Keen interest in World Bank Rhino Bonds launched in SA

The World Bank has launched an innovative approach to protect and grow the population of endangered black rhinos by launching a Wildlife Conservation Bond, also called the Rhino Bond. Two parks in South Africa, Addo Elephant National Park and the Great Fish River Nature Reserve will benefit. It is a $150m five-year bond that includes a potential performance payment from the Global Environment Facility (GEF). If a positive rhino growth rate (what a nice investment term) is achieved and the bond is deemed a success, we could have bonds connected to elephant or chimpanzee growth rates in the future. Michael Bennett, the head of market solutions and structured finance at the World Bank Treasury told BizNews the bank had a great deal of interest in creating a new outcome-based financial instrument that would pay for conservation performance and benefit local communities by growing tourism and supporting job creation. – Linda van Tilburg

How does the Rhino Bond work?

The innovation with the Rhino Bond is that traditionally with biodiversity or projects of this type, you are looking at governments or donors funding them upfront. By funding them upfront, they are living with the risk that the project ultimately doesn’t perform up to its objectives. So, we are really moving from that model to a model where a donor can pay just for success, which is what we’re doing here; where the donor is the Global Environment Facility (GEF), one of the largest facilities of its type in the world. It has 184 sovereign participants, and the Global Environment Facility has funded many traditional grant schemes in this area of biodiversity. But again, they were looking to see whether they could do something on a pay-for-performance or pay-for-success basis.

If they are only going to pay for success, we need someone else to take the risk of the project not being successful and that is where the bond and the capital markets come in. What we have done here is we issue a bond, a US$150m bond; and a bond, of course, ordinarily pays interest, on an annual or semi-annual basis. In this case, the investors give up all of that interest. Instead, all of the interest on the bond that would ordinarily go to investors is paid to these two parks. All the money that would otherwise go as interest on the bond is paid to these two parks on a set schedule. It amounts to R152m, and the parks then have the money to do various projects to try to protect and expand their black rhino populations.

In maturity, the investors have given up all of their coupons. Of course, they need a chance to make some money on the bond as we did want to make this a true investment, not a form of philanthropy. We wanted to see if we could attract real investors. The way they have a chance to make money is on what we’re calling conservation success payments, again funded by the GEF, and is based on how successful these two parks were in growing their black rhino populations in terms of average annual growth. An average annual growth of over four percent leads to a full payout of the success payment. There are three other stage payments: there is an 80% level and a 40% level.

If the growth is zero or negative, they don’t get any conservation payment. In this way, we have passed the risk of the project not performing up to its objectives from the donor or, in some cases, this would be from a government to the capital market investors. We think this is an important innovation and something we could scale and replicate in other uses where we have donors who would be interested in paying just for success as opposed to just paying for inputs and hoping for success.

Keen interest from institutional investors and high-net-worth individuals

It is tremendously interesting and exciting to a lot of investors. We have this as a target of institutional investors and what we call high-net-worth individuals. The minimum investment size of $100,000. So, it’s not for the typical woman or man on the street but wealthy people or institutional investors. The reason for this is that it is a rather complex bond.

There has been a tremendous amount of excitement over the bond. A lot of institutional investors, I would say, have looked at it. More have looked at it than could buy it because a lot of institutional investors [who] looked at it were interested in the structure but discovered they just didn’t have a portfolio or a place to put something that had rhino risk embedded. At the same time, we found plenty of investors who could take that risk. We are settling the bond on 31 March. Only then will we know the full investor list, but some very large institutional investors have purchased the bond and also some [high-net-worth] individuals.

Finding the right risk award to attract investors

This is a real investment, and that is what we are trying to do here; to come up with the right risk reward to attract actual investors. It’s the first time anything like this has been tried. We were experimenting with the right risk reward [profile]. We certainly didn’t want to overpay but we had to pay just enough to get $150m size [of the bond]. So, the bond is issued at a discount. It’s issued at just below 95% of its par value, meaning what the investors pay; if you can imagine one investor buying the whole bond – which is not what happened – but they would have paid 94.84% and at maturity they get 100%, so they actually get a guaranteed minimum return that way and they also have the chance for the success payment return.

Looking at our success payment bands; if the highest level is reached, which is 4% or greater growth, annual growth in the black rhino populations of the two parks, the investors get 2.83%, essentially based on the accretion to par, plus the success payment. That goes all the way down to the lowest return, which is if zero or negative growth occurs. In which case, they get no success payment and the total return to the investors is just above 1%. That is the span of potential return from just above 1% if there is no growth to 2.83% per annum, equivalent return if there is 4% or greater growth.

