Last week, I shared with you my “discovery” of Social Impact Bonds and provided you with a superficial overview of how they work, the structure they have, and what benefits they present.
However, by researching these bonds a little, I found something even more exciting, and even more relevant for my day to day work: Development Impact Bonds (or “DIBs”).
Development Impact Bonds are a variation on Social Impact Bonds (SIBs), which have been implemented to facilitate impact investment (investment intended to create a positive social or environmental impact as well as a financial return).The first SIBs launched in the UK and elsewhere were able to show how improved results can be achieved (e.g., reductions in reoffending) by orienting programmes toward outcomes and creating a space in which public services can make better use of evidence, innovation and adaptation.
Modelled on Social Impact Bonds (SIBs), which are already being implemented in many countries across the world from the UK to Australia, Development Impact Bonds (DIBs) are a new financing instrument that can help bring together the diversity of players involved in today’s development scene, and use the best resources and expertise each player can offer to improve the quality and efficiency of social programmes and maximise social impact.
As with a SIB, investors provide funds to implement social interventions, service providers work to deliver outcomes, and outcomes funders, primarily public sector agencies, repay investors their principal plus a financial return if – and only if – independently verified evidence shows that outcomes have been achieved. SIBs and DIBs are therefore not ‘bonds’ in the conventional sense as investors risks to lose part or all of their investment if unsuccessful.
A distinguishing feature of DIBs is that external development agencies would normally be needed to provide the outcome payment, or some portion of it, in partnership with a developing country government. DIBs are therefore a tool which can improve both the efficiency of public services in developing countries and the efficiency of donor spending.
In many developing countries, there may not yet be enough domestic revenues for the government to meet all of the outcomes payments, even though the investments would be worthwhile. A distinguishing feature of a DIB is that some or all of the outcome payments are provided by an external funder, such as a development agency or charitable foundation.
DIBs draw inspiration from recent efforts of donor agencies to experiment with results-based funding approaches, which build in a more rigorous focus on programme outcomes, and more flexibility for solutions to evolve and local actors to innovate. They are more than a new way to attract funding for development; DIBs are a new business model for development programmes, designed to encourage the innovation and flexibility for better results that are often blocked by the limitations of government budgeting, contracting and performance management.
DIBs can raise money for worthwhile social investments in developing countries, improve the effectiveness of public service delivery, and improve the efficiency of aid spending. They may be attractive for donor agencies that want to enter into new partnerships to ensure that aid is catalysing and complementing other financial flows and meeting the growing demand to demonstrate
effectiveness against rigorously-defined and measured outcomes, while also respecting the
complexity and unpredictability of delivery and the need for adaptation and flexibility.