Development impact bonds: fad or the future?
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Safeena Husain is a remarkable woman. As head of the award-winning Indian NGO Educate Girls, her vision is for India to become a country where girls enjoy equal opportunities. It was this vision and her desire to deepen her organization’s impact that led us into conversations about partnering to trial a new financing model, the Development Impact Bond.

This new instrument is still in its infancy, but builds on the experience of Social Impact Bonds or SIBs being used by governments to fund social programs in a handful of countries. It is different from traditional forms of development assistance as it is 100 percent focused on the outcomes of a program – and upfront investors only get their money back if the results are achieved. If DIBs work, it could unlock new revenue streams from the private sector to fund high quality global development projects around the world. 

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At UBS Optimus Foundation, this project meets our mission on improving the lives of vulnerable children and leverages our access to the resources of UBS, the world's largest wealth manager. Today’s release of the year-one results of the world's first DIB shows promise; we are on track to meet ambitious three-year targets. This will allow repayment of our initial investment plus a performance-related ‘bonus’ to Educate Girls. Most importantly, the program is delivering social returns by closing the gender gap in education and improving children’s learning levels.   

At the heart of the DIB is the idea of pay-for-performance against defined metrics: improving enrollment levels and educational outcomes in English, Hindi and maths for 15,000 children, 9,000 of them girls. This is the job of Educate Girls as the implementer. The UBS Optimus Foundation is the investor, providing the working capital for the project. At the end of the three-year program, our initial investment will be paid back by the outcome payer, in this case the Children’s Investment Fund Foundation (CIFF). CIFF will pay a fixed rate of interest depending on targets achieved. Educate Girls will also receive a bonus payment if it achieves its targets.  

So are DIBs, which are currently enjoying a flurry of interest in development circles, a fad, or are they the future? We’d like to suggest, based on the evidence so far, an answer somewhere in-between.  

In the current economic climate, official funding streams are under severe pressure and the impact of overseas development assistance is routinely questioned. DIBs could be attractive to new funders who want to make investments with both financial and social returns. And the model brings with it a rigor on performance and results that could be replicated, allowing development resources to be deployed more efficiently and cost effectively.

But, we’re certainly not seeing DIBs as a panacea. They are not always the right tool but rather a complementary instrument to other sources of finance. We expect they will work most effectively where there are clear cost economies for governments or specific and measurable outcome targets. 

We have to figure out ways to bring the transaction costs required to create a DIB down. We expect that as the model becomes more common, costs should fall.  For the field to grow, we need more people equipped to design DIBs, more front-line implementers with the skills and culture to deliver them, and more large donors – even governments – who are willing to invest in a pay for outcomes model.

But the win from bringing in new sources of finance, improved government budget efficiency, and better and more cost effective performance from implementers, has tremendous potential to make scalable and lasting impact for those who need it most.  

Phyllis Costanza is CEO of the UBS Optimus Foundation