- The private sector is facing unprecedented difficulties in accessing finance at at a time when it is sorely needed.
- Gig workers and those on low incomes in emerging economies are among those being underserved.
- Innovative financing structures could be key to addressing this issue.
As countries brace themselves for further rises in the number of COVID-19 cases and fatalities, there is an ongoing 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.
Governments have gone about this in different ways – from opening up financial assistance through development finance institutions to invoking emergency acts to force private manufacturing. And despite understandable roadblocks due to shutdowns and social distancing, private sector actors have done what they do best – convert huge challenges into huge opportunities.
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Healthcare firms 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 lines to manufacture ventilators, hand sanitizers, personal protective equipment (PPE) 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, the private sector is currently operating in unusual circumstances - and many firms are facing hitherto unseen financing challenges. Impact actors, including donors, can help firms surmount these barriers through flexible financing mechanisms.
For example, supply chains and logistics have come under undue stress, especially as the origin point for many is in China. Intermediaries need to commit to pre-agreed prices and delivery dates with healthcare providers, but must pay the price upfront and in full to manufacturers. However, they face back-end issues, ranging from cargo stuck in locked-down Chinese manufacturing hubs, 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 - and it is the most in-need public institutions that would be hit most heavily 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.
The need for innovative financing structures
Microlenders – traditional and mission-focused – are looking to provide concessional financing to a workforce that is temporarily unemployed due to the crisis. However, this demographic segment lies outside these lenders' comfort zones. 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 at 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 those in need. Potential exists for blending these two funds – for-profit and philanthropic – together to generate an impact multiplier of sorts.
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 will 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.
Financing Sustainable Development
The world’s economies are already absorbing the costs of climate change and a “business as usual” approach that is obsolete. Both scientific evidence and the dislocation of people are highlighting the urgent need to create a sustainable, inclusive and climate-resilient future.
This will require no less than a transformation of our current economic model into one that generates long-term value by balancing natural, social, human and financial conditions. Cooperation between different stakeholders will be vital to developing the innovative strategies, partnerships and markets that will drive this transformation and allow us to raise the trillions of dollars in investments that are needed.
To tackle these challenges, Financing Sustainable Development is one of the four focus areas at the World Economic Forum's 2019 Sustainable Development Impact summit. A range of sessions will spotlight the innovative financial models, pioneering solutions and scalable best practices that can mobilize capital for the the world's sustainable development goals. It will focus on the conditions that both public and private institutions should create to enable large-scale financing of sustainable development. It will also explore the role that governments, corporations, investors, philanthropists and consumers could play to deliver new ways of financing sustainable development.
Second, low-income workers, such as construction labourers 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 benefit from this monetary support. Philanthropic money from well-intentioned donors can be used to create bank accounts, and enrolments could unlock much larger government disbursements and provide more sustainable support to these segments ($10 of your money unlocks $100, for example).
The ongoing crisis 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 telemedicine services. Diagnostics will shift towards more point-of-care systems, wherever possible, and lenders 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.