Donors know that their money is going to a specific project

This structure has a lot of appeal, certainly to donors and governments, because they can just pay for success. We think it’s exciting for investors too because they get to know their money is going to a specific project. They know it is additional resources for the project that wouldn’t be there without their money, and they have a chance to make an attractive return if the project is successful. So, their incentives are all aligned with success. We think it’s exciting and it could certainly be rolled out for other, similar things, other species or even for other areas of development. There’s nothing specific about the structure to animals. It could be for other sorts of development goals.

Ellison Wright, senior environmental finance specialist at the World Bank said the Rhino Bond was a pilot and the World Bank hoped it can be expanded. He said there is a big biodiversity finance gap, estimated to be at least $700bn annually. Wright explained why black rhinos and two South African parks have been chosen for the Rhino Bond.

Two sites in South Africa chosen out of 130

We built on a project that was started back in 2014, which set the foundation for why rhino and why South Africa. It is important to highlight that the bank got involved in this around 2019, and we have been going through the preparation stage since. But we built on an existing project that really went through the scientific rigour to determine which one would be the most appropriate species and also, which sites are ready to do this. We did this transaction to build on that particular project, The Rhino Impact Investment Project. The GEF and other donors, including the UK Illegal Wildlife Trade Fund and some others, supported that.

We looked at 130 different sites from many countries. These are important sites that could contribute in a material way to the conservation of black rhino. Black rhinos were thought to be more easily monitored compared to, let’s say, pangolins or any other species out there. There is a very good track record and system of reporting. Annually, the minister of Forestry and Fisheries and Environmental Affairs, Barbara Creecy issues reports on how many rhinos are poached and periodically the population of the rhinos. So, all of that was very conducive [to creating this outcome-based financial innovation].

Addo Elephant Park and Great Fish Nature Reserve have good track records

These two sites have an extensive track record of delivering results. They grew their rhino population from an almost non-existent population. They didn’t have rhino back in the ‘90s, and reintroduced them from Namibia… and then from there, they started growing numbers and conserving these rhinos. Over the last, I would say, five or seven years, they have increased their capability to monitor and track [black rhinos] and this is all part of their conservation effort. Both of these sites are located in the Eastern Cape. Addo Elephant National Park is around 7,500 km2, [and] around 175,000 hectares. It is a key location for tourism. It is one of the top three nature-based tourism inflows for the SANParks system. It already has a very good tourism track record and is one of the big five parks. It also has elephants and other wildlife there.

Great Fish is a provincial park at around 45,000 hectares and ECPTA is the manager, the municipal entity in charge of that. Again, they have been spending a lot on their [black] rhinos and were participating in a prior phase [of the project]. These are well-managed parks; they have a very good track record. They’re very rich in their flora and the biomes they represent. Also, the rhinos are an umbrella species for representing how things are managed and how other species benefit from these types of investments.

Why was the Kruger National Park not chosen for the rhino bond? 

Obviously, Kruger is the gemstone for probably all of Africa, not just South Africa. And they draw attention to this. Part of the reason is they already implemented a lot of the efforts we are going to support this activity; meaning they had a huge spike in poaching from 2007 all the way to 2014/15. The epicentre was in Kruger. So, back in 2014, when there were over 1,200 rhinos that were poached, Kruger held the large majority of those. Just three years ago, back in 2019, they had one rhino poached a day, that was a successful year. Things have improved, at least in Kruger. They have been very successful in leveraging additional funds. There were big investments from the Buffett Foundation and the government. If you visit Skukuza and the security operation centres they have, it’s really top of the line. They are at the forefront of security operations but also tourism offerings and engaging communities… The reason why Kruger was not chosen was that these sites need all the investments that Kruger has benefited from over the last probably 10 years. So, this is helping fund the financing gap and it’s this additional financing they [the two parks] wouldn’t get otherwise.

Rhino growth rate will be independently monitored and verified

Hopefully, we will be able to educate and inform a lot of others so they get used to connecting rhino growth rate, elephant growth rate, chimpanzees, and many others. The bottom line is the sites; they have the mandate to manage the rhino population. They have the tools and techniques, which will be strengthened through this project. They will be reporting on the rhino growth as they do at the national level. Minister Creecy then consolidates and shares this information from the national perspective. Here they have provided verification for unique rhinos that are there in their population and they have to be monitored and recorded at least once a year. That is the minimum requirement we have. And then, we have a Conservation Alpha. They perform the calculation agent role, which is to do the quality assurance and all of that. They then apply a model that will capture any rhinos that may be within the population but have not been seen in the recent monitoring period because sometimes they are not always in the open… The Zoological Society of London (ZSL), which was also involved with that prior project we mentioned will be doing a specific check of the work that Conservation Alpha will produce.

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