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Benevolent Finance: How Development Impact Bonds Work

Development Impact Bonds
Development impact bonds are an emerging financial model that is outcome-based — donors and governments only pay if the proposed interventions achieve set goals for improving the lives of people in poor countries. Original funding for development programs comes from the private sector.

In such a model, impact bond initiatives looking for profit mobilize private capital to invest in service activities, and an outcome founder — donors or governments — pays the original investor if the service activities produce results that meet agreed-upon targets.

The First Development Impact Bonds in Education

UBS Optimus Foundation launched The Educate Girls Development Impact Bond (DIB) in June 2015, the world’s first development impact bond in education. UBS Optimus Foundation serves as the investor who recruited Educate Girls, a non-governmental organization (NGO) based in a remote rural district of Rajasthan, as the service provider. UBS Optimus Foundation directly funds Educate Girls’ programs, which works to help enroll girls into primary education and improve the learning of boys and girls in English, Hindi and mathematics.

ID Insights, a non-profit evaluation firm, serves as the third party that confirms and evaluates service progress. The outcome funder is the Children’s Investment Fund Foundation, who pays UBS Optimus Foundation a fixed amount for each unit of improvement in the quality and enrollment of girls’ education.

Satisfactory Results

The DIB functions on a $270,000 budget, and Educate Girls’ services reach 166 schools in 140 villages in Bhilwara. The goal for the program is to help as many as 15,000 children, 9,000 of whom are girls.

By the end of the second year of the three-year program, Educate Girls has achieved 87.7 percent of the proposed total enrollment increase, and 50.3 percent of the proposed total learning progress improvement.

A Focus on Outcome

Precisely because of the program’s outcome-oriented nature, service providers on the ground receive more feedback to help the organization work more efficiently. Safeena Husain from Educate Girls told Brookings that DIB and traditional grant programs are very different: while traditional grant programs only send results to donors, DIB has designed a mechanism over mobile dashboards that allows performance data to circle back to the front line. Thus, more effective strategies could be adopted as early as possible.

As this example shows, development impact bonds best serve those programs that depend on productive human behavior for the delivery of results. In contrast to immunization programs where intended results are almost guaranteed given the availability of vaccines, education programs that require attentive human effort may benefit from the development impact bond model instead.

USAID’s Initiative in India

U.S. Agency for International Development (USAID) has also tapped into the benefits offered by this innovative financial model. USAID administrator Mark Green announced the Utkrisht Bond in 2017, which is a development impact bond for health based in rural India. The investor is again UBS Optimus Foundation, with USAID and Merck for Mothers as the outcome funders.

“What’s most exciting to me is that, if this initiative is successful, which we expect it will be, the Government of Rajasthan will scale the approach throughout the State, which will leave a lasting and sustainable legacy for the people of India,” Green wrote.

These kind of positive, impactful and long-lasting benefits demonstrate the life-changing and, indeed, benevolent outcomes that development impact bonds can bring.

– Feng Ye
Photo: Flickr

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Facilitating the Elimination of Sleeping Sickness in the Congo

Sleeping Sickness in the CongoThe Democratic Republic of the Congo (DRC) is home to over 82 million people. Half of the population lives in rural poverty, causing the improbable prevention of life-threatening diseases. Human African trypanosomiasis, also referred to as sleeping sickness, is a parasite-transmitted disease that harshly attacks the central nervous system until the human host expires. While on the decline as of 2015, sleeping sickness in the Congo continues to be a concern, with 1,000 new cases reported annually.

Sleeping Sickness has two forms: Trypanosoma brucei gambiense, which accounts for 98 percent of Africa’s population, or Trypanosoma brucei rhodesiense, which accounts for two percent of Africa’s population.

Based on the parasite involved, the DRC is affected by the rhodesiense form. This form is an acute infection, in which symptoms appear quickly and the severity of the infection increases the likelihood of death within a short period of time.

Infection begins when a parasite, called the tsetse fly, bites a human. The infected tsetse fly transmits the disease into the host, distributing the poison into their bloodstream within seconds. Although the infection process has begun, symptoms may not appear until one to two weeks after the bite.

In most cases, a painless chancre, or ulcer, will appear topically on the skin where the bite was administered. Various other symptoms can be presented such as enlarged lymph nodes, fever, muscle and joint pain, itching and diseases in affected organs such as the liver.

In the second stage of sleeping sickness, neurological symptoms may be present. This can include changes in personality. The second stage also explains the reason behind its name: infected hosts will begin to feel weak and lethargic a majority of the day, causing them to sleep more than usual.

At night, infected individuals experience what is called nocturnal insomnia, which causes an imbalance in their circadian rhythm. Weakness and problems moving accompany these symptoms. As the central nervous system continues to deteriorate, bodily systems begin to shut down. Left untreated, and in rare cases even if treated, fatality is an end result.

