a guide to impact bond...

Impact Bonds are a type of innovative finance mechanism that is becoming increasingly popular across the globe. They enable governments and donors to more effectively allocate resources in the face of poor social outcomes and fiscal austerity. This is achieved through paying for and thereby incentivising the successful delivery of specific outcomes which ultimately results in profound impact in our communities.

A Guide to Impact Bond InvestingNovember 2015

1. Impact Bonds 2

Impact Bond Models 3 Impact Bond contracting arrangements 4

2. Legal forms 5

Potential legal form of Special Purpose Vehicle 6

3. Investor Guide 8

Guide for Foundations 8 Guide for Individuals 8 Guide for Corporates 9 The B-BBEE scorecard 10 Corporate roles within Impact Bond model 12

4. Conclusion 18

Annexes 19Acknowledgments

Bowman Gilfillan: David Geral, Rob Hare, Hannine Drake and Ashleigh Hale Simanye: Alana Bond Social Finance: Jane Newman, Jonny Gill and Cooper Renfro Trialogue: Nick RockeyRichard RosenthalCover image: Early Learning Resource Unit

Contents

Funders of the Bertha Centre’s outcomes based finance projects.

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An outcomes based contract is an agreement between a funder and service provider whereby payments are contingent on the achievement of pre-agreed, measurable outcomes. This stands in contrast to traditional contracting where funding is based on inputs, activities and number of beneficiaries served regardless of whether outcomes are achieved or not.

With outcomes based contracts financial incentives along with rigorous M&E ensure that learning is accelerated and wasteful expenditure is minimised. Funders can begin to understand how much social outcomes cost and compare the cost effectiveness of different services claiming to achieve similar impact. Although service providers take on more risk they have more freedom to achieve the intended outcomes, as funders are less prescriptive.

Impact Bonds are a way of financing outcomes based contracts. Private investment is used to finance services upfront. These socially minded

investors then receive repayments from an outcomes funder if independently verified evidence shows that the intervention has been successful in delivering the pre-agreed outcomes.

Socially minded investors are better able to assess and shoulder the financial risk of programme failure than service providers are. They provide the finance needed to demonstrate the success of emergent practice in otherwise risk averse environments and are able to contribute specialised management and intermediation skills to the partnership.

The term Social Impact Bond (SIB) implies that the outcomes funder is a government and Development Impact Bond (DIB) implies the outcomes funder is a private donor or Development Finance Institution. Public and private sector funding can also be pooled in a hybrid outcomes fund.

Impact Bond models

Impact Bonds can be set up as individual transactions or can be financed through funds that focus on specific social issues and aim to test various models of delivery through the same outcomes based payment mechanism. Tariffs for specific outcomes can either be published or price discovery can occur through the bidding process. The latter makes more sense in data poor environments where tariffs are not based on short term cost savings.

1. Impact Bonds

Impact Bonds are a way of financing outcomes based contracts. Public and private sector funding can also be pooled in a hybrid outcomes fund.

Figure 1: Single transaction Impact Bond model

INVESTOR

SERVICE PROVIdER

BENEFICIARIES

OUTCOMES FUNdER(PUBLIC/PRIVATE)

4 Outcomes are measured and verified

5 Funders make payments to investors based on outcomes achieved

2 Socially minded investors fund delivery of interventions with the target group

3 Providers work with the target group to achieve the desired outcomes

Funding flows

Figure 2: Impact Bond Fund Model

1 Funders agree a number of payments by results contracts with different investor groups

4 Outcomes are measured and verified

5 Funders make payments to investors based on outcomes achieved

3 Providers work with the target group to achieve the desired outcomes

2 Investor groups fund delivery of interventions with the target group

BENEFICIARIES

OUTCOMES FUNdER(PUBLIC / PRIVATE)

SERVICE PROVIdER

SOCIAL INVESTOR

SERVICE PROVIdER

SOCIAL INVESTOR

SERVICE PROVIdER

SOCIAL INVESTOR

1 The outcomes funder determines outcomes and prices

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Investors, intermediaries, service providers and SPVs can be set up as for-profit of not-for-profit entities. The preferred forms in the case of Impact Bonds would be covered by the Companies Act. There are no absolute legal prohibitions on the legal forms used in any of the roles in the Impact Bond. Instead, some legal considerations (eg tax; supply chain management; legal profit limitations on non-profit forms) may make certain legal forms more suitable. Suitability may vary on a case-by-case basis.

