Development Impact Bonds - What are they and why they might be the Next Big Thing in donor finance?

I was fortunate yesterday to attend the launch of a Consultation Draft report (available here) by a Working Group on Development Impact Bonds.   This has been driven by the Centre for Global Development (a US-led development policy outfit) and Social Finance (a UK outfit behind the first Social Impact Bond, which was in the UK and involves reducing re-offending rates for prisoners coming out of Peterborough prison).  

The report is an impressive tome of 156 pages in length, and you can read it at your leisure, or look at the 2 page briefing document here. 

The Working Group was formed from senior representatives from a series of multi-lateral and bi-lateral funding agencies (World Bank, DFID, USAID, OPIC), as well as developed world government (UK Ministry of Justice, Swedish Ministry of Foreign Affairs), and members from the increasingly growing 'impact investment' community (Omidyar Network, Rockefeller Foundation, Gates Foundation).  

So, what's all the fuss about? What is a DIB when it's at home? And why is a Development Impact Bond considered such a good idea, that could potentially change the way long-term aid funding works in the future?

The best way to get a sense of what a DIB is is to watch the short video on the CGD's website and read the report. A DIB is in essence a new financial investment instrument that allows private capital to be deployed into a delivery structure with the goal of improving a social problem (e.g. kids out of school, decreasing the incidence of a disease, decreasing the numbers of prisoners who re-offend).  If the outcomes (which must be measurable) around that social problem are indeed improved as a result of the new delivery structure (which normally saves the government substantial amounts of money) this triggers payments to the private investor. These payments come only after outcomes have been independently verified. These payments will normally include the original amount invested, plus a premium as a reward for having taking the risk in the first place and for having successfully achieved the improvement of an important social outcome.


This has a number of elegant features (in theory) that make donors, governments, and the delivery organisations happy:

1. Governments and donors only pay out money AFTER results has been achieved.  This makes DIBs one of the latest in a series of donor pushes towards 'results-based payments' and outcome-driven funding.  This new approach is trying to make more explicit links between the funding of inputs (roads, dams, school buildings) and social outcomes (better jobs, cleaner water, more educated children).  Implicit in this drive for DIBs is the recognition that much donor and government spending over the past few decades has been too input-focused,  with large amounts of tax payer money spent often without achieving real results. 

2.  Risk is pushed totally into the realm of the private investor and the delivery organisations responsible for improving the social outcomes.  This means that the delivery providers and investors have the licence to innovate their models as much as they like, and can do it in real-time as they climb the learning curve of delivery and get better at understanding different local nuances and solutions.  This is very liberating when compared to the typical model of government and donor procurement, which generally has tight prescriptions on the methods and amount of expenditure during the delivery phase. 

3. The premium payment can be ratcheted up to incentivise ever higher outcome improvements.  This means that once all stakeholders have agreed the basic price of an outcome's achievement threshold (e.g. 5% premium if prisoners' re-offending rates drop by 10%), if the delivery provider manages to attain higher levels of outcomes above other pre-determined thresholds, they can trigger further financial rewards (e.g. 15% premium if prisoners' re-offending rates drop by 25%).  This is a better alignment of the government's cost-savings on any particular social problem it currently pays for with the private investors and their accompanying delivery providers (who will want to maximise their financial reward for having innovated and improved the social outcomes of that particular problem). 

There will no doubt be a lot of debate still to come, and it will take some time I imagine before the first major DIB is launched.  Clearly I'm interested in seeing it work within my own sector of Education - particularly around learning quality outcomes (rather than the previous MDG school access emphasis - strictly speaking more an 'output' than an 'outcome').    I will need to take the time to read the full report and respond to the consultation, and I encourage anyone else interested to do so also.

I should also add, for the purposes of clarity, that a Development Impact Bond is NOT a Bond in the traditional 'fixed-income security' asset class sense that it commonly means in financial parlance. 

A DIB will not produce a debt instrument that can be traded between buyers over a certain known length of time for a known interest rate. 

