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At a glance: What Development Impact Bonds are and why they’re taking over the funding landscape. Read if you’re thinking about diversifying beyond your grant income.
– 9 min read –
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DFID has been testing them out in Uganda since 2014, there are reportedly 30+ being concocted all over the world right now, 2 brand new ones popped up within a week in October and the latest came out at the end of November: Development Impact Bonds are the new blended financing model for International Development work being tested right now.
With grant funding drying up left right and centre, donors, NGOs and the private sector are scrambling to shake up how we finance the Sustainable Development Goals and with smaller and smaller pots of grant funding available, us NGOs really need to consider all the ways we can shore up our funding streams.
Step in the Development Impact Bond, an innovative pre-financing tool which spreads the risk of funding development work with new private sector actors by creating a payment-by-results contract.
Who’s involved?
The partnership usually involves 4 to 5 main players who together agree upon outcomes and indicators:
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| Investor | Implementer | Outcome Funder | Project Manager | Independent Verifier |
|---|---|---|---|---|
| A private investor with different objectives and risk appetites looking to impact on global development issues whilst receiving a return on their investment.
*As a general rule, the greater the risk investors believe they are taking, the higher the financial return they will require for their investment. |
Those getting the work done, usually us, the NGOs |
Those with a stake in achieving the outcomes agreed. A Foundation, or a DFID-type who has budget to pay back the investor plus interest, of course. Basically these are the people we would usually be writing grant applications to. |
An external player brought in to oversea the management | Well, because that makes sense. |
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What’s in it for me?
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In my mind, there seem to be TWO BIG BENEFITS for using this model:
- Sharing financial risk: The big plus point for donors is about sharing the risk of funding development work with the private sector. With an upfront investor on board, the NGO just has to crack on with doing what it does best (their projects / the reason they exist) and the impact funder (i.e. the guys we are used to calling the ‘donor’) can relax knowing they will only pay if, and only if pre-agreed outputs and outcomes are successfully achieved. They’ll never be the financiers of failed development projects again.
- Adaptive management: Another HUGE plus point is that DIBs allow you to focus on OUTCOMES instead of OUTPUTS. Funds aren’t tied to a pre-agreed budget and activity plan as they are with grant funding. This allows for an adaptive management approach to programming with a need to EXPERIMENT (hurray!) and INNOVATE (YES!) to improve outcomes whilst the programme is still on-going. This is not something grant funders tend to go for (bar the really fab forward-thinking ones out there). On paper, then, DIBs should help NGOs adapt to unforeseen challenges.
As these guys put it :
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“There is flexibility of implementation for the [NGO] because the contract does not need to list specific actions or a specific sequence of action. Instead, the obligations relate to achieving the outcomes”
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And it’s not just the NGOs who win:
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There is a lower administrative burden on the outcome sponsor who no longer needs to conduct costly monitoring and evaluation of activities
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The Outcomes Funder is no longer compelled to make full payment for insufficient results on the grounds that activities were executed correctly but fell short of expectations due to external adverse events. The sponsor transfers these risks to other partners.
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Impact evaluation becomes an activity with significant material value; this will likely result in more credible impact assessments.
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“DIBs can harness the strengths of private sector management, while ensuring that the programme is designed to enable access to services for those who would otherwise not have received them” CDG
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So who’s already jumped on the DIB wagon?
Here’s a quick summary table of the 4 (no wait 5 as of today!) DIBs currently underway:
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| DIB sector & location | Investor(s) | Outcome Funder(s) | Service Provider | Independent verifier | Project Manager | Results |
|---|---|---|---|---|---|---|
| Cocoa & Coffee, Peru (2015 – ?) | The Schmidt Family Foundation (SFF) | The Common Fund for Commodities (CFC) | Rainforest Foundation UK (RFUK) | the Royal Tropical Institute (KIT) | ? | CFC committed to pay SFF for the results achieved up to a maximum of US$110,000 |
| Education, India (2015 -18) | UBS Optimus Foundation
USD 267,000 initial investment paid to the Service Provider |
The Children’s Investment Fund Foundation (CIFF) | Educate Girls, an Indian based NGO. | ID Insight | Instiglio are supporting the NGO designing the DIB’s outcomes, payment structure and financial mode. | CIFF will pay interest of up to 15% above the initial $267k investment to UBS who then shares a portion of this ‘bonus’ with Educate Girls, resulting in a financial incentive for the NGO and the investor to overachieve on targets.
UBS is currently on track to receive 108% of their initial investment (as of summer 2017). |
| Entrepreneurship and innovation, Kenya & Uganda (2017 – 2021 | Village Enterprise + its investors who remain unknown. | DFID, USAID + 1 x anon. donor will all pay into an outcomes fund, which will be managed by a third party. | Village Enterprise who found their own investors, something usually done by an intermediary | ID Insight | Instiglio will provide project management support and will be the process evaluator. | $5,260,005
If Village Enterprise achieves the performance it did in the earlier years at scale, they will be repaid the investment with a small return of between 1 – 2 %. If they improve performance by about 25 %, the rate of return will be between 16 and 18 &, but there is a cap on outcome payments |
| Cameroon Cataract DIB (2017-) | The Overseas Private Investment Corporation The Netri Foundation | The Conrad N. Hilton Foundation
Fred Hollows Foundation Sightsavers |
Africa Eye Care Foundation | D. Capital Partners (an ‘intermediary who helped put the deal together). | Initial investment of $2 million. The investment is part of OPIC’s Portfolio for Impact Program, which was designed to give the agency flexibility to do deals focused on innovative early stage initiatives with high levels of impact. Most investments are in the $1 million to $5 million range
OPIC will get a 4% return even if targets aren’t met. They’ll get 8% if they are met. Netri Foundation agreed to forgo any interest payment |
|
| Utkrisht Impact Bond (Health, India) (2017 – ) | Phase 1 (3 years): UBS Optimus Foundation – £3.5m initial working capital
Phase 2 (2 years): A second tranche of funding will be raised |
Phase 1:
– USAID – Merck for Mothers These two will purchase the outcomes for the first three years,. Phase 2: The Government of Rajasthan has agreed fund the outcomes for year 4 and 5. |
– Population Services International
– The Hindustan Latex Family Planning Promotion Trust (HLFPPT) |
Mathematica | Paladium designed and will manage this DIB | The outcome funders are committing to $8 million if the targets are met
The Implementers are also co-investors, committing 20% of the total capital required |
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Any Downsides?
Well, there’s only 5 (and counting) and only 1 with decent results analysis – Educate Girl’s DIB has got a lot of positive airtime recently. So it’s likely we will need to be patient to prove the concept it viable. Currently, the investors are all likely more concerned about the social impact than their return on investment, but as more and more come out we are likely going to see more financially motivated (and therefore less socially motivated) investors. Finally, and sadly as always, the model will no doubt benefit those NGOs least in need of diversifying their funding and leave the little leaguers out in the cold. Watch this space, and as always, don’t take my word for it. Check these articles for more info:
Educate Girls’ DIB showcased on Alliance / PFI / Brookings / Skoll / Devex / Bond
Village Entreprise’ DIB showcased by themselves & Devex
Evaluation Report on the Peruvian / Cocoa DIB here[/fusion_text][/fusion_builder_column][fusion_builder_column type=”1_6″ layout=”1_6″ spacing=”” center_content=”no” hover_type=”none” link=”” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_position=”left top” background_repeat=”no-repeat” border_size=”0″ border_color=”” border_style=”solid” border_position=”all” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” margin_top=”” margin_bottom=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”no” element_content=””][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
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