Table 2: For-profit and not-for-profit entities

For-Profit Non-Profit

Sole Proprietorship

Partnership Voluntary Association

Private Company Non-Profit Company

Business Trust Non-Profit or Charitable Trust

For-Profit Co-operative Non-Profit Co-operative

Public Company

2. Legal Forms

Figure 4: Possible legal forms for outcomes funders, investors and service providers in the direct contracting model

INVESTOR

BENEFICIARIES


• Government department• Not for profit entity - Non-Profit Company - Non-Profit Trust• For profit Entity - Private company - Public company• Individual

• Not for profit entity - Non-Profit Company - Non-Profit Trust• For profit Entity - Private company - Public company• Individual

• Not for profit entity - Non-Profit Company - Non-Profit Trust - Voluntary Association• For profit Entity - Private company - Public company

SERVICE PROVIdER

The outcomes funder can contract directly with the service provider or prime contractor (often an intermediary) or indirectly with service provider, prime contractor or investor through an SPV1. Most Impact Bonds in operation are intermediated or managed. The level of outsourced performance management increases from “direct” to “intermediated” to “managed” models.

Impact Bond contracting arrangements

Figure 3: Example of single intermediated Impact Bond with intermediary contracted to manage performance

Funders and investors make and receive payments to investors through Special Purpose Vehicle

Intermediaries are responsible for performance management which includes collating and analysing real time data

BENEFICIARIES


SERVICE PROVIdER

SPECIAL PURPOSE VEhICLE

INVESTOR

INTERMEdIARy

Table 1: Bridges Ventures. (2014). Choosing Social Impact Bonds: A practitioner’s guide.

Type direct Managed Intermediated

Contract management

Delivery contract between outcomes funder and service provider or majority service provider controlled SPV

Delivery contract between outcomes funder and prime contractor (often intermediary) or prime contractor – owned SPV

Delivery contract between outcomes funder and investor-owned SPV

Performance management

In-house performance management

Intermediary or prime contractor performance manages service provider

Intermediary can be contracted by SPV to performance manageservice provider

Investment To service provider To prime contractor To SPV

1 The SPV can be set up as a for-profit or non-profit entity on the optimal tax structure. Feasibility of the current local projects have indicated that a non profit company with Public Benefit Organisation status would be most suitable.

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OPTION 1

The SPV could be set up as an NPC. The SPV can invoice investors on behalf of the service providers when working capital is needed for the service. The SPV can invoice outcomes funders on behalf of the investors when outcome payments are triggered. The NPC status of the SPV does not preclude contracting with for-profit organisations or paying out interest on investor loans.

This option is best used when the sole outcomes funder is the government.

OPTION 2

The SPV could be set up as an NPC with PBO status. If the newly formed NPC funds organisations with tax exempt public benefit organization (PBO) status, that perform public benefit activities in terms of the Ninth Schedule to the Income Tax Act, 1962, then the NPC can itself apply for tax exempt PBO status (provided it meets all the other requirements under the Income Tax Act). If the organisations

funded by the NPC specifically perform any the particular public benefit activities under Part II of the Ninth Schedule to the Income Tax Act, then the NPC can also apply for “donor deductible status” in terms of section 18A of the Income Tax Act (18A PBO status). If granted, this would entitle the NPC to issue section 18A tax certificates to donors, which would enable the latter to claim limited tax deductions for their donations. The SPV can solicit funding from investors on behalf of the service providers when working capital is needed for the service. Public or private outcomes funders can make payments or donations into the SPV to repay investors once outcomes are achieved. This option is best used when one of the outcomes funders is a private donor.

OPTION 3

The SPV could be set up as a for-profit company. It will need to go through the full commercial tender process in order to contract with a public entity. It will not be eligible for tax-exempt PBO status and investors can achieve a taxable return on their investment.

