Recipe to Mobilise Additional Finance for Social Impact

“Buy land, they’re not making it anymore,” remarked Mark Twain once thereby also explaining the basics of supply and demand. Land is involved in every product that we touch, use and manufacture. Before 2007, when the housing bubble burst, it seemed that real estate prices could continue to rise indefinitely. The House Price Index (HPI) published by the Reserve Bank of India (RBI) shows that at the All-India level, the average home prices in India grew at 10.3 per cent between FY 2010-11 and FY 2021-22. Businesses systematically analyse such market forces before making competitive decisions. Compounding such critical nodes is the fact that each asset class, industry, and individual investment is a tightrope between risk and opportunities as well as having a varying capacity to create positive social and environmental impact. For several corporates, a question has arisen in recent years around how Environmental, Social, and Governance (ESG) frameworks and impact investing fit into their vision and organisational goal.

To be or not to be

Catering to the needs of businesses, that are driven by an intention to generate positive social and environmental impact (with a net positive financial gain) the Government of India announced the creation of thematic blended funds in the Budget for 2022. Blended financing for the inclusion of sunrise sectors like climate action, deeptech, digital economy, pharma and agri-tech was therefore timely, and welcomed by the entrepreneurs. According to a report by Bain and CII, between 2017 and 2020, agri-tech start-ups attracted at least INR 6.6k Cr in private equity investments. Kellogg’s recently earmarked $ 2 Mn to incentivize rice farmers to adopt regenerative agriculture practices. General Mills has undertaken steps to nudge farmers toward regenerative farming, most recently including $ 3 Mn to Eco-Harvest, an ag-carbon credit program. Other major food companies pursuing regenerative ag practices include Cargill, Danone, Diageo, and PepsiCo.

How blended financing works

Blended financing lies at the intersection of outcome-based financing, innovative financing, and public-private partnership. A principal agent (government or a private player) pursuing food security and enhanced productivity, intends to set up say a vertical farm downtown. It seeks a service provider that has expertise in this area. This service provider in turn seeks capital from investors (typically philanthropists and commercial lenders) who are willing to invest in this idea and cover the risk associated with the project. An independent evaluator thereafter accesses the project and if the service provider has been successful in delivering the targets, then the principal agent pays back a return on the risk capital to the investors. Realistically, there are no standard models, and they vary from sector to sector, riddled with challenges, regulatory norms, and different tax implications. Finance Minister, Nirmala Sitharaman, had earlier announced that blended capital raised under the co-investment model for agri-tech segment will be facilitated through NABARD to finance agriculture and rural enterprises for the farm produce value chain. Nabventures (a subsidiary of NABARD) is a venture growth equity fund and has been investing in food, agriculture and rural businesses. More such initiatives are required along with an interest by talented fund managers who may blend such funds from NABARD along with venture capital (commercial lenders).

Striding the path of economic recovery

If a silver lining can be found, the Covid-19 induced lockdown accelerated internet usage and proficiency. A World Bank study found a positive economic impact from fixed broadband with studies suggesting that every 10 per cent increase in fixed broadband penetration boosts GDP per capita growth by 0.9-1.5 per cent. India transferred an average of over 9 Mn DBT payments per day in FY 2021-22, this is indicative of India’s success in the creation of digital assets (DBT, JAM trinity, NPCI etc). Opening doors for Foreign Direct Investment (FDI) in the digital economy will further bring capital. The emerging International Financial Services Centre (IFSC) set up in GIFT City Gujarat is on its growth trajectory with at least 8 international banks setting up offices and at least 50 Alternate Investment Funds (AIFs) setting up a base there. India in 2021-22 saw the highest-ever annual FDI inflow amounting to $ 83.57 Bn coming from the highest number of countries ever at 101. Cross-country collaborations can be effective in closing technological gaps. The upcoming thematic blended funds governed by specialists from private as well as public enterprises could result in a win-win situation. While considering the GST cooperation among centre-state relations, game theory was upheld, and it resulted in maximum payoffs to the duo. Blended financing can rephrase the models of 3P to public-private-producer partnerships effectively.