The authentic Bee-Coin: A tokenized financial instrument for revenue-generating projects with social or environmental impact.
| Autor | Guzella, Marcelo |
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Introduction
Impact bonds are contracts based on outcomes, in which private funding from investors is used to cover the upfront capital required for a provider to deliver a social or environmental service (Agusti Strid et al., 2021). If predicted outcomes are achieved, a bond guarantor (typically a government entity or a philanthropic or multilateral organization) repays the investor's capital. Impact bonds have gained prominence and been increasingly adopted in several countries. However, some limitations hinder its adoption, such as possible misalignment of incentives and undesirable risk-return profile (Saenz, 2022). Moreover, the projects that are funded typically do not generate revenue, at least not enough to cover the costs to achieve the social or environmental outcomes. This paper describes a financial instrument to fund revenue-generating projects with features adapted from the impact bonds framework. It also presents the financial implications of the use of this instrument in a real case that involves beekeeping and vegetation cover restoration in the Brazilian cerrado (savanna) biome.
Pay for success mechanisms are used to foster structural changes in how social policies or environmental projects are developed. Enthusiasts of impact bonds highlight that they increase the focus of public policies on results, shifting the orientation from activities to outcomes. Studies show that these instruments can overcome perennial government challenges, such as the fragmentation of public services, a short-term political and financial focus and lack of collaboration and innovation (Agusti Strid et al., 2021; Dowling, 2017). Azemati et al. (2013) point that impact bonds help overcome barriers such as political constraints that prevents governments from investing in prevention, inability of non-profits to access capital and limited capacity to raise evidence about what works.
According to Carter et al. (2018), while traditional service deliver results in siloed budgets or redundant assignments, impact bonds focus on mutually dependent or aligned outcomes, which determine payment and hence foster the coordination of a variety of commissioners across different units and levels of government. Moreover, resources are traditionally directed to crisispoint situations and costly remedial services, resulting in short-term orientation and reactive services. Social impact bonds (SIBs), on the other hand, are based on invest-to-save and upstream interventions, funding preventative measures that decrease the need on further remedial services when the outcomes are achieved. SIBs also foster innovation, in terms of performance management and choice of intervention or provider, by transferring financial risk from commissioners and service providers to investors.
While potentially beneficial, impact bonds can be complex and expensive to design and require reliable data and stable regulatory environment (Acevedo and Live, 2016). Agusti Strid et al. (2021) point that the high complexity and costs arise from the need to bring together several different participants with distinct incentives and that may not be familiar with the technical aspects of the arrangement, such as results measurement and pricing of outcomes. Moreover, they require a high level of commitment and capacity but, at the same time, the amount involved in the contract may not be large enough to break even those costs or to arouse market interest. Since performance defines payments, its evaluation requires a robust and rigorous methodology and available data, with treatment and control samples, to be reliable. Stable political and economic environment is also determinant, since SIBs take time to design and implement, therefore institutional or macroeconomic turmoil affect SIB continuity and the willingness to pay for outcomes.
Impact projects in developing economies, even the ones that are expected to generate revenue, typically have challenges that limit the access to capital from private investors, specially in moments of higher risk aversion (Bartzokas, 2022). Political and institutional instability, inflation, liquidity, currency or technological risk, lack of skilled labor or of law enforcement affect investment inflows (Asiedu, 2006). Even with higher expected returns and positive sustainability impact, projects in developing economies typically struggle to access capital from private investors worldwide (Diamonte et al., 1996). Risk-averse investors are reluctant to invest in bold projects and prefer allocate in highest-income countries and/or in low yield fixed-income assets (Bartzokas, 2022; Schlumpf, 2017).
Financial innovations have a key role in the development of instruments to make those opportunities more attractive or more compatible with investors expectations or preferences. There is also positive feedback, since the availability of capital and the development of financial markets decisively influence the way in which new technologies are created and projects are structured. Considering this context, we propose the creation of a mechanism similar to impact bonds to revenue-generating projects with relevant impact potential in developing economies. The goal is to improve the risk and return trade-off of those projects to investors, in a way that they can profit from operational performance as well as from the achievement of social or environmental impact. The reward for impact, granted by the outcome payer (or a bond guarantor), benefits not only financial investors, but other relevant stakeholders that commit upfront capital to the project (land owners and large customers) or that provide services to the project (beekeepers and farmers). This aligns incentives and improves the liquidity of the security that represents the ownership of these impact award rights.
This paper addresses the problem of lack of capital to projects that combine profitability with sustainable outcomes in developing economies. It attempts to answer whether an adapted structure of impact bonds can be useful to funding those initiatives and better aligning stakeholders' incentives. It adds to the field by proposing an innovative financial instrument to increase private funding likelihood of projects in developing countries. Such instruments aim at the development of the capital markets and the global financial system by providing new means for encouraging private funding for impact investing, leading to a more sustainable economy and ultimately mitigating harmful effects of climate change. It also contributes to a more socially responsible society, since the proposal covers aspects such as inclusion and employability. This security is in line with other less granular innovations such as the green and sustainable bonds, a market that has already reached more than one trillion dollars (Sartzetakis, 2021), despite a still low presence in Latin America or emerging economies in general.
This study relates to the strand of the literature about financial innovations aimed at preserving the environment or improving social welfare (Bhutta et al., 2022; Maltais and Nykvist, 2020). They contribute to aligning the objectives of firms and economies towards a more sustainable growth path (AlAhbabi and Nobanee, 2020; Park, 2019). Such innovations help close the spending gap of approximately USD 1 trillion annually, in low- and middle-income countries, necessary to achieve the 17 Sustainable Development Goals defined by world leaders (Anderson et al., 2022; Colglazier, 2015; Kharas and McArthur, 2019).
Some innovative mechanisms have been developed and applied to contribute to higher capital allocation in projects oriented to sustainability goals. Besides green and sustainability bonds, impact bonds are an interesting instrument to provide more effectiveness to public policies. The Rhino Bond is an impact bond (specifically a wildlife conservation bond) with the goal to protect and increase black rhino populations in South Africa (Endsor et al., 2020). Social impact bonds are also very common in projects to improve public education or health outcomes (Fraser et al., 2018).
Despite relative complexity and higher structuring costs, impact bonds are a promising instrument, but some shortcomings limit their usage. The first one is that, in the classical model, investors carry all the execution risk (Liang et al., 2014). This means that the service provider payment is usually not sensitive to its performance, which may create a conflict of interest. The instrument we propose overcomes this limitation by allowing the risk to be shared between capital and service providers. Moreover, impact bond models often determine payments without considering the revenue that the project may generate (Jackson, 2013). This occurs because they are usually applied to public policies such as social services for vulnerable population or environmental conservation. The proposed model is an improvement on impact bonds as it has a mechanism that combines socio-environmental outcomes with financial results.
Some recent technological features can also have a significant role in boosting financial innovations. The most prominent one is the blockchain, which basically uses cryptography and a...
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