From grants to commercial funding

Most people would agree that grant funds should be focused on tackling development projects which would simply not take place unless free money was available. However, what is the right point for grant funds to be replaced by more commercial forms of funding such as debt or equity?

Four years ago, we set up MicroEnsure with a grant from the Bill & Melinda Gates Foundation. Our aim was to serve a large number of people with a range of affordable and relevant insurance products. Today we are serving in excess of 3.1 million people whilst growing by more than 200,000 new clients per month. By the end of 2012, we should be approaching 10 million active clients being provided with a safety net that stops the poor from falling back into poverty when disaster strikes.

MicroEnsure is entering that difficult stage in its development where the grant funds are coming to an end and donors are rightly asking whether more grants are really needed for an organization serving millions of clients. And yet, it is still early to demonstrate to potential investors that it’s a sound investment that will offer a compelling return.

Our approach to this conundrum has been to contemplate separating our operations into those that have been proven and are rapidly scaling up and those, such as the development of health insurance in Africa, which are still at an early stage. The “proven” parts of our business can be placed into a company that insurers, mobile phone companies and social investors can fund using equity; the “R&D” parts of the business can be placed into a foundation that can continue to use grant funding. As the best ideas from the R&D company are proven, they will be transferred across to the core business to be scaled up using a robust platform that is serving millions of poor people.

Using this approach, we believe, will enable us to tap into commercial funds and strategic partnerships that are necessary to continue our growth, while continuing to experiment and test out new development ideas using grant funding.

Of course the real test of this approach is whether the inevitable tensions between the needs of the equity funders for continued growth and the desire of the management team to innovate and develop new ideas can be addressed to everyone’s satisfaction.

The role of donors

The finance that donors provide not only plays a significant role in the development of organizations that address difficult development goals; it also has the power to shape markets. One of the frustrations of working in development is to see well-intentioned funding not helping those that were targeted to be assisted. In most developing countries, the provision of health care is funded by donors via the ministry of health, which in turn pays for medical facilities, medical personnel and the drugs required to provide the population with the services they need. If you visit these government-run health facilities or speak to the general public who use them, it is all too frequent you will learn that medical personnel and the drugs that are supposed to be available are in short supply. All too often, the medical personnel and supplies can be found around the corner at a private clinic.

Interestingly, some innovative approaches are emerging for funding health care; the most notable has been in India through the provision of the Rashtriya Swasthya Bima Yojana, a state-managed national health insurance program. Central to this approach has been the theory that it would be better to provide donor funds as a premium subsidy to the poor, enabling them to have a health insurance policy which they can use at both private as well as public health facilities. This approach is innovative because it ensures that the poor benefit from the donors’ health expenditure; it provides power to the people who are free to choose where they want to spend their health funding, leading to the development of a robust market in the provision of health services. Whilst there are a number of issues that continue to be worked out in relation to these public-private partnerships in the provision of universal health for the poor, the early results indicate that they have a greater impact on the poor than funding the ministry of health.

Donors should be proud of the role that they play in providing grant funds to organizations engaged in tackling issues that the commercial market sees as too risky. MicroEnsure would never have taken off without grant funds provided by Opportunity and the Bill & Melinda Gates Foundation. Some of these organizations will inevitably fail due to the magnitude of the task they undertook. But those that succeed need to be ready to transition from grants to debt or equity, which can be used to finance working capital needs whilst not losing sight of their roots and continuing to seek grants to continue to push the development boundaries on specific projects.

Donors should continue to look inward at their activities and ask themselves whether their grants are distorting markets or having the greatest impact on those they hope to help.

Want to read more about innovative financing for development? Check out Busannovate, a blog brought to you by Devex in partnership with the United Nations Foundation, and launched with a thought-provoking guest opinion by Nobel Peace Prize winner Muhammad Yunus.