Позитивные изменения. Том 2, № 2 (2022). Positive changes. Volume 2, Issue 2 (2022)

As noted on the website of the Russian Government, the outputs of the pilot testing will come in the form of a portfolio of projects for raising private investment to implement national projects, along with a project-based approach to addressing socially important problems with the involvement of socially oriented non-profit organizations and other contractors funded from nonpublic sources.

SIB – A TERRITORIAL DEVELOPMENT TOOL?

If we look at the geography of Russian social impact projects, we can see that five of the seven projects are being implemented in the Far East: two in the Republic of Sakha (Yakutia), two in Primorsky Krai and one in Kamchatka Krai. In recent years, the Government of the Russian Federation has started work on maximizing the favorable investment climate in the Far East. Can SIB projects become a territorial development tool? We turned to the experts with this question.

According to Olga Balabkina, Deputy Chairman of the Government of the Republic of Sakha (Yakutia), SIBs can be used for that purpose, because they are implemented in various sectors of the social sphere – from education and healthcare to employment and social protection or social services. That is, they are aimed at improving the quality of life, which directly affects the level of development of production and technology in the region. However, it is still too early to say whether SIBs will fuel territorial development in Yakutia.

"First, the two projects currently underway have not yet been completed; there is no final conclusion on the efficiency of this tool. Second, successful completion of a SIB project alone is not enough. It requires further replication and scaling", Olga Balabkina says.

According to her, the current social impact project in the field of education, which is implemented in Khangalassky district of Yakutia covers more than 5,000 children and 700 teachers from 27 schools of the district. According to preliminary calculations, the project has improved the children's overall educational performance by 10 % compared to previous years. Test results show an increase in the basic knowledge of eighth and tenth grade students of up to 29 percent in Russian language and up to 10 percent in mathematics. The number of winners in the regional stage of the All-Russian School Olympics increased from 5 to 11 children. Once we see the final testing results in Russian language and mathematics at the end of the academic year 2021/2022, we will be able to calculate the final figures of the social effect. A lot of work is planned for the last stage of the project: «packaging», evaluating and transferring the practices developed to the government of the Republic of Sakha (Yakutia), represented by the Ministry of Education and Science.

Khanty-Mansi Autonomous Okrug – Yugra, which comes third in the Ratings of Social and Economic Status of Russian Regions (RIA Rating, 2021), has been discussing the opportunity to launch social impact bonds in its territory with VEB.RF state corporation for the last two years.

"The topic itself is quite interesting, because it is close to the topic of concessions and public-private partnerships (PPP). PPP is developing quite well in the region, some concession agreements are also in place. We consider SIB projects implemented together with VEB.RF as a pilot. But so far we haven't found a specific topic to focus on, we're still considering all the options. On the whole, the idea is quite promising for a region like Yugra. It is likely that we will have such projects in the future", says Yakov Samokhvalov, General Director of the Yugra Center for Civic and Social Initiatives foundation.

SIBs can become a territorial development tool, albeit with some limitations.

"Social impact bonds are not a Russian invention, but a borrowing of foreign practice. They require adaptation to our legal system, budgeting processes, education about what examples of projects exist in the world and what domestic mechanisms are available in the country. The idea of buying only the finished result looks quite tempting per se. And I think that will play a part. We should probably talk more about this with specific examples that can be easily adapted to our country and specific territory", Yakov Samokhvalov added.

FIRST CHALLENGES

Only one of the seven social impact projects in our country is coming to completion in 2022, "Improving the Educational Performance of Students in the Republic of Sakha (Yakutia)". Therefore, experts believe it is too early to analyze the challenges faced by the project participants during their implementation. Open sources, including VEB.RF website, do not mention any problems when describing the interim results of the projects. Nor do the business media, such as Kommersant, Vedomosti, or RBC.

However, we can already talk about the general difficulties that emerged at the project launch phase. The regional government acts on behalf of the state, ordering the intervention and paying for the results of the project.

Social impact bonds are not a Russian invention, but a borrowing of foreign practice. They require adaptation to our realities.

"This is a new tool, there is little practical application experience, the regulatory documents are still to be worked out, so understandably mid-level officials are quite alarmed about it. Preparing the paperwork to launch the project proved to be a complex and time-consuming job, and we must give credit to the persistence and professionalism of VEB.RF specialists, the procedure becoming more and more streamlined with each new project launch", says Tatiana Burmistrova, co-founder and Chair of the "Toward Change" Foundation Board.

Judging from the available progress reports on the projects nearing completion, another major challenge is developing a system for monitoring the interim results of the project.

"Since the project conditions change all the time, it is vital that the contractors are flexible and focus on the end results. In general, it would be very interesting to do case studies of social impact projects, including the factors that influence the success and difficulties", Tatiana Burmistrova added.

