New York City: Social impact investors, leaders of non-governmental organizations, and development specialists gathered at the Rockefeller Foundation in New York City this week to learn about Development Impact Bonds (DIBs), a new financial instrument that aims to tap private sector innovation to help improve the lives of poor people in the developing world.
Zia Khan, Rockefeller Foundation vice president for strategy and evaluation, told the audience that DIBs hold promise as “the next evolution” of innovative finance for meeting global development goals.
“What excites me most about the report are the specific case studies ranging from HIV prevention in Swaziland to scaling up low-cost schools in Pakistan. There’s enormous appetite for this kind of innovation at a global level,” Khan said.
Although the first DIB deal has yet to be signed, the idea is more than wishful thinking. Presenters explained how DIB pilots in various stages of development would bring the private sector’s drive for success to such problems as reducing sleeping sickness in Uganda, improving education in Pakistan, avoiding teen pregnancy in Colombia, and fighting malaria in Mozambique. (See event page for full video and photos.)
“There’s growing interest in doing good while doing well but changing the world requires more than good intentions,” said Toby Eccles, the founder of Social Finance UK, an organization that works to inject market-principles into social sector funding. “DIBs provide an opportunity for the private sector to invest in the world’s most pressing development challenges in a meaningful way.”
Eccles, CGD senior fellow and director for Europe Owen Barder, and Elizabeth Littlefield, CEO of the US Overseas Private Investment Corp., a US government agency that turns a profit, served as co-chairs of the CGD-Social Finance Working Group that prepared the report.
Eccles explained how Social Finance UK pioneered a new instrument for involving private investors in financing socially desired outcomes starting with a project to reduce high rates of UK recidivism—when former prisoners commit fresh crimes after release and wind up behind bars again.
Barder told how he was living in Ethiopia when he first learned about the new approach, dubbed Social Impact Bonds, or SIBs, and contacted Social Finance to explore how the approach could be applied to development challenges. That led to a partnership between CGD and Social Finance, which jointly convened a working group to adapt the new approach as Development Impact Bonds, or DIBs.
SIBs and DIBs work in a similar fashion: Private investors provide up-front capital to service providers who work to achieve a specific, measurable goal, such as fewer teenage pregnancies or reduced recidivism. If an independent third party verifies the goal has been met, funders (such as national governments for SIBs or donors for DIBs) repay the investors their initial investment plus a return linked to performance—the better the outcome, the greater the return.
Unlike traditional aid projects, which tend to focus on implementation of specific solutions identified before a project is funded, the DIBs approach links payments to outcomes and aligns the incentives for investors and the service providers to discover the quickest and most cost-effective means to achieve the desired result. Funders—aid donors, in the case of DIBS—pay only if the result is achieved.
Drawing on one of six case studies in the report that describe emerging pilot projects, Barder explained how a DIB could be used in Uganda to reduce sleeping sickness, a parasitic disease that takes a heavy toll on human health and is invariably fatal if left untreated. He encouraged investors and donors to learn about the new approach—and to consider taking the plunge.
“This is a time for leadership,” Barder said. “Traditional aid is giving way to innovative new forms of development finance that will create new opportunities for private firms and donors—and at the same time much better development outcomes. But these benefits can only be realized if some pioneering funders and investors are willing to bear the upfront costs of creating a new market. Heroes wanted!”
To help manage risk for individual investors and funders, the Working Group recommends the creation of a new DIB Outcomes Fund and DIB Investment Funds. These funds, which would pool capital and dilute risk, would facilitate launch and implementation of the first DIB projects and help catalyze market growth.
Luther Ragin, president and chief executive officer of the Global Impact Investing Nework (GIIN) kicked off the discussion at the New York event with a ringing endorsement of DIBs, .
“There is innovation at play that is very exciting to a wide range of investors. At the GIIN, we are convinced that this is a space that has lots of opportunity. We are happy to be associated with the development of these instruments, and the organizations that have pushed the development of these instruments.”
But he also offered some potential concerns from investors. Success would depend crucially on the quality of the management of the NGO or other entity that serves as the intermediary, he said, and of “the quality and integrity of the data that determines whether or not investors get paid.”
The Development Impact Bond Working Group was convened by CGD and Social Finance with support from the Rockefeller Foundation and the Omidyar Network. Working Group members include thought leaders from the worlds of finance, government, civil society, foundations and official aid.
Six case studies of DIBs in various stages of feasibility, development and negotiation are included in the Working Group report. Pilot DIBs currently being explored and the groups in the lead include: Social Finance, for reducing sleeping sickness in Uganda; Lion’s Head Global Partners, a London-based merchant bank, for education in Pakistan; Instiglio, a non-profit that designs Social Impact Bonds, for avoiding teen pregnancy in Colombia; OPIC, for investment in clean energy; and Dalberg, a development advisory firm, for fighting malaria in Mozambique.
Guest post by Lawrence MacDonald, Center for Global Development