By Camden Kelliher
Although Official Development Assistance (ODA) fell 2.7% in 2018, things in the development world are shaking up. The Chinese Belt and Road Initiative is in full force. The United States is set to launch the new U.S. International Development Finance Corporation (USIDFC) this year. In addition to government action, development wonks continue to innovate. These innovations include not only policy goals to achieve the sustainable development goals (SDGs) by 2030, but also tangible development tools that are impacting the world as we know it. Specifically, Development Impact Bonds (DIBs) might be the hottest topic in international development that you have not heard about yet.
So what are DIBs? This is a complicated question that the remainder of this blog post attempts to explain. To give a brief explanation, the Center for Global Development succinctly explains DIBs as:
“Development Impact Bonds (DIBs) finance development programs with money from private investors who earn a return if the program is successful, paid by a third-party donor. The outcomes to be measured are agreed upon at the outset and independently verified. With greater focus on outcomes instead of inputs, DIBs create space for more innovation, local problem-solving, and adaptation. CGD and Social Finance UK jointly convened the Development Impact Bond Working Group and released a seminal report about the rationale for, and technical design of, Development Impact Bonds and how to create a market for this approach.”
But what does this mean? To answer that question, it is important to give an overview of the history of DIBs. DIBs were born out of Social Impact Bonds (SIBs), which have been implemented in the UK, the US, and other industrialized countries to facilitate impact investment. Impact investing is essentially an investment with a financial and a social return. The social return can be measured in a variety of ways, which could include public housing, environmental impact, or even poverty reduction. Both DIBs and SIBs offer a way for private investment to influence a change for the better with a financial return. Here, IDR explains how DIBs are funded:
“A Development Impact Bond, or DIB, is a results-based investment instrument that involves three parties: a private investor, an outcome payer, and an implementing partner/service provider. In practice, a DIB can have more than one of each type of partner. The private investor—usually a fund or group of investors—gives money to carry out a development project that promises certain social outcomes.
The service provider, usually a nonprofit organisation, is responsible for the project and its outcomes. If the outcomes are achieved, the investor is paid back the capital plus interest by the outcome payer, usually a philanthropic funder or organisation.”
To briefly explain, DIBs tend to follow this process. First, a private investor commits capital with a specific, target outcome in development. Then, the implementer uses this capital to create a solution for the beneficiary and a performance manager monitors this. Once the implementation is complete, an independent evaluator will assess the development impact of the project and report the findings to the investors. Finally, if the development targets are met, then the outcome funders, typically an NGO or development organization, will pay the original investor the principal and a rate of return. However, if the targets are not met then there is no payout. This is huge for development, because it encourages smart, well-managed projects. Dalberg provides a visual representation of this process here.
Currently, there are seven DIBs contracted globally. At this point, it seems like this number will continue to climb, and Brookings has been at the forefront of reporting on these development investments. Namely, Brookings reported on the world’s first development impact bond in Rajasthan, India. The target of this bond was to increase girls’ school enrollment and achievement. In just three years, 92% of girls aged 7-14 that were previously out-of-school enrolled in school. Needless to say, the bond was a success. So, DIBs could be a financial vehicle that changes private sector engagement in development, but only time will tell.