Estudio Beccar Varela partners María Shakespear and Constanza Connolly discuss working on Argentina's first social impact bond with Paola Aurisicchio  

How do the firm come to be mandated on this deal?

MS: Let us give a little bit of the background. Our role on the social impact bond came in part thanks to our firms deep involvement in this matter, especially because of Fernanda Mierez and Constanza’s reputation in the impact investments field. With Constanza we co-led the transaction that launched the social impact bond in Argentina and we advised the social investors such as Banco de la Ciudad de Buenos Aires, Banco de Galicia and Buenos Aires, Banco Interamericano de Desarrollo LAB, IRSA Propiedades Comerciales, Organización Román. The initiative was developed by Acrux Partners, a company founded by Maria Laura Tinelli, that also advised the government on how to launch the bond. In addition, the bond was supported by Social Finance UK, which is a company that develops social impact bonds in Latin America and the UK, where social impact bonds originated.

Was the use of this structure something the firm suggested or did the client come to you and say it would like to issue a social impact bond?

MS: Our firm belongs to Argentina Impact Investment Taskforce and we are highly active members. They started analysing the use of this type of vehicle and when the government of the city of Buenos Aires launched the bid to submit offers, investors and the rest of the parties invited us to be part of the operation.

CC: We’ve been following the development of impact bonds and we knew that it could be an interesting instrument to solve some of the great social challenges that Argentina faces nowadays, as well as an accelerator of projects linked to development. It was a matter of waiting for the right opportunity and finding the right partners to push the initiative forward.

What are the main incentives for the issuer when using this bond structure?

MS: This type of bond is an innovative financial mechanism. International experience shows that this instrument, which aligns efforts from the government, the private sector and specialised organisations to address social issues, generates efficiency in the use of public resources and the resolution of problems by focusing on payment by result.

In times of budgetary constraints combined with aggravated social challenges in Argentina, SIBs have emerged as an innovative financial mechanism representing a complementary approach to traditional social policy interventions, notably in areas where there are government and market failures.

Argentina requires the introduction of innovative instruments such as SIBs which allow the state to transfer a project’s financial risk to investors and create a rigorous framework for result accountability. Thus, an environment which boosts innovation is created, testing new intervention models, and assessing cost-effectiveness before scaling.

CC: Although less complicated and less costly means of financing social services already exist, SIBs may prove to yield specific advantages. For example, they can represent a more effective way to deliver social services due to their focus on monitoring and measuring social outcomes. Another aim of SIBs is to funnel private resources to address social issues. Even though during startup investors are generally philanthropic institutions, international experience demonstrates that as the social investment bond becomes institutionalised, the market opens itself to other parties such as banks, impact investment funds, and individual social investors.

Given this bond structure has not been used before in Argentina, did you look at other social impact bonds for a template?

CC: The idea of the social impact bond was provided by a person in the city of Buenos Aires and we worked a lot with Social Finance UK and Acrux Partners. Social Finance worked in Latin America on other impact bonds, but these haven’t been issued yet. The only one in Latin America that has been was in Colombia. We reviewed their experience because it is similar to ours - it also addresses an unemployment issue.

Were there any challenges or difficulties in closing the deal?

CC: Structuring Argentina’s first SIB was a major challenge. The structure of SIBs in foreign jurisdictions could not apply and time pressures required timely alternatives under existing local law. Beccar Varela coordinated strategic analysis, education and multi-party negotiations to develop this pioneering tool.

MS: We negotiated for more than a year because social impact bonds involve very complex problems and require a complex solution. Additionally, the bonds involve different parties with different mindsets. On the one side there is the government with its structure. On the other side you have investors that usually need to report economic benefits and have very efficient structures. You also have NGOs that, in Latin America don’t generally have a strong structure and efficient structure.

The hardest part was coordinating different parties, but through the social bond we had the chance to speak with many administrative authorities and explain the benefits of this structure and to educate them in issuing social impact bonds.

Were there any regulations that had to be amended or overcome before the bond could be issued?

MS: In Argentina the role of the government was different. The social impact bonds are a social problem highlighted by the government, then the investors provide funds to finance the NGO that addresses the problem. The difference compared to other countries is that in Argentina the government didn’t call for investors but it went through a public bid. The challenge of this constraint is that a public bid is very rigid; we needed to form and incorporate a different structure – in our case a trust – in order to channel the funds to the NGO .

CC: Participation by our lawyers was paramount when it came to public advocacy in favor of this instrument and its prospective beneficiaries. We contributed to addressing the following elements of the general fiscal framework in Argentina: the tax system does not allow NGOs to become social investors; consequently, our lawyers, jointly with Acrux Partners, contacted the Argentine tax authorities to present proposals for the regulation of income tax law, to add the clarification that social impact bond investment was possible. For the SIB financial assessment, it is necessary for the trust to deduct expenses incurred by NGOs, requiring NGOs to bill for services, however tax exemptions granted to NGOs by tax authorities are restrictive. During the negotiation process with NGOs delivering the program, legal opinions were presented to assure NGOs that by providing services and billing, their tax exemption would not be put at risk.

Do you expect to see more work on social impact bonds in Argentina after this first issue?

CC: Yes, we are working with another NGO to launch a social impact bond for education. There is a lot of interest in different parts of the world to develop social impact bonds in Argentina. Our country is currently designing a provincial education bond with a much simpler structure, with the local government, an international organisation, a private investor and a specialised NGO as participants. Other SIBs on health topics and drinkable water supply in vulnerable communities are in the exploratory phase. We understand that what has been learnt, along with the designed legal tools, will simplify the road ahead, as well as make social investing more economically efficient.

MS: By the end of 2018, Argentina’s United Nations Development Program (UNDP) organised an Impact Investment work group and agreed to move forward on a feasibility analysis for a Wholesale Impact Fund, or Payment by Results Fund, tapping good practices from international experience, adapting them to the Argentine reality.

If you work on any more deals of this type is there anything you would change about the structure you used for this issue?

MS: Structuring an instrument as innovative as a SIB requires overcoming certain challenges and finding its correct legal development, respecting the country’s regulatory environment. SIBs are an emerging mechanism in developing countries, thus, we believe this will be the first of many of several forms which are expected to evolve from learning on employability throughout the SIB pilot. The fact that the structure had to have a public bid maybe was an unnecessary constraint and it created additional problems. If the structure meant the government could have more scope to negotiate the terms of the agreement that would facilitate a better procedure. With this first structuring and setup in execution, we reckon that it will be easier for SIBs carried out in jurisdictions with public private partnerships legislation.

CC: In hindsight, one of the lessons learned from this issue is that legal teams should be involved from the SIB startup, to guide the different parties, collaborate with the correct governance through the process, and defend the general interests of the project. Another key aspect is to design a working schedule, especially during the first experiences in different jurisdictions, which contemplates the necessary time to negotiate and build trust among the different parties, which are generally diverse, given their heterogeneous characteristics. 

The future challenges to reach scalability with this type of tool are: remove legal barriers which generate setup complexities and greater costs for everyone involved; payment by results has its complications related to public administration’s budgetary execution modality which would need simplifying; result management and assessment is challenging both for the government and civil society organisations; lack of local market development for sustainable investment-related financial products; and macroeconomic volatility complicates the possibility to foresee and receive return on investment.