Social impact projects require constant close interaction between the customer and the contractor. In case of the project "Improving the Educational Performance of Students in the Republic of Sakha (Yakutia)", the customers are the Ministry of Education and Science of the Republic of Sakha (Yakutia) and the National Research University – Higher School of Economics. Hence the first difficulty related to communication: the Republic of Yakutia is 5,000 kilometers and 6 time zones away from the contractor, NRU HSE – by the time Moscow gets to the office, the working day in Yakutia is almost over. At the same time, it is impossible to have the specialists from HSE to be permanently present in Khangalassky ulus.

"Therefore, the key to project implementation is delegation of responsibilities, high mutual contractor discipline, coordination of the positions, and reliance on local staff. Equally difficult is to develop a unified vision of the works aimed at achieving the planned results. Trust between the customer and the contractor is a very important part of success. NRU HSE has made some effort to jointly chart a development path for the municipal education system. Horizontal methodological interactions between schools in the district have been created and are sustained solely by the teachers’ enthusiasm. In the future, when implementing social impact projects, it is necessary to create special conditions for the experimental areas. As our experience has shown, the workload of the municipal project coordinators increases considerably", says Olga Balabkina.

In addition, external factors were also in action during the project period. The epidemiological situation in 2020–2021 influenced the change in the format of many project activities, most of which had to be carried out remotely.

GROWTH POINTS

In October 2021, the "Toward Change" Foundation initiated a round table "Social Impact Bonds: the Potential for Social Innovation in the Regions" at the Civic Chamber of the Russian Federation. The participants noted that the SIB model is very relevant for Russia. However, its expansion would rely on the regional authorities being ready to take action that is different their traditional work formats, to move from the "spending budget" to purchasing social effects. Further, it is also necessary to develop a methodology for evaluating the effects of SIB projects, calculating the return on investment and the training a sufficient number of qualified evaluators. It is important to keep the business investors involved in social projects. Given scarce resources, the SIB model may become more popular as part of Corporate Social Responsibility programs, done with the hope of getting the investment back in a few years.

"The growth points include raising awareness of the businesses, finding the balance between the social effects and commercial returns in impact investment projects, a fair risk assessment and active involvement of the state in developing the instruments and making such investment attractive", says Tatyana Burmistrova.

According to her, the underdeveloped social investment mechanisms and the difficulty of assessing the effectiveness of social spending are the main constraints for the development of public-private partnerships in achieving the goal of positive social change. The preparation of the contractors, namely socially oriented non-profit organizations and social entrepreneurs, to successfully address such large-scale tasks also raises concerns. Given the potential for the development of social impact projects in Russia, the term of the pilot testing of this financial instrument should be extended, as for now it is defined until the end of 2024.

Given the pilot nature of SIB implementation, its mechanics need to be formalized and substantiated, says Vladimir Vainer, director of the Positive Changes Factory.

Expansion would rely on the regional authorities being ready to take action that is different their traditional work formats.

"This starts with the actual project passport submitted for consideration. Right now, it barely details the outcome evaluation methods. The main focus goes to the most formalized external data of immediate actions and immediate results. The reasons for this are clear, but the work to improve documentation is not enough. The reference to an independent examination and evaluation of projects based on the results, without detailing the mechanisms of this evaluation, allows only the official statistics to exist, without any research before and after, or specific development to match the project monitoring methods", Vladimir Vainer explains.

Secondly, we can distinguish problems at two levels at once. At the level of the implementation efficiency, it should definitely focus on stimulating the growth of investment, but now there is more reliance on the registration of existing CSR programs of the large corporations, which are invited to move their existing programs into the new format.

"On the other hand, like any investment, SIBs must be appropriate for the market conditions – this applies to the conditions of return on investment, which are dependent on achieving the social target, unlike in ordinary investment contracts. Currently, this question is not raised at all", Vladimir Vainer notes.

The concept of "social impact" does not currently exist in Russian law, which also imposes a number of restrictions.

"There are always questions with its definition, measurement, its stretch in time. If you think in terms of "customer – contractor – subcontractor", there is a service provided and the result of that service. Since it is not defined in the Budget Code of the Russian Federation or in any bylaws, no one understands how to work with this, everything is quite complicated. SIB projects are usually expensive, they are more difficult in implementation and achieving social impact than ordinary social projects. In each specific case, the risks of the project participants must be insured, which is especially difficult in case of large investment amounts. These difficulties will likely prevent SIBs from becoming really widespread", says Yakov Samokhvalov, General Director of the Yugra Center for Civic and Social Initiatives foundation.