A DIB will need upfront private capital (another attractive feature from a government's perspective) that will pay for all the delivery activity during at least the first few years.  That money is completely at risk until the outcomes of the programme are measured and meet the improvement targets agreed by all at the start.  Should a delivery programme fail to meet the targets, the investor will take some sort of hit (but unlikely to be a complete write-off in practice, I imagine).  It is interesting to speculate, with the introduction of this new DIB instrument and the making of a new market, how far the market development can go.  Will there be a secondary market of DIB re-insurers and traders?  Will it be possible to take out 'futures options' in the success of any particular social development programme that is DIB funded? Who will these new intermediaries turn out to be - and how powerful will the so-called 'Integrators' become?  Will the philanthropic funders actually turn out to catalyse this new market and what kinds of returns will actually be tolerable for them to consider investing? 

I will leave you with a funny slide put up by Owen Barder of CDG as he introduced the paper - it shows the two polar opposites of what 'Hell' might look like if DIBs went wrong, against the 'Heaven' that DIBs could produce if properly introduced:

Thoughts on cognitive self-diagnosis, or How Can We Reduce Student Drop-Outs?

Finding the time to write and post these blogs is proving tricky!  I wanted to write something of a follow-up to my previous post on the interesting UK-based Medical Diagnostics company, who developed a simple and cheap widget for rural African villagers to self-diagnose their HIV immunity levels.  

The concept of patients ‘lost to care’ which their device helps reduce is the equivalent in the education sector of student ‘drop-outs’ - except I suspect the consequences of not receiving medicine are probably more threatening in the short-term and result in more fatalities.

Meeting these two gents has got me wondering: what would the educational equivalent of this immunity diagnostic test be? Could one imagine a widget that would allow self-administered diagnosis for learning deficiencies? Would it have the same impact? 

One problem I can immediately identify with my own whimsical educational widget is that learning is not binary, and while there are aspects of cognition that lend themselves to either/or diagnostics (can you resolve a quadratic equation or can’t you? Do you or do you not remember who invaded England in 1066? Can you or can you not change a spark plug or a nappy in under twenty seconds?)  the more interesting questions are open-ended and to do with forming critical connections, reapplying theories and what is loosely called creativity (e.g. what were the causes of the second world war? How would you predict the winner of the next election? Are the Millennium Development Goals helpful or harmful? etc).

Answers to the former category of binary learning tests would simply inform the curious educational ‘patient’ that, no, they didn’t have the recall or hard knowledge about solving quadratic equations or William the Conqueror but it wouldn’t necessarily tell them why they couldn’t remember or why these particular facts or skills are relevant or important.  Answers to the latter kind of question could be interesting to read but there would be so many it is hard to imagine how a cheap and self-administered diagnostic tool would realistically cover them all.

In some sense, most villagers who carry a mobile phone do have access to a widget with great processing power and educational potential.  What is clever about the medical diagnostic widget is that the fool-proof but complicated blood-based chemical tests that happen within the white plastic box, tell the patient simply 'Treat' or 'Don't Treat'.  This basically means 'get to hospital ASAP' or 'don't worry, you've got a bit more time to live'. Brutal, but effective. 

Some series of quick-fire tests (maybe subsidised phone calls with a volunteer teacher or coach, maybe some response SMS texts that test basic literacy or basic arithmetic) could potentially serve the same function: if you can't answer this, or read this, or compute this within a certain time threshold - GET YOURSELF TO SCHOOL/COLLEGE/SKILLS TRAINING. 

The problem I now see is that the motivational pressure that is at work within the medical diagnostic isn't quite so acute when applied in the educational self-testing; people failing the educational diagnostic don't have impending death to focus their immediate actions on getting to a school.  What might be needed would be some accompanying information that conveys to the educational 'patient' all the benefits that accrue when you remain in school - e.g. how much more income they might make, how much better their livelihood skills would be (these already seem too trite and theoretical, and not as punchy as 'you're about to die!').  Accurate diagnosis followed by quick remedial cognitive results might yield better results.  This is how the 'master-a-skill-get-a-reward-by-gaining-access-to-a-new-level' pyschology underpinning certain computer games operates - and it effectively keeps gamers playing for hours!  This could in effect be turned into some form of conditional cash transfer scheme - paying students via the mobile phone as they progress through more and more sophisticated levels of competencies.  10 cents for every series of 10 Maths questions you get right in a row.  1 full dollar if you get 100 questions right, and can show sustained competency on a similar test 3 months later...maybe even a real book gets posted to you when you complete all levels!

