and
Sustainability: The success of this model can be replicated across AAF’s other projects in need of renovation.
Social investment, including AAF’s hybrid model is a legitimate and alternative form of philanthropy to grants and donations. Therefore donors are requested to take AAF’s offering.
Amiable philanthropy capital – AMPHICAP
AAF has identified that the funding for this building construction comes from 3 sources:
1. Interest bearing loan- Rs. 10.5 crores intended to be mobilized from this source – repayable from operating cash flow
2. Zero interest loan – Rs. 10.5 crores intended to be mobilized from this source – repayable from the sales of traditionally made AAF’s herbal medicines and fee collected for other services.
3. Donations – from public and corporate – that would cover the gap between the full costs of AAF plans and what can rise from loans.
Amiable philanthropy capital (AMPHICAP) is a think tank dedicated to helping funders and AAF to achieve a greater impact. AAF has an ambitious vision on fundraising: to create an environment in which AAF and their funders are as effective as possible in improving needy and downtrodden people’s lives and creating lasting change for the better.
For AAF, this means focusing on activities that achieve a real difference, using evidence of results to improve performance, making good use of resources, and being ambitious to solve problems by exerting high-quality leadership and staff, and good financial management.
For funders, apart from an assured return from investment, this means understanding what makes AAF effective and supporting their endeavors to become effective apart from a good return. It includes using evidence of its results to making decisions and measures their own impact.
This AMPHICAP from potential donors has acted like a gold standard, engendering AAF confidence that ‘we are competent and well run’.
The implementation process is extremely rigorous and required robust financial projections and exact costing, as well as detailed fundraising plans. The implementation process therefore is helping the AAF think through its plans in a structured way, and built confidence among staff and funders that the project will be successful in a long run.
Interest – bearing loan (or AEP-BOND)
AAF’s budget for housing its care home, hospital and research center comes about Rs. 13.50 lakhs per month. Annual budget for the above expenses will be Rs. 1.62 crores. In 15 years the actual spending for housing related expenses will be accumulated to Rs. 24.30 crores. The estimation for constructing a new building for this purpose will be Rs. 24 crores. Based on this statistics AAF aims to go in for public to mobilize a sum of Rs. 10.50 crores from donors by issuing AMPHICAP ETHICAL Bond (AEP-BOND).
The value of one unit of AEP-BOND is Rs. 5000 /-
On maturity, over a period of 15 years the value of the bond will be Rs. 10000 /-
The AEP-BONDS will be repaid by the AAF from operating cash flow from the housing expenditures.
These Bonds will be very useful for AAF to accumulate fixed assets. The fixed assets will be useful to attract more grants from Government and grant-making organisation and for acquiring working capital to run the AAF’s activities.
In some cases, some impact-first investors may even sacrifice their financial returns so that more attractive rates can be offered to other investors demanding flexibility in returns.
Zero – interest loan (or ACP-BOND)
In addition to the above instrument, AAF proposes to raise this tranche in the form of zero interest loans for the sum of Rs. 10.5 crore by issuing AMPHICA CHARITY Bond (ACP-BOND).
The value of ACP-BOND is Rs. 3000 /-. After 5 years donors can get the money back after surrendering this bond.
The ACP-BONDS will be repaid by AAF from the sales of its own Indian traditional medicine products and fees collected for various services.
The pay–off for impact-first investors is that they are able to leverage their own funds in order to achieve more social impact than they could achieve alone.
Donations
The remaining fund of Rs. 4 crores would be raised via donations.
In this social investment model, one unit of donation is Rs. 2000
In this ‘venture philanthropy’ and a zero-interest loan (ACP-BOND) of Rs. 10 500 blended with interest bearing loan of Rs. 10 500 into a single charitable-donation unit. Value of this unit is Rs. 21000
The donation will be collected from the general public, corporate sector and grant making organisations that would cover the gap between the full costs of AAF’s plans, and what the charity can raise from loans.
AAF views that the donation element is a crucial layer of this financial model. AAF cannot afford to take out a loan on the entire cost of the project, as the operating surplus is not enough to cover repayments.
However, despite recent growth non-grant, loan oriented, social investment are only used by AAF in a small scale, grants and donations are still the primary, and probably preferred, way of meeting AAF’s financial needs.
Grant funding is a valuable resource in great demand. However, the level and number of grants and donations available to AAF is finite – particularly the availability of unrestricted funding.
The priority therefore should be to use grants to meet costs that can not be funded by alternate mechanisms. For example, ongoing or revenue expenditure such as service provision, research, campaigning and overheads – none of which are suitable for non-grant (loan) finance – will need donation funding.
Advantages
Recyclable: AAF plans to repay a sizable portion of donors’ contributions allows this money to be ‘recycled’ into other projects. This means that donors interested in supporting amiableAID from their current ‘maturity bond value’.
AAF is willing to recycle the money on their behalf, putting it towards other of its projects supporting people with complex needs. This recycling means that the same money can go further.
Replicability: For donors, the opportunity to be part of an exciting and pioneering new venture will be appealing. AAF can demonstrate that the model works and sustainable, it plan to roll out it to other geographical parts where this kind of need is required.
RISKS
Financial risk: Many charities do not have the necessary skills or knowledge to take on loan. If the charity is not able to plan repayments correctly, it may realize it cannot afford them only after taking out a loan. AAF, however, has a track record of successfully managing and repaying loans on its books. To make this financial model successful, AAF recruits efficient auditors and certified financial planners.
Project risk: There are always risks associated with development projects which could compromise funding arrangements: the project goes over budget; the project takes longer than expected; the contractor fails to complete the project. Any Social Institute undertaking capital projects faces these risks. AAF overcomes this problem by adopting proper management and implementation strategies.
Incidental risks: AAF plans to repay zero interest loans by means of (ACP-BOND) to donors from the sale of its medicinal products. If it can only sell it at a reduced volume, there is a chance that AAF will be struggled to make this repayments effectively.
Justification : The repayment period for ACP-BOND is 5 years. Within that period the building construction will be completed and a permanent fixed asset will be created in the name of AAF. Any nationalized bank will give mortgage loan on fixed assets. This gives AAF a comfortable buffer and the repayment will be made appropriately.
Risk of Inflation: The cost to the donor of funding the project is not limited to just the donation element of the funding provided. The ACP-BOND at zero-interest rate the donor will be exposed to the risk of inflation reducing the value of ACP-BOND element when returned.
Justification : Elsewhere if the donor invested, the funds could be generated a higher return. However an extra return from a charity in five years period is arguably not as valuable as a lower contribution, which can be speeded up an important humanitarian project.
