COVID-19 and the role of impact finance

Most governments have slowly but steadily moved from a state of “if” to a state of “when” and “how big” the COVID-19 crisis is expected to be. As countries brace themselves for the seemingly inevitable – increasing number of infection cases and rising death tolls – there is a scramble to mobilize resources. Governments have ramped up their public health system capabilities and enacted financial security measures for citizens and businesses. However, governments also realize the magnitude of the challenge at stake and have looked to cooperate with and co-opt the private sector.

The critical difference has been in “how’” governments have gone about engaging the private sector – from opening up financial assistance through development finance institutions, to invoking emergency acts to force private manufacturing. Another key factor has also been an understanding of “what” these different actors should do; case in point being the United States’ insistence on making their own test kits through the Centers for Disease Control, which eventually failed and resulted in a loss of crucial response time. On the other hand, India rightly depended on the private sector, but has had hiccups in creating the right regulatory framework for testing and authorizing diagnostic kits.

Despite understandable roadblocks due to shutdowns and social distancing, private sector actors have done what they do best – convert huge challenges into huge opportunities.

Healthcare actors are leading the charge in critical care, diagnostics, supply chain and other allied areas. Screening and diagnostic tests with high sensitivity and specificity are already in the market. Non-healthcare actors have also repurposed their assembly chains to manufacture ventilators, hand sanitizers, personal protective equipment kits and other essential supplies. Lenders are looking to re-allocate and deploy funds towards new customer segments that are being identified week on week. Venture capitalists and financial institutions are identifying normally unviable but suddenly rewarding investment opportunities to provide urgent and timely capital.

Unblocking financing challenges

Despite good intentions backed by tangible action, private sector actors are currently operating in unusual circumstances and face financing challenges, hitherto unseen. Impact actors, including donors, can de-bottleneck these activities through flexible financing mechanisms.

For example, supply chains and logistics have come under undue stress, especially with the origin point for many being China. Intermediaries need to commit to pre-agreed prices and delivery dates with healthcare providers, but pay the price upfront and in full to manufacturers. However, they face back-end issues, ranging from cargo stuck in Chinese manufacturing hubs that are suddenly locked down, disrupted land logistics that need to align perfectly with inter-country shipments, fluctuating prices for the same logistics due to rapidly moving demand patterns, and working capital risks with stuck payments.

This naturally leads to a state where intermediaries start prioritizing cash-and-carry buyers. While the most needy, public institutions would be heavily hit in such a scenario due to their more stringent procurement processes. Donors can help by providing highly concessional working capital loans to intermediaries, or guaranteeing a price to intermediaries and supplementing shortfalls between pre-agreed prices to eventual costs. This reduces the cost of capital for intermediaries, thus enabling them to align shareholder value to public health value, and serve public health institutions when they would otherwise not.

In the medium-term, COVID-19 may see the fastest time-to-market vaccine ever, as envisaged by Bill Gates. However, that’s just part of the puzzle: volume guarantees assuring a given quantity of procurement may be needed to ensure that manufacturing capacity is built ahead and in time to dovetail with the transition from labs to factories.

Need for atypical and innovative financing structures

Microlenders – traditional and mission-focused – are looking to provide concessional financing to a workforce that is temporarily out of employment due to the crisis. However, this demographic segment lies outside their comfort zone. Many do not possess bank accounts, let alone a long enough banking history. And this is not a livelihoods loan; it's the exact inverse – its purpose is to help you stay home. At the same time, corporates and groups of individuals have looked to donate or fundraise for different interventions to support this segment. As well-intentioned and much needed as these interventions are, they will only reach limited numbers of the needy. Potential exists for blending these two funds – for-profit and philanthropic – together to generate a multiplier of sorts for the possible impact.

These are atypical financing needs and may therefore demand atypical and innovative financing structures. We see two possible structures across two different demographics. First, the gig/semi-formal workers (for example, Uber drivers) possess a relatively higher ability to pay and a reasonable banking history. However, lenders would stay away given the lack of clarity on the horizon of re-employment, and the level and timing of rebound of the job market. If foundations and fundraisers can provide a guaranteed repayment period, that would enable them to negotiate highly concessional lending by lenders who are eager to deploy their funds in these tumultuous times.

Second, low-income workers, such as construction labour in India, possess a lower ability to pay and no banking history. Fortunately, governments have proposed financial support to this population through direct benefit transfers. Unfortunately, large numbers of this segment do not have the bank accounts or the right scheme enrolments to avail this monetary support. Philanthropic money from well-intentioned donors can be utilized to create bank accounts and enrolments to unlock much larger government disbursements and provide more sustainable support to these segments ($10 of your money unlocks $100).

We foresee that the ongoing scenario will significantly change how healthcare, financial and logistical ecosystems function and therefore how impact actors operate. For example, telemedicine – the healthcare sector’s perpetual bridesmaid – may finally have arrived. Although many customers may drop off when the pandemic ends, many users will continue to use the telemedicine services. Diagnostics will shift towards more point-of-care systems, wherever possible, and lender may discover previously untapped demographics.

In a post-coronavirus world, the private sector will face completely new challenges and emergency trends across the healthcare journey, and impact finance can help manage these strategically.

This opinion piece was originally published by KOIS. 

KOIS is a leading international impact investing company specialized in asset management and innovative finance services. Their mission is to turn projects with high societal & environmental impact into tangible investment propositions for public & private sector clients. Through impact finance, they create innovative finance mechanisms and use fund management to scale financing solutions serving the dual objective of impact & profit.