January’s annual World Economic Forum meeting in Davos met under the banner of the ‘Fourth Industrial Revolution’, referring to the way economies are being impacted by emerging technologies. Alongside the focus on technological investments, some of the most interesting discussions I attended also looked at the broader issue of financing developmental commitments, such as the newly ratified Sustainable Development Goals (SDGs).
One event held by the World Bank and the Canadian and South African governments acknowledged that there is an estimated $2.5 trillion annual funding gap needed to achieve the SDGs in developing countries alone. As the Rockefeller Foundation argues, private capital will be essential to bridging this gap and addressing the scope of the challenges identified.
Consider higher education and scientific research, two priority areas identified in the SDGs. I am delighted that many of Africa’s leaders increasingly recognise that higher education is essential to building the skilled human capital needed in the global knowledge economy. Yet higher education institutions on the continent are struggling to balance delivering quality and industry-relevant instruction, particularly in the STEM subjects, with increasing social demand for access.
A similar problem is happening in scientific research. Leaders acknowledge that science is integral to development decision-making, but only three countries have met the 1 percent target R&D investment target – Uganda, Malawi and South Africa. What’s more, local banks and other financial organisations offer loans at rates averaging 16-20%, making it impossible for universities and higher education institutions to secure financing to expand their facilities.
As a result, there is an enormous opportunity to leverage private finance to strengthen higher education institutions, and foster the development of scientific research and cutting-edge technologies. Private investors and other organisations can use innovative financing mechanisms to achieve social impact in these areas, while generating a competitive financial return.
Providing higher education in technical fields can be more expensive than the social sciences, forcing cash-strapped public education institutions to cut expansion in these areas. The private sector can help equip universities with the technical equipment and facilities that they need through BOT (Build, Operate and Transfer)/BOL (Build, Operate and Lease Back) initiatives. These programmes have been commonplace in higher education for more than a decade especially in China where Hong Kong developers made significant investments after 1995 for expanding public university campuses, especially in its eastern seaboard provinces.
For African investors looking for quick and high returns, BOT/BOL initiatives may seem like less appealing, considering that they generate an average rate of return of 8-12% and there is considerable uncertainty around predicting revenues during the concession period, which can be up to 30 years. This may pale in comparison to an investment fund such as Asia Pacific trust, the Scottish Oriental Smaller Cos Trust, which regularly posts dividend yields of over 11%. Yet I would encourage my peers to diversify their portfolios to include such investments, accepting lower returns and longer repayment rates. These projects result in well-operated facilities for students and scientific researchers and generate high social impact.
The social impact bond (and the related development impact bond) has been proposed as another useful way to address seemingly intractable social challenges. As the Brookings Institution explains, the impact bond, whether social or development, is a mechanism that harnesses private capital for social services and encourages outcome achievement by making repayment contingent upon the achievement of the agreed outcomes.
For example, private investors could provide African universities with capital to encourage talented students to pursue postgraduate training. The outcome funder (in this case, African governments) could agree to repay the investors if all students gain a related position in industry. Social impact bond success stories abound, such as the group of UK investors who funded mentoring for at-risk investors in the Thames Valley and Greater Manchester in 2012 and recovered their initial outlay of £1.5 million within three years. However, Stephen Foley of the Financial Times points out that the risks of social impact bonds are idiosyncratic and may require expensive due diligence, which makes this asset class better suited to the more risk-tolerant investors. However, the Brookings Institution does point out that capital protection and early termination opportunities can act as protection mechanisms for investors in social impact bonds with group-based outcomes. For example, the Institution’s report on social impact bonds refers to two social impact bonds in Australia where senior capital in two deals are 100% and 75% protected, respectively.
Finally, our talented diaspora could be a valuable source of private funding for higher education and science in Africa. The World Bank has estimated that diaspora bonds, typically long-dated securities redeemed only on maturity, could allow sub-Saharan countries to raise as much as $5-10 billion annually. The African Development Bank also argues that this figure would be much higher if concerted effort is made to appeal to the 140 million African Diaspora living in the western hemisphere. For example, Israel and India, the pioneers of diaspora bonds, raised over $25 billion and $11 billion respectively, by drawing on the wealth of their communities.
While these mechanisms are an underused source of finance, research indicates that countries are expected to find diaspora bonds an attractive mechanism for securing a stable and cheap source of finance. Furthermore, for investors, diaspora bonds provide an opportunity to diversity asset composition and improve risk management.
Diaspora communities can help connect tertiary institutions and scientific institutes to growing international networks and the development of new ideas, mentoring and innovation will help to provide the cornerstones for future economic development in Sub-Saharan Africa.
Private finance and other organisations can reap real benefits by investing in higher education and science in Africa. Not only can innovative financing mechanisms generate impressive returns, but investors can also help equip younger generations with the skills that they need for the workplace, and provide much needed support for scientific researchers. In so doing, they can help drive sustainable and inclusive development on the continent.
Dr Álvaro Sobrinho is a prominent businessman and philanthropist, and chairman of the Planet Earth Institute, an NGO working for the ‘scientific independence of Africa’. Find more information on Dr Sobrinho’s website (www.alvaro-sobrinho.com) and the Planet Earth Institute’s website (www.planetearthinstitute.org.uk) and follow him on Twitter.