DEVELOPMENT IMPACT BONDS: THE RIGHT ANSWER TO THE NEW FUNDING CHALLENGES FOR DEVELOPMENT?

DIB =

Do Innovative Business

Development Impact Bond

Is ODA on the verge of collapsing?

ODA has been steady in the last 5 years, while non-ODA and remittances are on the rise. Where should the future investment look at?

OECD – Better policies for better lives

https://www.youtube.com/watch?v=csWQBsJhmVI

Here is the answer:

DEVELOPMENT IMPACT BONDSDevelopment Impact Bonds (DIBs) are a performance-based investment instrument intended to finance development programmes in low resource countries.DIBs create a contract between private investors and donors or governments who have agreed upon a shared development goal. Investors advance fund development programmes with financial returns linked to verified development goals.DIBs is one of the «Under Payment by Outcome (PBO)» models, where a social sector organization is only paid for delivering a social service, once agreed social outcomes have been met. When a service provider agrees to take on a PBO structure, it agrees to a level of risk-sharing with the contractor.

Organisations may require working capital to cover the costs of the given program. The service provider may look to impact investors for debt/equity capital, repayable once outcomes are achieved.

Depending on the performance of the DIB, investors also stand to receive different levels of interest on their investments. In some cases, philanthropists and other for-purpose investors may secure any first losses in capital through various funding structures.

DIBs are particularly suited to preventative programs, such as health care, early child care, homelessness, and criminal justice. They require rigorous data and measurement to assess what is working, and why, as payments are only made to service providers with empirically proven results.

Most DIBs are structured around the cost savings delivered by an intervention, to one or more government departments.

How do DIBs work?

WIN-WIN?- Society: wins by achieving better social outcomes- Investors: win by getting high rates of financial return on investment (7-10%) while fulfilling their social commitment- Social providers: win by delivering efficiently and effectively by receiving upfront funding with regular cash flow and a reasonable time span (at least 5 years) to tailor their intervention to the local context and implement the program- Donors: if a Government, win by paying only for success and getting relevant savings by not allocating resources to run a specific service, but just underwriting the investment and paying interest rates. If a private philanthropist, win by giving out money under a different arrangement from the traditional grant and ensuring that there is a leverage effect on the funding, with high return on investment.

THE CHALLENGE IN DEVELOPING COUNTRIES- Very few governments in developing countries (especially in the LDC) are ready to allocate resources to underwrite a private investment. They would be the perfect donors of DIB since the savings goes to their benefit.- Some bilateral donors such as DFID have already have ventured into this space, though, and are in the frontline to push the agenda:“Sleeping sickness is a parasitic, vector-borne disease, carried by the tsetse fly and prevalent in Uganda. There are 9 million Ugandans at risk of infection with sleeping sickness, most of whom are of prime working age. As a result, this disease is a key risk to the economic future of the country. A DIB, sponsored by DfID, immunises the 8 million cattle in Uganda who, untreated, allow the disease to spread. Pilots have been carried out and have proven to be effective and create cost savings. DfID has committed $2.5 million to fund the feasibility of the project and design the delivery mechanism to treat Uganda’s cattle with repeated immunisation over several years in over to eradicate sleeping sickness. The bond will then be issued to raise the capital for the immunisation program, underwritten by DfID”

WANT TO LEARN MORE?https://www.youtube.com/watch?v=leLZv0I-1nk