I haven't figured this one out yet.  I do sense there will be something out there to do with technology and self-study and appropriate motivational structures that could shift the dial somehow to tackle the enormous drop-out rates across SSA.   Any suggestions please do comment and let me know your thoughts...

Aid-funded business trip in Kenya and Uganda

For two weeks in late November and early December 2012 I was part of the UK’s Trade and Investment ‘aid-funded business’ delegation which took me first to Nairobi, Kenya to meet the large donors (World Bank, Department for International Development, African Development Bank, United Nations Family) and then on to Kampala, Uganda (to meet the same folks, with more of a UN focus).  The idea was that the twelve or so UK SMEs represented by our motley crew would be able to find out more about the not-particularly-straightforward way these donors procure business, and we would all, in some way, benefit by increasing UK exports.  

I’m only now just getting round to posting this note, which is inspired by two new friends I made whilst on the trip – the CEO and his long-time Director of a UK based health medical diagnostics company called Omega Diagnostics. 

This company has been in existence for 25 years and produces (in Scotland and a couple of other regional sites in England) niche diagnostic health equipment, for use particularly in sub-Saharan Africa.  

My two new friends were showcasing a specific product called CD4, which was essentially a small white rectangular box about the size of my finger. CD4 is used to test a patient’s blood sample, and simply requires a tiny finger prick blood sample which is processed right then and there within 45 minutes. After the chemical magic has taken place, a simple ‘treat’ or ‘don’t treat’ message appears, telling a patient whether their immunity levels have decreased beyond a critical threshold, and therefore whether they need to seek out HIV retro-viral medicine.   

The product is brilliant because it is sold for less than $5 USD per unit, is simple to use and portable, is diagnostically definitive, and the results following the test are easy to understand for the patient.  If you are a villager in a remote part of Africa you can now test yourself with a CD4 box, without having to walk ten miles to a regional hospital for a trained nurse.  Villagers with HIV can self-monitor regularly and affordably, and will now be able to move quickly to obtain antiviral drugs the moment the test shows their immune levels dropping beneath a certain critical level.   

What’s very clever I think about Omega’s approach is that they have picked an area of real medical importance, thought about the everyday barriers that patients in Africa tend to face (long walking distances, no transport), and combined the science and technology and manufacturing know-how to solve this puzzle.  Commercially they have first-mover advantage – they tell me there is no other company in the world which currently produces such a health kit diagnostic. The chemistry behind the diagnostic test was developed by an Australian Laboratory and Omega worked with them and provided the IP and facilities to help scale production. Omega is now in the Sales phase, approaching donors specifically interested in reducing AIDS HIV to buy this kit. Pharmaceutical companies see it as an advantage because for a very small amount of upfront subsidy cost they can get patients onto the much more expensive retro-viral drugs.  CD4, if it’s taken up by donors and used in the way it is intended to be, should basically help reduce the numbers of patients lost to care (which is sadly, I’m told, still very high across Africa). There are still an estimated 33m people with HIV in Africa, (quite likely to be an underestimate).  

It pleases me to think of scientific and manufacturing innovation like this coming out of the UK, and I wonder if Omega Diagnostics is the shape of companies to come as globalisation increases and our world gets smaller; relatively small numbers of highly specialised employees, collaborating with others in Australia, manufacturing in the UK and in India, and distributing and targeting customers in Africa.  I’m not at all prone to giving stock tips but Omega is actually listed on London’s AIM, so anyone who wants to invest in Omega can do so.  I believe you’d be investing in a company that has its heart in the right place and is in a very good position to help reduce the some of the considerable suffering caused by AIDS. If only more companies could be like this, and if only more donors would take the time to actually attend travelling business delegation meetings and hear what is actually out there in the marketplace.