With the help of a results-based financing mechanism, Mexico’s largest specialised diabetes provider Clínicas del Azúcar has doubled its number of patients from the poorest segments of society and tells HBI it can now double the locations for potential clinics. We speak to its CEO and the co-creator of ‘social impact incentives’ about how to monetise extra value in impact investing.
The ‘social impact incentives’ or SIINCs give a cash reward for social enterprises for meeting certain metrics – typically one based around quantity and one based around quality. Clínicas del Azúcar, for example, earned extra income by increasing the numbers of patients it treated from the so-called Bottom of the Pyramid (BoP, the largest and poorest socio-economic group) and reducing their average blood sugar (HbA1c levels).
“We know that high impact enterprises create much more value than they are able to capture in their income,” says Bjoern Struewer, an ex-banker who co-created the SIINC alongside Peter Beez from the Swiss Agency for Development and Cooperation (SDC).
“They are serving the poorest of the poor and in many ways are creating so-called positive externalities. Our model is monetising these externalities for them so for the first time they can capture this value and create cash flow by actually earning rewards for achieving pre-defined impact metrics.”
Javier Lozano, the CEO of Clínicas, tells HBI that although the incentive has only been available for 2-3 years he now has a sustainable business model that he can present to investors for future growth capital. “It gave us a few years to learn how to increase the volumes and eventually become sustainable. We can not only keep the clinic running but it doubles the number of potential locations because know we know that we can go into lower-income areas. Now we’ve proven that BoP patients can be sustainable, even profitable, and our investors are more willing to put up the money for future growth capital.”
He admits that the amount provided, up to $275k over 2.5 years, wasn’t hugely significant to the size of the company so it was more about what the SIINC meant for the future. At the beginning, existing impact investors agreed on a fresh commitment of $1.5m, followed by a further round of $6m in the course.
Both Lozano and Struewer emphasised that the risk in this model is with the entrepreneur. “About 32% of our members were BoP and the project came with the challenge to raise it to 37%,” says Lozano. “We take the risk and once we deliver the outcome then we get rewarded for that.”
More than half of the patients at one clinic in Juárez, once dubbed the world’s most dangerous city, designed to reach BoP patients now come from that group. The hardest thing about reaching BoP patients is their sensitivity to seasonality as costs like school fees change throughout the year and that renewals tend to be lower because patients want to start to self-manage after feeling better, diverting that spend to other needs. He’s found that a sustainable mix of patients is about 30-40% high or middle income and 70% lower income.
Clínicas is now the largest private provider of specialised diabetes in Mexico with 16 clinics and Lozano says he aims to end the year with 21, going up to 50 in two years. It prides itself on offering affordable and convenient care in a country where diabetes is the biggest cause of death. He claims that the costs are around 40% of the average price of treatment and that he keeps costs low by using data algorithms for personalisation and efficiency and is now looking to invest in AI and telehealth. Lozano also says that he’s looking for international partners for potential future expansion.
Struewer, who created the SIINC as part of Roots of Impact, an impact investing advisory company, says that the mechanism is “sector agnostic” and also has applications in off-grid energy, water and sanitation. It’s close to closing a project with Ecuadorian group Novulis, who provide dental care BoP patients, often through employers with large low-skilled worker groups like flower plantations. The quantity metric here is around reaching the employee’s family members but the quality metric is much harder to measure as it’s based on customer satisfaction.
“Our assumption, and after conversations with experts, is that people who have problems with their teeth will report it. We just have to ask them how satisfied they are with the treatment,” Struewer says. The SIINC rewards are funded through development aid, which is large but falling annually. The OECD reported $149m collected in 2018, a drop of 2.7% from 2017.
His ultimate goal for the SIINC is that it’s used across the board: by governments and public payors to subsidise different activity, by private equity and venture capitalists, even perhaps by debt financers. “The big ambition is that we want to establish the model as a standard tool of finance and development with an open platform and guidelines, etc. The idea of accounting for impact is theoretically possible across the whole financial system.”We would welcome your thoughts on this story. Email your views to Rachel Lewis or call 0207 183 3779.