The legal form of the SPV will need to take the tax and contracting requirements of the various stakeholders into account.

Potential legal form of Special Purpose Vehicle (SPV)²

Figure 5: Possible legal forms for outcomes funders, investors and service providers in the intermediated or managed model

• Government department• Not for profit entity - Non-Profit Company - Non-Profit Trust• For profit Entity - Private company - Public company• Individual

• Not for profit entity - Non-Profit Company - Non-Profit Trust• For profit Entity - Private company - Public company• Individual

• Not for profit entity - Non-Profit Company - Non-Profit Trust - Voluntary Association• For profit Entity - Private company - Public company BENEFICIARIES


SERVICE PROVIdER


INVESTOR

INTERMEdIARy

Figure 6: Possible legal forms for Special Purpose Vehicle in intermediated or managed model

• Not for profit entity - Non-Profit Company• For profit Entity - Private company

BENEFICIARIES


SERVICE PROVIdER


INVESTOR

Figure 7: Possible legal forms for intermediary applying to any model

BENEFICIARIES


SERVICE PROVIdER


INVESTOR

INTERMEdIARy

• Not for profit entity - Non-Profit Company• For profit Entity - Private company

2 See Annex for more details

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There has been a trend over the last few years for philanthropic and corporate donors to use their grants or investments to either leverage further funding and/or drive quality outcomes3. This translates into a greater emphasis on M&E, transparency, innovation, blended funding models and intersectoral collaboration. Relatively small amounts of capital can be used to catalyse systems change with multiple partners taking on the responsibility for sustainability. Impact Bonds can be used to catalyse this kind of change.

Foundations can act as outcomes funders or investors. They are generally set up in the form of a Non Profit Trust but can also be set up as a Non Profit Company. They can be accredited by the South African Revenue Service (SARS) as Public Benefit Organisations (PBOs), provided that they meet all the relevant requirements under the Income Tax Act.

• Theycanbeoutcomesfundersintheirtraditional capacity as grant makers. They can pay for social or environmental outcomes from not for profit or for profit entities performing public benefit activities.

• Theycanbeinvestorsusingeithertheirendowment principal or investment income to finance service providers performing public benefit activities. They should not pay tax on the interest generated from this investment as long as they are accredited as PBOs by SARS. If

they are accredited as PBOs, they would not be required to pay capital gains tax, but they would be required to withhold and pay payroll tax, if they employed and paid remuneration to employees.

In general, a not-for-profit company or trust that is accredited as a PBO may participate as an investor in an Impact Bond contract, as long as such investment activity is carried on in a non-profit manner and with an altruistic or philanthropic intent, with a view to funding its own public benefit activities or re-investing to fund the service provider’s public benefit activities. To the extent that such investment activity constitutes a “business undertaking” or “trading activity” that company or trust could be taxed on that investment income.

If the Impact Bond contracts are held by an SPV then that SPV should ideally be in the form of an NPC.

Guide for foundations

Individuals can act as outcomes funders or investors.

• Iftheywouldliketodonatemoneytheycan be outcomes funders. If the SPV or service provider is set up as a 18A PBO they will be eligible to receive a section 18A tax certificate and claim a tax deduction for their donations, up to

a total deduction of 10% of their taxable income per year.

• Iftheywouldliketoinvestthenanyreturnaccruing to them will be taxable at their regular tax rate.

If the Impact Bond contracts are held by an SPV then that SPV should ideally be in the form of an NPC.

Guide for individuals

3. Investor Guide

3 Trialogue CSI Handbook

There are a number of roles companies can assume within the Impact Bond transaction model. They can provide upfront finance for services, pay for positive social or environmental outcomes and/or help to build a thriving outcomes focused social sector eco-system. They can do this in order to achieve independent objectives unrelated to the B-BBEE codes or they can align their contribution with the B-BBEE scorecard and gain points as a result.

Corporates should be mindful of both their own BEE position, both voluntary and in terms of sector-specific codes as well as the compulsory BEE obligations when contracting with the state. Every organ of state and public entity must apply any relevant code of good practice issued in terms of BEE legislation when developing criteria for entering into partnerships with the private sector, developing and implementing a preferential procurement policy.