Disease control measures have been in place to help in the prevention and treatment of sleeping sickness in the Congo, including the routine delivery of required treatments that focus on prevention instead of the reaction stages. The World Health Organization provides routine surveillance and free medicine to countries affected.

Further operations on disease control for sleeping sickness in the Congo is costly, therefore a process called Development Impact Bonds, or DIBS, can be an option to cut costs and save more lives.

Development Impact Bonds (DIBS) is a further model of social impact bonds. DIBS is expanding its use from the United Kingdom to include international development and global health interventions. According to Rita Perakis of the Center for Global Development, the model can be described as “flexible, innovative, and cost-effective”.

Although this is a risky financial strategy, it can reap sufficient benefits.
DIBS involves a donor agency, a developing country government, private sector investors and a private service provider. By bringing all of their specialties to the table, they agree upon a common goal and the most effective means of achievement. With the focus on social priorities, investors are able to provide input on financing and performance management. As a result, service providers are then able to use the information discussed to implement an experiment according to societal needs.

After establishing a common goal, for example finding a way to work together to reduce sleeping sickness in Congo, the private investors loan the entirety of funds needed to implement the experiment. Throughout the development program, investors monitor progress to ensure successful achievement will be met. If the development program is successful, investors receive a return on their original investment plus additional interest. If a program is not successful, investors lose some or all of their loan.

In this instance, the World Health Organization has been able to implement intervention programs for countries affected by sleeping sickness. These programs create more accessibility to diagnosis and treatment and continue monitoring of treatment. They also ensure that properly-skilled staff are sent to improve conditions and continue experimentation and research to improve treatment tools already in effect. Their goal is to continue these programs on a larger scale, reaching as far as possible to other African countries.

The impact DIBS has, in comparison to any other investment strategy, is the ability to pay for all costs upfront. This reduces delays in research and delivery and has a stronger possibility of saving more lives. Without DIBS, funding is secured at a much slower pace, delaying the production rate.

By using Development Impact Bonds, the World Health Organization can not only maintain their effective disease control but they can become several steps closer to the eradication of sleeping sickness in the Congo. DIBS is currently being used for disease control measures in Uganda, and with its success will come further measures to other parts of Eastern and Central Africa, including Congo.

The World Health Organization aims to eliminate African sleeping sickness by 2030. Their goal is achievable, and with the support of a financial strategy such as Development Impact Bonds, they have a greater chance of success.

– Brianna Summ

Photo: Flickr

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Development Impact Bonds: Investing in Poverty Reduction

Development Impact Bonds for Investing in Poverty Reduction- BORGEN
A relatively new strategy in guiding private money toward poverty reduction are deemed Development Impact Bonds, or DIBs. DIBs differ from traditional financing for poverty reduction in a few key ways.

First, rather than an aid agency or philanthropist giving money for a certain goal, like increasing educational attainment for girls in a developing country, private investors provide the money with an expectation to make a profit. As with any investment, risks are an inherent part of the equation.

The way that the investors recoup their investment is the principle of outcome-based returns. If a certain project hits its goals, then the investors get their initial money plus whatever interest was agreed upon in the contract.

For example, a program that trains job seekers would not get money for the number of people trained but by the number of people that graduated from the program and held jobs for a certain amount of time. If successful, investors’ profit comes from a philanthropic organization, aid agency or the government that received the benefits of the program.

What this does — and the second way DIBs differ from traditional development program financing — is to take the risk off the hands of the constrained budgets of aid agencies. If, unfortunately, the program fails, then the aid agency or government responsible for repayment is off the hook and the investors are left empty handed. However, this risk sharing allows for more programs to have a chance.

Thirdly, the outcome-based principle allows allows for more flexibility in meeting program goals. Rather than be burdened with a predetermined process imposed by the donor, the program can be innovative and work within the context of the local environment.

This allows frees up space for local entrepreneurs. They know the area, the culture, and have a better idea of what will and will not work best. The flexibility in meeting targets not only incubates different and novel ideas, it incorporates locals and their knowledge better than traditional funding.

While these differences make DIBs attractive, the management and transaction costs may be prohibitively high. The novelty of the mechanism and uniqueness of each contract, together with the infant stage that this industry is in are what contributes to these costs. If successful, over time, a streamlined process and proven results will reduce the costs and increase the uptake.

DIBs have potential in the areas of global health, education, agriculture, water and sanitation, housing and the environment.

Investors interested in creating a positive social impact with their money now have a new option. Savvy investors may also view these investments as laying the groundwork for future business opportunities in the developing economy.

– John Wachter

Sources: Conscious Company Magazine, EcoEnterprises Fund, The Guardian 1, The Guardian 2, Instiglio, JP Morgan Chase
Photo: Flickr