10 mins read
Maximum outcome payments
Households living in extreme poverty (less than $1.90 per day) & geographically targeted
Department for International Development, UK (DfID); Development Innovation Ventures division of United States Agency for International Development, USA (USAID); an anonymous philanthropic fund based in USA
Total of nine, but not all publicly disclosed: Delta Fund; The Halls Family; ImpactAssets (gathering 3 private investors, incl. Silicon Valley Social Venture Fund (SV2)); Jay Friedrich; Brian Lonergan, The Laidir Foundation; Bridges Impact Foundation; Anonymous Philanthropy
Global Development Incubator
Global levels of extreme poverty - defined as a person living on less than $1.90 a day (purchasing power parity - PPP) - have fallen significantly from 1.9 billion in 1990 to 736 million in 2015. However, the number of people living in extreme poverty in Sub-Saharan Africa has increased during this same period, from 278 million to 413 million, with current forecasts predicting this trend to continue. This rise is partially explained by the population of Sub-Saharan Africa doubling during this period. However, many other regions of the world have experienced similar population growth and yet have been able to reduce the number of people living in extreme poverty.
Poverty is not only the deprivation of money, but of food, education and health care, amongst many other indicators. Ending poverty in all its forms everywhere is the Sustainable Development Goal 1, and a 2019 progress update on this goal shows that: 'The decline of global extreme poverty continues, but has slowed. The deceleration indicates that the world is not on track to achieve the target of less than 3 per cent of the world living in extreme poverty by 2030. People who continue to live in extreme poverty face deep, entrenched deprivation often exacerbated by violent conflicts and vulnerability to disasters. Strong social protection systems and government spending on key services often help those left behind get back on their feet and escape poverty, but these services need to be brought to scale.'
The Village Enterprise Development Impact Bond (DIB) microenterprise development programme seeks to improve the income levels of at least 12,660 (estimated 13,830) extreme poor households in rural Kenya and Uganda by creating 4,000+ sustainable microenterprises. The Village Enterprise’s (VE) microenterprise development programme delivers support in the form of a cash grant as well as regular business mentoring and training - an approach that is commonly known as a graduation programme.
A graduation programme recognises that poverty is complex and multidimensional, and that the extreme poor are generally excluded from social services as well as markets. A graduation approach provides a comprehensive time-bound set of integrated and sequenced interventions with the aim of graduating people out of poverty in a way that is sustainable. This approach was pioneered by BRAC in Bangladesh, 2002, and BRAC have reported positive impacts for the programme recipients as well as the broader economy.
There are 5 components to the programme: targeting, business savings groups, training, seed funding and mentoring.
Poor households are identified using a hybrid combination of a community-based Participatory Wealth Ranking exercise and a survey using Grameen’s Progress Out of Poverty Index (PPI). Participatory Wealth Ranking uses consultations with community members, usually village elders, to identify the poorest households relative to the rest of the community. PPI attempts to establish a household wealth by using a simple questionnaire about household characteristics. For a detailed discussion of poverty targeting approaches see: Coady, Grosh and Hoddinott (2004). However, it should be noted that the effectiveness of poverty targeting is widely disputed (Sen, 1992; Devereux and Sabates-Wheeler, 2004; and Kidd and Athias, 2019).
The VE DIB is implemented in remote rural areas of Kenya and Uganda, East Africa where more than 50% of the population live in extreme poverty.
Kenya: Kitale, Trans-Nzoia, Migori, Bungoma and West Pokot
Uganda: Soroti, Hoima, Masindi, Kiryandongo, Nwoya, Gulu, Kitgum, Dokolo, Amuria, Katakwi, Kampala
Business savings groups (BSGs) are formed at the beginning of training, comprising of approximately 10 businesses (30 entrepreneurs) each. The BSGs create the platform through which VE carries out the training program. BSGs are also used to establish trust and respect between the participating community members. While VE expects programme recipients to participate in BSGs, they are self-generating and self-managed, with a personalised constitution. BSGs are a form of microfinance that allow members to pool savings and access loans. By pooling savings BSGs provide members with ongoing protection against financial shocks, as well as provide access to growth capital.
Local mentors deliver a four-month training programme, with modules on financial literacy, business education, entrepreneurial skills, and resource sustainability. The aim of the training programme is to equip programme participants with the necessary knowledge to run a small business. Participants form groups of three and agree a plan for a microbusiness that they will launch together. The Business Mentors support and guide the participants in selecting a viable business.
Each group is provided a cash micro-grant to enable them to launch their business. The seed funding is in the form of a grant rather than a loan, meaning the businesses are not expected to repay the seed funding. The rationale for providing a grant and not a loan is that entrepreneurship is by nature a high-risk activity; therefore, a grant reduces the fear of the cost of failure, and incentivises innovative business ideas. In order to test the impacts of grant levels approximately 65% of business (group of 3 individuals from different households) will receive a $150 seed with the remaining 35% receiving $450. This means that each household receives either $50 or $150
The local business mentors provide continuous guidance to the participants for one year, coaching them in choosing the focus of their business, as well as how to grow and manage their business and finances, including saving in the BSGs. This is a critical capacity-building phase to ensure the sustainability of the business after the participants exit the programme.