Guide for corporates

They can provide upfront finance for services, pay for positive social or environmental outcomes and help to build a thriving outcomes focused social sector eco-system.

LEAP SCIENCE & MATHS SCHOOLS

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EqUITy OwNERShIP

There are a number of ways companies tend to create broad based ownership structures some of which are applicable to releasing funds for investment purposes. Direct and employee ownership models speak to individual benefit but the broad based ownership schemes hold potential for the release of funding to grassroots black beneficiaries in the broader population. These broad-based schemes are set up by companies in the form of a trusts, the dividends of which are dispersed to black beneficiaries. NPOs can buy into these trusts and become recipients of dividends after they have paid down the capital.

The weighted average target for this type of broad-based ownership has been reduced from 6.25% to 3%. As there is less emphasis on incorporating broad-based groups into ownership structures with the amended codes, we should expect companies to continue focusing on incorporating established black shareholders. Nevertheless there are many corporate trusts in existence that are mandated to disburse grant funding to black beneficiaries.

The distribution of funds depends on the mandate of the trust. Typically beneficiaries will be set up front or trustees will select beneficiaries or initiatives to benefit. 85% of the benefit of these trusts overall needs to accrue to Black South Africans amongst other criteria. The funds that are dispersed are generally dividends and interest earned from the underlying investment.

SkILLS dEVELOPMENT

The skills development expenditure definition has expanded to include training of unemployed black people as well as employees whilst maintaining some allocation for learnerships, apprenticeships and internships. Mandatory sectoral training for employees does not qualify for this allocation. It is considered a priority element with the amount required for full achievement increasing from 3% to 6% of the payroll for large businesses and 2% to 3% for small businesses.

This modification presents the opportunity for organisations that provide workforce development in the form of skills training and job placement to

benefit from this pot of funding although courses would need to result in the achievement of a SAQA qualification or certificate issued by an accredited or registered formal institution.

ENTERPRISE ANd SUPPLIER dEVELOPMENT

Preferential procurement and enterprise development have been reconfigured to promote supplier development with 3-year contracts attracting an additional points. 2% net profit after tax (NPAT) is expected to be spent on supplier development with the remaining balance of 1% available for enterprise development. Procurement points are harder to achieve with special emphasis on supporting at least 51% black owned suppliers (including Qualifying Small Enterprises and Exempted Micro Enterprises) and “empowering suppliers”. Empowering suppliers are so named according to their local procurement and beneficiation practices and their creation of jobs for black people.

Grant funding to these organisations is fully recognised under the new codes but loans and equity investments and human resource capacity attracts between 50-80% recognition.

SOCIO-ECONOMIC dEVELOPMENT (SEd)

This category remains a contribution made to black beneficiaries with the specific aim of income generating activities for beneficiaries. A grant, payment, discount or overhead cost is fully recognised whereas consultancy services or company employee is counted at 80% of its value with the total needing to reach 1% of NPAT for points to accrue.

Companies can put their SED allocation into an investment vehicle that can invest or grant the money in a manner whereby that capital can be recycled and thus used to assist an exponential number of beneficiaries, as long as the ultimate beneficiaries are at least 75% black South Africans and the contribution by the company is not repayable to the company.

Table 3: The generic B-BBEE scorecard for generic-sized companies4

(Simanye, 2015)* Bonus points are available

Element weighting(Old criteria)

% Contribution weighting(New criteria)

% Contribution

Ownership 20 points (+3) 21.5% 25 points 21.2%

Management Control

10 points (+1) 10.3% 15 points (+4) 16.1%

Employment Equity

15 points (+3) 16.8%

Skills Development

15 points 14.0% 20 points (+5) 21.2%

Preferential Procurement

20 points 18.7% 40 points (+4) 22.9%

Enterprise Development

15 points 14.0% 14.4%

Socio-Economic Development

5 points 4.7% 5 points 4.2%

100 points (+7) 105 points* (+13)

The B-BBEE scorecard

Through the recent amendment of the codes, the DTI is once again attempting to move from a compliance approach to one that contributes towards achieving sustainable, inclusive and meaningful transformation. There is an emphasis on entrepreneurship and job creation especially as it relates to partnerships between established business and emerging enterprises. Increasing the weighting and targets of skills development and preferential procurement elements as well as merging preferential procurement and enterprise development into enterprise and supplier development has created that emphasis.

