The Red Cross has turned to the nascent field of social impact bonds to raise capital for a series of projects.

The nascent trend of what are called social impact bonds took another turn when the International Committee of the Red Cross announced last week it had created the world’s first “Humanitarian Impact Bond”.

The bond raised SFr26 million ($27.4 million) to build and run three new physical rehabilitation centres in Africa (Nigeria, Mali and Democratic Republic of Congo) over a five-year period, providing services for thousands of people. 

The payment-by-results programme also includes the necessary training for the new staff as well as the testing and implementation of new efficiency initiatives, the Red Cross said. 

The launch of the bonds is part of a broader impact investment trend that is already worth billions of dollars around the world and slated to become larger as investors seek to harness their financial muscle to force changes that are not always measured in financial terms. Advocates of impact investing insist, however, that it still generates returns comparable with, or even better than, traditional investing. (To view an article about social impact bonds, see here.)

The Red Cross said this funding mechanism has been created to encourage social investment from the private sector, to support the ICRC’s health programmes. A rising number of conflicts as well as a growing annual budget of the ICRC are the driving forces for this innovative funding model, the organisation said in a statement. 

The “Humanitarian Impact Bond” is legally known as the Program for Humanitarian Impact Investment, and not bond in a strict sense but a private placement. The initial payments by ‘Social Investors’ - (New Re, part of Munich Re Group) and others identified by co-sponsor Bank Lombard Odier - enable the ICRC to run the activities at each rehabilitation centre and hence expand the ICRC’s Physical Rehabilitation Programme, the Red Cross said.

At the end of the fifth year, “Outcome Funders” - governments of Belgium, Switzerland, Italy, the UK and ”la Caixa” Foundation - will pay the ICRC according to the results achieved. These funds will in turn be used to pay back the social investors partially, in full or with an additional return, depending on how well the ICRC performs in terms of the efficiency of the new centres.

Independent auditors will verify the ICRC’s reported efficiency in the three new centres. The efficiency - the ratio of how many people receive mobility devices per physical rehabilitation professional - is compared to existing centres. If above the benchmark, the social investor will receive its initial investment plus an annual return. If the performance of the new centres is, however, below the benchmark, then it will lose a certain amount of the initial investment.