Development impact bonds are a “revelation”

5 Jul 16

Development impact bonds can bring new funds, improve efficiency and provide much-needed flexibility for NGOs that are looking to scale up a proven model, according to a panel discussion at the UK’s Overseas Development Institute.

At the event in London today, panellists described the benefits and challenges of the innovative funding mechanism, which aims to draw in new sources of development finance as traditional streams increasingly pale in comparison to massive global need.

Under a DIB, private investors pay the upfront costs and bear the risks of a project, and are repaid later by donors or governments based upon the results achieved.

Safeena Husain is the founder and executive director of Educate Girls, an NGO that works to increase girls’ enrolment and attainment in schools in India. Her organisation executes a project, reaching 15,000 children, funded by one of the world’s two active DIBs.

She explained that as well as sourcing the funds needed to scale up Educate Girls’ work, the DIB fostered a performance- and impact-based culture and allowed greater flexibility in how resources are used.

DIBs force NGOs to think “so much more deeply” about how to achieve impact, as well as providing clear direction across the organisation, while introducing an element of performance management that she described as a “revelation”.

“The money doesn’t come attached to inputs or outputs,” she continued. “So it also means I can move money and resources around the way I see fit or as it is needed. That level of flexibility is great for an NGO, we’ve never had it at that level before. We could just do what is needed.”

Paddy Carter, a research fellow at the ODI, agreed that DIBs bring more than just new investors to projects.

He highlighted that as well as often being the cheapest method for donors and governments to pay only when results are achieved, the involvement of the private sector also brings a management culture and expertise and an emphasis on efficiency.

Donald Menzies, a payment by results advisor at the UK’s Department for International Development, pointed out that DIBs were more about hastening the timing of funding rather than relieving the burden on the public sector, which recompensates investors later.

But Phyllis Constanza, CEO of the UBS Optimus Foundation, which was the upfront investor in the Educate Girls DIB and developed the bond as a proof of concept, noted that timing is key. She said that money is needed for these kinds of projects today.

The sustainable development goals, agreed by world leaders at the United Nations last year, are estimated to require $1tn every year up until 2030 to be met – a figure traditional sources of development finance fall far short of.

Constanza said that not only do DIBs mobilise funds sooner, but they attract philanthropic investors that would in the past have been reluctant to invest in international causes due to fears over accountability.

She explained that private investors look for different criteria when considering investments, for example, a culture of delivery and results, that can bring a return on their investment.

DIBs, with the “new rigour” they bring in terms of performance and results and their focus on monitoring and transparency, can convince investors that it is worth taking the risk, she said.

While she praised DIBs for this and their cost efficiency, and said the mechanism will be much more widely used in future, she warned they are not appropriate for every organisation and project.

DIBs are not for early implementers, she stressed, and are only suitable to organisations with a proven model that can be scaled up, with a clear cost economy and clear outcome targets that can be measured and valued.

Menzies also cautioned that payment by results instruments are no silver bullet, and need to be tailored to circumstances and carefully designed. 

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