4 There are various codes for different types of businesses: large businesses (generic codes), specialised enterprises, qualifying small enterprises (QSE codes), exempt micro enterprises (EME) and companies falling into one of the nine sectors that have their own codes: transport, construction, tourism, ICT, forestry, finance, property, accountancy and agriculture.

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The benefits for corporates in granting money in this manner would include only paying for what works, fostering inter-sectoral collaboration, encouraging government efficiency, amplifying impact by leveraging other funding, testing innovation and raising their profile.

The scorecard allocation from which this type of funding would be grant based could be drawn includes:

• Broad Based Trust earnings

• Socio-economic development

• Skills development

The specific requirements associated with each of the above elements would need to be met and proven to a registered auditor or verification agent, in order to obtain the B-BBEE recognition.

Corporates could provide outcomes funding for individual Impact Bonds or pool funding to create outcomes based sectoral funds, which could transform the way services are delivered in line with sectoral scorecard requirements.

Corporate roles within Impact Bond model

International examples

• Peterborough Social Impact Bond (UK): The Big Lottery Fund, which is a private charity, contributed outcomes funding to the Ministry of Justice’s budget in order to fund the rehabilitation of short-term prisoners in order to decrease the rate of recidivism.

• Educate Girls: The Children’s Investment Fund Foundation, which is a major international donor, paid for girls in Rajasthan to attend school.

• Malaria: Some of the corporates active in Mozambique including Anglo American and Coca Cola are contributing to the fight against malaria by paying for outcomes alongside the Mozambique Department of Health.

Local examples

• The departments of Social development and health fund NPOs to deliver Early Childhood development services to homes and communities in order to achieve health, nutrition and developmental outcomes in pregnant women and children less than 5 years. Corporate SEd funding already contributes significant funding to this space. That funding could be aligned with public funding to drive better outcomes, contribute to learning about what works in the space and capacitate NPOs to scale their services. Organisations like Philani or mothers2mothers would fit this profile.

• The Department of Economic Development pays organisations like Harambee to train young people and place them in semi-skilled positions. Companies could use part of their increased skills development allocation to co-fund these types of organisations. Payments would be made on the basis of success enabling the most cost effective delivery models to thrive and provide a public private sector funding model that could be replicated countrywide. Corporates could even pool funding and issue a challenge to organisations to be paid on the basis of outcomes. Financing efficiencies could potentially be created as organisations raised loans or grants to cover operational expenses until outcomes payments started to flow.

• Companies could pool funding into an education fund whereby they would pay for basic and tertiary educational outcomes. Qualifying organisations could range from those like Ikamva Youth who are providing academic tutoring outside of the classroom, to Wordworks who help foundation phase teachers with literacy to those organisations supporting university bursary students to pass. Outcomes are clear-cut and would include matric pass, pass with exemption or bachelor pass etc.

INVESTOR

BENEFICIARIES


SERVICE PROVIdER

5 Trialogue CSI Handbook

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Corporates can use grant funding to contribute to outcomes payments within the Impact Bond transaction model. They can either do this as the sole outcomes funder or in partnership with other public or private sector outcomes funders.

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MARkET BUILdING

Corporates can use the grant portion of their funding to contribute to market building in the form of research (proof of concept and feasibility), capacity building (M&E development, data analysis and technical assistance to service providers) and transaction support (intermediary costs which include research, investment structuring, capital raising, technical assistance, stakeholder alignment). In other words companies could use their capital catalytically to motivate for a change in business as usual.

INVESTMENT OR CREdIT ENhANCEMENT

Corporates can use the investment portion of their funding to fully or partially invest in the Impact Bond transaction. Once an independent auditor has verified the achievement of social or environmental outcomes, the outcomes funder will repay corporates with a return on their investment. Corporates can either invest as the sole investor or in partnership with other investors.

