Designing a social impact bond in a developing country: Lessons learnt

From high transaction costs to ensuring service provider strength is sufficient, Dr Susan De Witt from the Bertha Centre for Social Innovation & Entrepreneurship in South Africa shares lessons learnt from designing a social impact bond in a developing country and reflects on conversations from the 2016 Sankalp Africa Summit in Kenya last week.

So what is a South African university doing researching and designing Social Impact Bonds (SIB)? The Bertha Centre for Social Innovation and Entrepreneurship has been grappling with the role of universities in the building of new markets for the last five years. As a credible source of knowledge and a neutral, non-profit convener and educator we have been able to unlock outcomes funding for an Early Childhood Development (ECD) Impact Bond Fund from our provincial government, with the specifications due to be published within the next two months.

This step has proven very tricky in similar nascent markets especially in developing countries where the norm has been to raise outcomes funding from large international donors or corporates, meaning that this deal is the first of its kind in the developing world. Our subsequent goal has been to use state funding to leverage private capital to create a blended outcomes fund, which may prove more efficient than the status quo where non-profit organisations raise grant funding to augment inadequate government subsidies for early childhood development. Unlocking outcomes funding is the first step in building this market.

A Social Impact Bond is a contracting and financing mechanism where socially motivated investors pay for social services upfront and are repaid by outcomes funders if pre-agreed outcome targets are achieved. Social Finance, which is supporting the Bertha Centre in this project, first pioneered SIBs in the UK in 2010. The South African government views them predominantly as a form of performance based contracting with the goal of improving services in an environment where lots of money is being spent and people don’t appear to commensurably be better off. The embedded monitoring and evalution and performance management are seen as particularly valuable to this end.

The ECD Impact Bond Fund will fund community health workers and early childhood practitioners to enable young children achieve their development potential. This includes improving antenatal care, reducing mother to child HIV infection rates, increasing the incidence of exclusive breastfeeding (where the infant receives only breast milk), improving child nutrition indicators, improving immunisation rates and strengthening early learning opportunities for children between 0-5 years.

There have been specific challenges designing SIBs – such as this one – in a developing market:

  1. The first has been designing a contract, highly dependent on accurate baselines and counterfactuals, which adequately deals with the paucity of data. The market is such however that stakeholders would prefer to take a risk and iterate on the second procurement round than spend time on pilots.
  2. In addition most non-proft-led sectors are fragmented and under-resourced leading to few organisations that have successfully scaled. Service provider strength is untested with regards to rigorous outcomes measurement so it will thus be critically important to choose an intermediary with deep technical and management expertise to support this element. Indeed this expertise may be used strategically in future by the departments to strengthen other NPOs working in the sector.
  3. We are also keenly aware of high transaction costs in a resource constrained environment and have recommended a single intermediary and the syndication of investment for the three SIBs emanating from the Impact Bond fund in an attempt to reduce these.

What has emerged from this process is perhaps less of a “traditional” SIB and more of a quasi-experimental programme with rigorous measurement introducing some Impact Bond elements with a view to testing the mechanism. The design process has significantly altered how government perceives its role in the control of outsourced service delivery and an outcomes based mindset is permeating the departments we’ve been working with. This is the first of many worthy steps. We have yet to see where the road will lead.

The group that gathered at SANKALP Africa to hear this narrative, including Barbara Kong (D.Capital), Drew von Glahn (World Bank) and Tracy Austin (Palladium), agreed that securing outcomes funding from both public and private sector was an essential first step – many organisations having fallen short without this piece of the puzzle. Jeffrey Liebman was mentioned as particularly influential in this regard having worked from the previously named Harvard SIB Lab. The issue of transaction costs was paid particular attention – especially the largely hidden cost of pro-bono legal services – and it was suggested that current templates be shared through learning platforms be they sector or SIB/Development Impact Bond specific.

 

For more information on this and what the Bertha Centre is doing in Africa, please click here. 

Header image: Cape Point, South Africa

Photo credit: David Stanley