When are development impact bonds a good idea?

New insights on the DIB model

The evidence on development impact bonds (DIBs) in Asia and Africa is growing. A new evaluation report from Ecorys evaluates four such projects, and finds that the DIB model contributed to a focus on outcomes, stronger performance management and adaptive management across all of them. While the projects are still in progress and it is too early to draw definitive conclusions on efficiency and effectiveness, these are promising signs. But are DIBs always needed to catalyse change?

In a recent session of the Government Outcomes Lab’s Engaging with Evidence series, Ecorys shared emerging learnings from the FCDO DIBs Pilot Programme and suggested that there are four situations where DIBs might be most applicable: 

1. When performance can be increased by a stronger focus on outcomes  

Buttressed by performance management, the shift from inputs and activities to outcomes is at the heart of the ‘DIB effect’- the factors which help DIBs add value over other traditional forms of project delivery and commissioning. 

Having ‘skin in the game’ can motivate stakeholders to work more closely together and focus on results. In the Quality Education India (QEI) project, a combination of outcomes orientation and intermediary involvement facilitated collaboration between a wide number of stakeholders. However, there was agreement that this might have been unlikely if stakeholders hadn’t shared a common understanding and interest in the target outcomes to begin with. 

Where strong performance management systems already exist, a DIB may not be necessary.

2. When a system needs disruption to bring about change

Impact bonds can be powerful tools for change where things are in stasis. The partnership of outcome funders, investors and intermediaries can be key in pooling expertise and strengthening delivery. DIBs can also galvanise preventative spending and innovation.

For the ICRC Humanitarian impact bond, the impact bond brought an opportunity to capitalise on innovative financing, multi-year funding and gear itself towards sustainability. Outcome funders for the project were incentivised to test the funding mechanism as a new approach to closing the humanitarian financing gap. Meanwhile, investors sought to test and build a new market for outcomes. 

Stakeholders across the four DIBs found they could lend support in flexible and diverse ways, without being restricted to conventional roles and responsibilities. This led to increased adaptation and course correction across all four DIBs. 

3. Where service providers would not be able to tolerate high levels of financial risk

While the reputational and financial risk of failing to achieve outcomes can act as a driver to address underperformance more quickly, DIBs also bring in external upfront finance which assists risk-sharing. This potentially makes DIBs more appealing than payment by results (PbR), especially for service providers who would not be able to tolerate high levels of financial risk on their own. 

Service providers in the Cameroon Cataract Bond were keen to make use of upfront funding, which was perceived to have more favourable terms than commercial loans, and to share operational risk with outcome funders. They also hope to gain international recognition from working with the outcome funder. In the Village Enterprise (VE) and QEI projects, the DIB was seen as an opportunity for service providers to test and scale existing models and gain visibility through the DIB. 

While upfront capital from investors certainly helps, the extent of risk-sharing can vary in reality. In the Cataract Bond, capital protection measures mean the risk is minimal and investors’ capital is fully protected. This risk is moderate for investors within the ICRC project, where 60% of the capital is protected. On the other hand, investors in QEI and VE projects have chosen to take the full risk. 

4. Where service providers would benefit from external expertise and support

DIBs often involve external stakeholders, such as intermediaries and technical advisors, particularly during the development phase. They can help service providers build capacity and acquire crucial technical skills, which can prove valuable for non-DIB projects as well. 

For example, the expertise of Dalberg and Aravind in the QEI DIB and Cataract Bond (respectively) drove improvements in performance management. Dalberg was seen to bring a fresh perspective and a collaborative approach which motivated the QEI team. Stakeholders in the Cataract Bond found external scrutiny helpful in shaping their performance management systems and service delivery. In the Village Enterprise project, service providers were able to develop more efficient processes for collecting information on staff at all levels and build a data-driven management system. 

However, a service provider in QEI shared that while intermediaries’ support was valuable, it laid too much focus on outcome metrics of the DIB at the expense of sustainability of outcomes. Sometimes, additional guidance was needed during delivery. In the long run, it would be helpful to strengthen in-house performance management and capacity for service providers.

Are DIBs necessary to produce the desired effects?

The question remains, can some of these desired effects be produced without using an impact bond? James Ronicle, Associate Director at Ecorys argued that this is indeed possible. As part of their evaluation, Ecorys saw evidence of effects such as greater flexibility and improved performance management in other projects too. 

For example, a non-DIB variation of the Cataract Bond produced similar equity and hospital improvements as the DIB project. This grant-funded comparator was being implemented elsewhere in Africa, but did include additional performance monitoring and technical assistance for project design and implementation. It had received support from the same technical advisor as the DIB project. 

Arguably, these projects might not prioritise these elements or indeed sustain them in the long run. DIBs can generate change more quickly given the high stakes environment they operate in, and through their specific focus on outcomes. 

Development impact bonds: emerging tools for social change

While a DIB may not be always be necessary, stakeholders agree that the model carries clear benefits in its outcomes focus and multi-year funding. Policy areas such as education, health, poverty alleviation and humanitarian aid can benefit from projects being structured as DIBs. Close collaboration and flexibility through a focus on outcomes instead of activities have helped in adaptation to COVID-19. Nevertheless, questions remain as to whether the rigidity of the bond and high transaction costs are appropriate in development contexts. Building service provider capacity, tailoring design choices, and generating context specific learning will be important in addressing these concerns.