Corporates can also use the grant or investment portion of their funding to provide credit enhancement in the form of a subordinated investment or guarantee. As guarantor they can guarantee a minimum return or full or partial principle.

The risk return profile of investors depends on whether they are finance first or impact first investors. Because of the lack of track record of the instrument and lack of data in the market place investments have tended to be reasonably high risk to begin with although that is changing. Foundations, trusts and high net

worth individuals have made the majority of the initial investments or capital guarantees in the global Impact Bond market.

The benefits for corporates investing in this manner include achieving a financial and social return (the higher the impact the higher the return), being tightly aligned with other stakeholders and being part of a high profile deal.The benefits for corporates in providing credit enhancement include leveraging mainstream capital, lowering the cost of capital and encouraging a range of investment.

The allocation from which this type of funding could be drawn include:

• Broad Based Trust earnings

• Socio-economic development

• Potentially Enterprise and Supplier Development, depending on qualifying entities

International examples

• Rockefeller Foundation: Supports intermediaries and governments by investing in early SIBs and funding research and knowledge building

• Omidyar Network: Supports intermediaries like Social Finance to build the market in the UK and funds researchers such as McKinsey and Company to disseminate best practice

• Laura and John Arnold Foundation: Supports the Harvard Kennedy School Social Impact Bond Technical Assistance Lab which has provided intermediary services to multiple Impact Bonds in the USA seeding the market

• Big Lottery Fund: Paid for transaction costs of Peterborough SIB

Local examples

• Bowman Gilfillan has worked closely with the Bertha Centre for Social Innovation to develop a guide to impact bond investing and contracting.

• The Innovation Edge and Lego Foundation have paid for the feasibility study and design of an Impact Bond fund for Early Childhood Development in the Western Cape.

International examples of credit enhancement

• Rikers Island: Bloomberg Philanthropy underwrote 75% of Goldman Sachs’ investment capital investment in the Rikers Island Bond

• New South Wales Benevolent Bond: Subordinated debt structure with 3 tiers of risk enables institutional investors to take senior positions using large amounts of capital where foundations took the majority of the risk

• Utah Preschool: JB Pritzker Foundation underwrote part of the capital investment of a large investment bank in order to draw non traditional forms of finance into the transaction

Local examples

• The Jobs Fund has opened an Innovation window, which will allow the setting up of an outcomes based contract where payment is contingent on job creation and the government is kept accountable to this measure. It would mean that corporates invest in 51% back owned businesses upfront and if those businesses grow in terms of jobs, payroll tax or turnover then the Jobs Fund pays out the investor.

• Investment could be made into NGOs adhering to Enterprise Development criteria i.e. NGOs and organisations that support at least 51% black owned businesses with annual revenue less than R50m, in which case emerging Early Childhood Development for-profit social enterprises could benefit.

• Mining houses could invest in local enterprise development on the basis of job creation

INVESTOR

BENEFICIARIES


SERVICE PROVIdER

5 DG Murray Trust, ELMA Foundation, Firstrand Foundation, FNB Fund, Omidyar Network and UBS Optimus Foundation

The allocation from which this type of funding could be drawn include:

• Enterprise and supplier development, depending on qualifying entities and service providers

• Socio-economic development: Even though a corporate cannot get SED funding

back the money could be granted to an implementing entity who could use it to obtain the success funding which they could use to strengthen their balance sheet or invest in the next opportunity. Corporates could also recycle capital through funds set up to defer SED payments.

• Broad based Trust endowment capital

Corporates could invest in individual Impact Bonds or pool funding to create outcomes based fund to finance particular sectors in a bid for transformation.

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TAx IMPLICATIONS

Tax deductibility of any expenditure will depend on whether the legal requirements for a deduction under the Income Tax Act are met. In general, expenditure is deductible if it is incurred in the production of income, in the course of carrying on a trade, and does not constitute capital expenditure. However, as mentioned above, donations to 18A PBOs will be tax deductible up to a total of 10% of the company’s taxable income in that year, provided that a section 18A certificate has been issued for such donations.

