The Development Impact Bonds (DIB) Working Group (co-chaired by Owen Barder, Center for Global Development) has put out an innovative idea to enhance the effectiveness of development interventions by taking into account two crucial aspects: the complexity of delivery and the need for adaptation and flexibility.
DIBs are “outcomes-based contract that can bring together the private sector, civil society organisations, governments and donors, in a way that captures and complements the strengths which each player can bring to achieve development outcomes, and buttressing their respective weaknesses.”
Excerpts from the Working Group’s report:
Development Impact Bonds (DIBs) respond to both of these imperatives. They use private investment flows to provide upfront risk capital for development programmes, only calling on donor funding to repay that capital (plus a potential return) once clearly defined and measured development outcomes are achieved.
Under a DIB, all interested parties agree a desired social outcome and a metric for measuring success. Private investors bank-roll a programme to achieve the outcomes. The programme itself is carried out by specialised service providers, and investors are paid back by an outcome funder (usually a donor agency) if – and only if – independently verified evidence shows that the programme has been successful. The greater the measured success of the programme, the greater the return to investors, up to a cap. Typically, an intermediary organisation will coordinate between investors, the outcome funder, and service providers, representing the parties not in the room and negotiating an agreement that fits the needs of all.
Recommendations by the DIB Working Group:
- Donors should establish a DIB Outcomes Fund and investors should establish DIB Investment Funds, which would enable these actors to share risks and pilot a range of DIB models.
- DIB pilots should be evaluated rigorously and a group of donors and philanthropic organisations should set up a DIB Community of Practice to share and accelerate learning.
- DIBs should be open by design. Openness will accelerate confidence in DIBs for investors, governments, service providers and taxpayers and help to build a high quality market. Donors and foundations should establish a research data protocol which would provide a standard of data and facilitate information-sharing.
- DIB parties will have to accept the high transactions costs of early DIB pilots. Foundations should consider subsidising these costs by providing funding to catalyse the development of a DIB market.