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:
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