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Corporate forms & accreditation

There are three tiers of legislation that organisations can engage with:

• Investors, intermediaries, service providers and SPVs can be established as for-profit of not-for-profit entities through the Companies and Intellectual Properties Commission (CIPC). The preferred forms in the case of Impact Bonds would be those that have the tightest governance structures and are covered by the Companies Act. Those include private and public companies, non-profit companies (NPC) and non-profit Trusts (most often used by foundations).

• They can apply for tax exemption by registering with the South African Revenue Service (SARS) as a Public Benefit Organisation (PBO) with or without 18A PBO (“donor deductible”) status, assuming they meet the applicable criteria under the Income Tax Act.

• They can voluntarily register as Non-Profit Organisations depending on whether or not they would like to access government funding.

1. Establishment

FOR PROFIT

Private and Public Companies

One of the key attractions regarding private and public companies is the fact that they offer investors limited liability protection. Shareholders are not liable for the debts and liabilities of the company and directors are also protected unless they breach their duties as directors. The company is a separate legal person to both its shareholders and its directors meaning that the company is itself the owner of the business and the assets which it purchases which are registered in the name of the company rather than in the names of its shareholders or directors. The company can sue and be sued in its own name and the company has perpetual

succession or legal continuity. This means that if its shareholders or directors are replaced, the company will not automatically dissolve and can continue indefinitely. Companies are currently subject to a maximum corporate tax rate of 28% on income. Private companies are restricted from offering shares to the public in their constitutional documentation, which is registered with the company registration incorporation of the company.

NOT FOR PROFIT

Non-Profit Company

According to the section 1 of Companies Act 71 of 2008, the purpose of NPC is to provide pubic benefit or other objectives relating item 1(1) of the Schedule 1. NPCs can generate income but cannot distribute it to members, incorporates, directors, officers or related persons in the form of dividends. These persons can however be paid reasonable remuneration for services or goods rendered. Any excess income can be used to further the objectives of the entity or if the entity is dissolved, can be donated to other not-for-profit entities with similar objectives.

A minimum of three persons are required to sign the Memorandum of Incorporation and can chose to have additional voting and/or non-voting members. Those members can be individuals or juristic persons such as not-for-profit or for-profit entities. Alternatively the NPC can appoint a board of directors to manage its affairs.

Non Profit Trust

The legal formalities involved in establishing a charitable trust are essentially the same as for a business trust, the key distinction being that the trust’s object contained in the trust deed will be a charitable purpose. In addition, the trust may apply to SARS for accreditation as a tax exempt PBO, and a 18A PBO (with “donor deductible” status), if it satisfies the relevant criteria.

The founder of the trust known as the “settlor” would hand over control of assets to another person known as the “trustee”. The trustee administers those assets for parties, known as beneficiaries, who are identified in the written agreement. Trustees have fiduciary duties towards beneficiaries and are under obligations to protect the trust assets, keep them separate from their personal estates and are not permitted to use trust assets for personal gain (unless a trustee is also a beneficiary which is permitted).

Trusts do not have separate legal personality, apart from specific exceptions involving insolvency and tax. Consequently the trustees themselves own the relevant assets rather than the trust or in the case of the bewind trust, the beneficiaries own the assets directly.

Annex

For Profit Not for Profit

Sole Proprietorship

Partnership Voluntary Association

Private Company Non-Profit Company

Business Trust Non-Profit or Charitable Trust

For-Profit Co-operative

Non-Profit Co-operative

Public Company

Impact Bonds have developed in response to the persistence of intractable social problems and desire to intervene earlier in their trajectory. The public and private sector have recognised that it’s going to take robust and deeply collaborative partnerships to bring about change; partnerships in both the operational and monetary sense. These partnerships should drive efficiency to enable those in the public and private sectors to spend their money on what works.

Private sector organisations can play the role of outcomes funder or investor. As outcomes funder they can blend their capital with multiple sources including government. As investor they can find a suitable risk reward profile that suits their mandate. The times call for “out the box“ thinking and Impact Bonds are one of the ways global institutions are designing outcomes based instruments to drive better social and environmental outcomes.

