Wildlife Conservation Bond
By Tavish McNulty | October 27, 2022
Over the past ten years a new tool in impact finance has been developing called social and development impact bonds. This form of financing is a public-private partnership that serves as an alternative to traditional debt-financing. Under this structure, the private sector funds a social service and is repaid a percent of the principal plus additional returns by the public sector based on the outcomes of the project.
Development impact bonds have essentially the same structure, however, the service is carried out in a developing country. Such a bond was issued this year by the World Bank called the Wildlife Conservation Bond. The purpose of the bond is to increase funding in two national parks in South Africa to help preserve the population of the black rhinos. Poaching across the region has driven black rhinos nearly extinct, a horn from these animals can go for up to 60,000 USD per kg. The World Bank issued a 5 year, 150m USD to solve the issue. The capital will be used in the parks to strengthen the ecosystems, increase park security, and improve community service engagement.
Another interesting term of the agreement of this bond is the distribution of capital to the parks. The parks receive a percent of the capital as though it is a coupon payment. Under the terms of the bond, the outcome that determines whether the investors receive their money is the growth rate in the black rhino population. As exemplified in table 1, the investors receive 100% of their initial investment if the rhino population grows by at least 4% by the end of the project period similar to a zero coupon bond. The investors cannot receive a return greater than the principal under this agreement so the return of this bond, thus lies in the investors’ value of goodwill. In current events as interest rates rise the yields have risen across bonds in capital markets. This lowers the price of the bonds and in terms of present value the bond has decreased. If the present value has dropped below investor’s willingness to invest in goodwill, then the investors would have a theoretical negative return.
This bond is the largest development impact bond to date in terms of capital raised, and will be interesting to track its progress over the coming years until it matures in 2027 to see if investors say if it was worth it.
Edited by Michael D'Ambrosio