Experts unveil plans for 'Development Impact Bonds'
LONDON, UK – Proposals for implementing a new social investment vehicle that will offer the benefits of Social Impact Bonds to developing countries are being unveiled in London today.
On the eve of London’s Social Impact Investment summit, an international group of experts is proposing how it will implement the ‘Development Impact Bond’ – or ‘DIB’.
The new financing instrument could bring together investors, governments, the private sector and civil society to provide public services in developing countries.
There are pilot DIBs in various stages of feasibility, development and negotiation. Bonds being developed by:
- Social Finance (for reducing sleeping sickness in Uganda)
- Lion’s Head Global Partners, a London-based merchant bank (for education in Pakistan)
- Instiglio, a non-profit that designs Social Impact Bonds (for avoiding teen pregnancy in Colombia)
- The US Overseas Private Investment Corporation (OPIC), a US government agency (for investment in clean energy)
- Dalberg, a development advisory firm (for fighting malaria in Mozambique).
The Development Impact Bond Working Group has been convened by the Center for Global Development (CGD) – a non-partisan think tank specialising in international development – and Social Finance, a non-profit company in London which pioneered Social Impact Bonds in the UK, at Peterborough Prison.
The Working Group members include thought leaders from the worlds of finance, government, civil society, foundations and official aid. The Omidyar Network and the Rockefeller Foundation are financing the group’s work.
CGD and Social Finance will present the Working Group’s emerging conclusions in London today on how Development Impact Bonds could be implemented. The event marks the beginning of a public consultation on the report that will run for six weeks until 17 July.
Development Impact Bonds combine the distinct contributions of these very different stakeholders to improve the coverage and effectiveness of public services and increase the efficiency of foreign aid and investment.
Here’s how they work: money from investors is channeled to local public and private service providers. If independently verified evidence shows that intended results have been achieved, the government and donors repay the investors their principal plus a financial return linked to performance.
Development Impact Bonds are an adaptation of Social Impact Bonds, an innovative way of financing public services, with promising experiments underway in America, Australia, Britain, Canada and Ireland. The main additional characteristic of Development Impact Bonds is that in countries whose governments cannot yet afford the full cost of additional public services, donors provide some or all of the repayment to investors when the results are proven.
Elizabeth Littlefield, President and CEO of OPIC and a co-chair of the Working Group, said: ‘Innovative financing mechanisms such as Social Impact Bonds stand to improve the efficiency of development assistance in the coming years – and that is what has brought us to the working group. As a vital component of the impact investing sector, outcomes-based finance can be a powerful means of enhancing the effectiveness of aid and development finance.’
CGD president Nancy Birdsall said: ‘Development Impact Bonds are part of a wider movement to explore new financial instruments that better align the incentives of various players to improve outcomes for poor people in developing countries. I believe that this has huge potential and that the consultations on the draft report will help to strengthen the proposal and increase the chances of success.’
Toby Eccles, Development Director at Social Finance and a co-chair of the Working Group, said: 'Development Impact Bonds turn social services into investible opportunities. There is huge demand among investors for opportunities to do good while doing well, and Development Impact Bonds will enable investors for the first time to bring their resources, expertise and energy to the world’s most pressing social problems.'
Owen Barder, Senior Fellow at the Center for Global Development and a co-chair of the Working Group, said: 'There are exciting times for development finance. Traditional aid is vanishingly small compared with new sources of finance, such as domestic revenues, private investment, remittances, and money from new donors, foundations and private giving. Development Impact Bonds enable different organisations to work together, each making an important and distinct contribution. The result will be better health, education and other services in developing countries, and more efficient use of scarce development funds.'
The key characteristics of a Development Impact Bond are:
– Some or all project financing is provided by investors who assume risk for project performance
– An outcome funder (such as a government or a donor agency) must be willing to pay for pre-defined results after they are achieved
– Financial returns to investors are based on the achievement of social outcomes
– Outcome funders do not specify interventions – strategies for achieving outcomes are agreed between investors and service providers, usually through an intermediary or coordinating agency, with some flexibility for adaptation through the duration of the programme
– Contract outcomes and outputs are independently verified to ensure that both investors and outcome funders are confident about the extent to which results have been achieved
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