Conclusion

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2. Tax exemption

Public Benefit Organisation

NPCs do not automatically qualify for approval as a PBO. In order to be eligible for PBO status, the sole or principal object of an NPC must be the carrying on of one or more prescribed public benefit activities in a non-profit and altruistic manner for the benefit of the general public, and those public benefit activities must not be intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the NPC. For approval as a PBO, the NPC must apply to the South African Revenue Service (SARS). If SARS approves the NPC as a PBO, it will benefit from a variety of tax exemptions. The categories of prescribed public benefit activities that may be performed to be eligible for PBO status are set out in Part I and II of the Ninth Schedule to the Income Tax Act:

• Welfare and Humanitarian*

• Health Care*

• Land and Housing*

• Education and Development*

• Religion, Belief or Philosophy

• Cultural

• Conservation, Environment and Animal Welfare*

• Research and Consumer Rights

• Sport

• Providing of funds, assets or other resources

• General

The starred categories fall under Part II of the Ninth Schedule only. In order to be eligible for 18A PBO (“donor deductible”) status, a NPC that has been accredited as a PBO must perform one or more of the limited set of public benefit activities under these headings.

If a NPC is accredited as an 18A PBO as well as an “ordinary” tax exempt PBO, it may issue section 18A certificates to donors, which will entitle those donors to tax deductions for those donations. A taxpayer (individual, trust or company) making a bona fide donation in cash or of property in kind to a 18A PBO is entitled to a deduction from taxable income, up to a total amount of 10% of that taxpayer’s taxable income for that year. Such donations should not be subject to any reciprocal obligations and not result in any personal benefit for the donor. In other words if taxpayers want to contribute to the outcomes fund their contribution cannot be contingent on results. Their donation would need to be a voluntary, free gift that enriches the beneficiary and impoverishes the donor. The donation of a service such as time, skill or effort does not qualify for a deduction.

*Certain restrictions and conditions need to be adhered to in order to be eligible for approval as a PBO, including the following:

• On dissolution, the remaining assets of the organisation must be transferred to a similar PBO, exempted institution or a sphere of the South African government. All of these entities must use the assets solely for the purpose of carrying out one or more public benefit activities;

• Funds must be used solely for the object for which the organisation is established;

• The organisation may not accept any donation which is revocable by the donor unless the organisation “materially” failed to use the donation for its “designated purposes and conditions.”

3. Voluntary registration

Non Profit Organisation

NPO is defined in the Nonprofit Organisation Act 71 of 1997. An NPO may voluntarily register with the Department of Social Development which will enable the organisation to apply for funds and grants from the government. NPO accreditation is granted by the NPO directorate, after which they are required to comply with various reporting requirements.

Applicants must be able to show that the organisation has been established for a public purpose and that the income and property of the organisation is not distributable to the organisation’s members or office-bearers except as reasonable compensation for services rendered.

When registered the organisation can access funding from the Department of Social Development, the National Lotteries Trust, the National Development Agency and various other agencies.

ABOUT ThE BERThA CENTRE:

The Bertha Centre for Social Innovation and Entrepreneurship is a specialised unit at the UCT Graduate School of Business (GSB). The Centre’s mission is to uncover, connect, pioneer and advance social innovators and entrepreneurs who share their passion for generating inclusive opportunities and achieving social justice in Africa. Established in partnership with the Bertha Foundation in 2011, it has become a leading academic centre dedicated to advancing social innovation and entrepreneurship. Today the Centre is a dynamic space, with three key initiative areas, which include Education Innovation, Inclusive Healthcare Innovation and Innovative Finance with a strong focus on Africa.

Some of the Centre’s highlights include integrating social innovation into the GSB’s curriculum, establishing a wide community of practitioners and awarding over R3 million in scholarships to African students. Together with its partners it has begun testing solutions ranging from social impact bonds, social franchising, to healthcare innovation hubs.

ABOUT ThE INNOVATIVE FINANCE INITIATIVE AT ThE BERThA CENTRE:

Working with social finance experts from across the world, the Innovative Finance initiative partners with governments, enterprises, and investors to research, incubate and test promising social financing vehicles across Africa. Recognising the importance of education and field building, the team regularly convenes stakeholders and publishes on the topic of impact investing.

a guide to impact bond...

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