Here is an example. All social projects are aimed at improving the quality of life of their beneficiaries, in one way or another. Take the area of smoking prevention. Let’s say the project authors claim that 300 students participating in the project will stop smoking after five years. That is, the social effect will be achieved over a span of five years. But from the point of view of the Russian law, the project should be closed and reported on after one or two years in implementation. Also there is no norm that would allow a social project to be recognized as unsuccessful if the social effect is not achieved, the technology does not work, or the results are affected by some external factors, like deteriorating social and economic situation. You can go ahead and criticize the project, saying that there is no proof that the respective social effects were achieved as a result of the project. If the targets are not reached, however, then the supervisory authorities will certainly have questions as to why it happened.

Olga Balabkina, Deputy Chairman of the Government of the Republic of Sakha (Yakutia), emphasizes that once a SIB project is successfully implemented, it can be repeated in other territories. Or, by testing how a particular innovation works, you can extend it to a new project to reach more beneficiaries.

"In this case, such projects will be more attractive to the investor (lower risk of failure in achieving the results), and on the other hand, the project could potentially become cheaper to implement, after cutting out all the inefficiencies, which the customer will appreciate. Finally, there are ideas of dividing complex projects into separate components, which have proven effective, and their further implementation will take place individually", she says.

DEVELOPMENT OF IMPACT INVESTING

The growth of impact investing can also occur without government involvement, when private funds are invested either by venture capitalists or investment funds, or by foundations that provide loans or grants to achieve social effects. At the end of 2021, there was a growing interest in return impact investing, in entering the capital of startups whose activities led to an impact in the social or environmental sphere, Tatyana Burmistrova says.

But since the market situation has changed dramatically, one can hardly expect an acceleration of growth and interest in impact investing by market players, since what is needed first and foremost is general economic stabilization.

The market situation has changed dramatically, one can hardly expect an acceleration of growth and interest in impact investing by market players.

According to Sir Ronald Cohen, founder of Social Finance and pioneer of social impact projects worldwide, the SIB model optimizes risks, returns and impact, as return on investment does not depend on the stock market activity but solely on the social impact achieved.

"This gives us hope that the development of impact investing will take place primarily through the development of the SIB model", Tatiana Burmistrova explains.

Alexey Ryzhkov, the founder of Seven Suns Development Group, entrepreneur and social investor, believes that at the moment we can only talk about individual examples of social impact projects or the establishment of such a niche in the market.

"The current model of social structure in the world in general and in our country in particular does not provide for or accept the existence of such a phenomenon as social investment and social investors. It is rather an exception to the rule. The very notion of "social investment" means people acting from surplus rather than deficit; it means the society has confidently reached the level of carrying out independent economic activity; it means the realization that every activity has its social impact in one way or another. And we need to make sure that this impact is positive and constructive, which in turn means that people are ready to take responsibility for society into their own hands. The existence of a large number of people in the society who have crossed this path on their own, allows us to raise the question of the transition to the economy of positive social impact. But this can only work fully if all of the society, that is, the majority of people in the society, have realized these things or at least share an understanding of them. This is a very high development level. Until we as a society have realized this, we can talk about individual examples of social impact projects or about creating a niche in the market that will include various positive social impact projects and enterprises. We need to make this niche a trendsetter in the market of independent economic activity. The world is now experiencing a tectonic shift of global transformation, as President Putin says. Russia has its own role in this process – the role of a crossroads, which should unite the world, first preventing it from self-destruction, acting as an exemplary country – a design of positive, constructive social impact, if you will, then spreading this model to the whole world. We’ll be working on this", Alexey Ryzhkov says.

The SIB model is a long game, which should have its own logic of change and monitoring of intermediate results.

IMPROVING EFFICIENCY

The mechanism of social impact bonds initiated by VEB.RF was included in the Concept for Improving the Efficiency of Budget Expenditures in 2019–2024. Resources, including financial resources spent on social problems, must improve the quality of life of citizens.

According to Tatyana Burmistrova, there is a growing consensus in the society that the focus of paying for public services should shift from ensuring the fulfillment of formal quantitative results to achieving social effects.

Right now, most social services are provided by the state with little regard for how effective these programs and services are in achieving positive outcomes for the demographics served. Existing contracts with state or private providers of social services are paid based on a measurement of quantitative results achieved. The SIB model is in fact the key to effectiveness, as long as the social effect is not replaced by quantitative results. For example, the number of social contracts concluded (the expected result of one of the social impact projects in the Russian Federation) cannot in itself be a metric of the fact that signatories will get out of a difficult life situation by spending money to start their own business or learn a new profession.

"These kinds of errors occur as early as the design level of the project, and can only be avoided through a more thorough, sometimes longer design phase, involving all stakeholders, including beneficiaries. The design should be preceded by the data collection stage, the involvement of professionals in the field of evaluation and theory of change at the stage of project development", says Tatiana Burmistrova.

THE THEORY OF CHANGE APPROACH

The SIB model inevitably involves building a theory of change for the projects launched. Otherwise, it simply will not work or will be ineffective.