When we talk about solving society’s biggest challenges — poverty, climate change, healthcare, education — we often think first of nonprofits and government initiatives. But these entities alone cannot close the staggering funding gap needed to meet global sustainable development goals.
For profits play a crucial role in delivering social impact, going far beyond just providing capital. While several Indian companies have demonstrated admirable commitment to impact by exceeding their CSR spending obligations, the for-profit universe’s role in providing social services extends much wider. For reference, over 60% of healthcare in India is delivered by private hospitals and nearly 35% of students in our most populous states attend affordable private schools.
However, when it comes to serving the underserved, for-profits often encounter a tradeoff between quality and affordability. For instance, affordable private schools struggle to invest in teaching-learning practices, and private healthcare providers are constrained to employ untrained nursing staff.
While market forces usually take care of affordability, quality is mostly driven by the fear of regulatory penalties rather than positive incentives. Most for-profit entities face a challenging reality: they are expected to deliver social benefits equitably but are left to fend for themselves when it comes to financial sustainability.
The government has successfully used incentives to nudge private sector behavior in specific sectors. For instance, the FAME (Faster Adoption and Manufacturing of Electric Vehicles) subsidies have accelerated electric vehicle adoption by creating the right incentives for manufacturers and consumers alike, demonstrating how targeted incentives can transform entire industries.
Private philanthropic capital too has demonstrated models to broaden the impact footprint by providing well-designed incentives to for-profit entities. The Utkrisht Impact Bond supported by MSD for Mothers enabled philanthropic capital to be utilised to enable 400+ private maternity centers in Rajasthan receive quality accreditation for the improvement in quality of care. The Michael & Susan Dell Foundation developed an innovative pay-for-performance model to improve learning outcomes in affordable private schools in India. Schools participating in the program received both financial support and mentorship to improve teaching quality. If schools achieved predetermined learning outcome targets, they received incentives that could reduce their loan costs. The program reached 337 schools across 11 cities in India, ultimately improving educational outcomes while creating a sustainable model for quality improvement. India’s first development impact bond dedicated to skills training and employment, the Skill Impact Bond (SIB), further illustrates the use of philanthropy to incentivise the achievement of desired social outcomes by for-profits. Led by the National Skill Development Corporation (NSDC), this outcomes-based financing model benefits 50,000 young Indians, with 60% being women. Unlike conventional grant-making that funds activities and inputs, SIB links funding directly to achievement of verified livelihood outcomes. The delivery partners for this programme includes for-profit training providers alongside non-profit ones.
Blended Finance: Creating Impact-Aligned Incentives
Implementing effective incentive structures requires addressing several systemic challenges. The current regulatory environment often creates added complexity in channeling benefits to for-profit entities. Philanthropic organizations face restrictions on providing grants to for-profits, while government funding typically flows exclusively to nonprofits and public institutions.
At The Blended Finance Company, our work has inspired us to consider several radical possibilities for aligning for-profit incentives with social outcomes:
- What if healthcare quality determined financial returns? Could we create financial instruments that reward private hospitals for measurable improvements in care quality and patient outcomes? Through incentives linked to specific quality metrics, we could help shift the focus from volume to value in healthcare delivery.
- How can we make insurance accessible to those who need it most? Could parametric insurance products, which pay out based on triggering events rather than assessed losses, provide a pathway to protect vulnerable populations? What if blended finance structures incentivised insurers to serve the most needy population segments?
- How can we channel CSR and philanthropic funding to amplify for-profit impact? Could we create mechanisms that unlock CSR and philanthropic capital to de-risk commercial investment in high-impact ventures? What if credit enhancement enabled funding access for bankable borrowers perceived risky, or outcomes-based funds rewarded businesses directly for delivering desired social outcomes?
Various forms of capital can be strategically combined to design these incentives. The common thread in these approaches is using catalytic capital to align commercial interests with social impact. Blended finance offers a promising pathway by strategically combining public, philanthropic, and private resources. This reduces risk for commercial investors while enhancing potential returns, unlocking significant resources for impact-focused enterprises.
At The Blended Finance Company, we’re turning these possibilities into reality by designing innovative financial structures that bridge different types of capital. Our approach transforms how capital flows to social challenges, making impact investing more accessible and scalable.
Are you interested in exploring how blended finance can help incentivize for-profit impact in your area of focus? Reach out to us at partnerships@theblendedfinance.com and let’s continue the conversation!