Source: Village Enterprise.
The VE DIB program seeks to improve the income levels of 12,000+ extreme poor households in rural Kenya and Uganda by creating 4,000+ sustainable microenterprises. Programme outcomes are measured against a Randomised Control Trial (RCT) conducted by IDinsight.
The project is being implemented, and there are no interim results currently available.
Outcome payments are tied to the RCT conducted by IDInsight, with VE being paid approximately $1 for every $1 increase in household income. Household income will be measured against consumption and assets. The rationale is that growth in assets provides some evidence that impact of the programme will be sustainable over the long-run. Given a seed funding transfer to beneficiaries (either $50 or $150), the calculation is based on resultant increase in household level of a) consumption and b) assets above the initial seed transfer.
The total budget committed by outcome payers for outcomes is capped at $4.28 million to VE. Payments for the seed funding of phase of the programme is capped at $1.2 million. There is an additional outcome payment cap of $265 per household.
The payment formula closely follows the Village Enterprise DIB Theory of Change, as it seeks to attribute increases in household consumption and assets. The payment formula can be found here, pp 21-25.
Service provider selection. From a long list of 80, VE was selected to implement the DIB.
Outcome payer engagement began in May 2015 with a strategy to primarily focus on engaging foundations and other private donors. However, no outcome funding commitments were raised by late-2016. At this time, the anonymous donor and Instiglio worked with VE to continue developing a more detailed design as well as shift the outcome payer engagement focus to bilateral funders. After a comprehensive assessment, USAID and DfID agreed by early-2017 to be outcome payers.
Investor engagement. Conducted by the service provider, Village Enterprise.
The DIB design. The preliminary DIB design work was conducted during the second half of 2016, this involved drawing in outcome payer commitments (USAID and DFID). Then, between May and Nov 2017 DIB design negotiation, updating, and finalisation was conducted, alongside contracting Sept-Nov.
A trustee was appointed with the responsibility of collecting, holding, managing and disbursing the funds as well as drawing, signing, holding and managing the various contracts. The rationale for using a trustee was to reduce the burden of contracting and fund management from the other stakeholders, including the outcome payers.
RCT evaluation design and evaluator selection.
The project was launched.
The VE DIB is the first DIB to be implemented in Sub-Saharan Africa and is seen as a way of increasing cost-effectiveness on poverty spending for donors. The DIB model is seen as a way of shifting focus and financial resources from monitoring outputs to measuring outcomes.
The VE DIB model has four potential advantages over conventional funding models:
Some positive effects of the DIB mechanism have already been seen on this programme. At its outset, as a relatively new type of funding mechanism, it has created greater levels of collaboration between different stakeholder types, including outcome funders, the service provider, investors and the intermediary. Furthermore, the service provider has innovated, particularly by experimenting with different grant sizes, using mobile money and introducing new adaptive management techniques.
Although it is still too soon to put these innovations purely down to the DIB, stakeholders felt that the DIB helped to create an ‘innovation space’ to make it possible. This is a positive sign for the future.
For this DIB, the service provider was responsible for approaching and bringing investors into the intervention. Although they were able to do this with success, stakeholders from Village Enterprise felt that this was a costly process and a challenge for them.
However, stakeholders hope that in the future Village Enterprise will be better equipped to undertake such a task and will do so more efficiently.
The extraordinary circumstances of the COVID-19 pandemic had the potential to have a profound negative impact on the VE DIB. As noted above, the programme delivery model was designed around in-person business saving group meetings and in-person business training. Furthermore, many of the VE DIB micro-enterprises' used physical market places to sell their goods. When COVID-19 hit Kenya and Uganda ‘normal’ delivery of the VE DIB was not possible as restrictions to the movement of people were introduced and market places were forced to close. Therefore, the Village Enterprise team needed to respond rapidly to adapt the delivery model to build resilience within the micro-enterprises.
As travel and holding physical meetings was not possible the Village Enterprise team quickly pivoted to providing remote mentoring using phone calls. These phone calls were complemented with SMSs. These services supported entrepreneurs and business mentors to identify solutions, adapt, and innovate during the onset of the pandemic.
At the onset of the pandemic, April 2021, the Village Enterprise team conducted a phone survey with over 1,100 small business owners to learn what were the most significant issues they were facing. They learnt that as a result of the restrictions on movement and market closures 71% of micro-enterprises in Uganda and 84% of micro-enterprises in Kenya had seen a reduction in their revenue. Upon receiving this feedback the Village Enterprise team and the DIB Working Group agreed that it may be merited to adapt the DIB contracts to allow for an out-of-cycle stimulus grant to affected business groups. To confirm the appropriateness of delivering a stimulus grant two critical assumptions needed to be validated:
The study validated the first assumption though it invalidated the second. In order to recommend the deployment of a stimulus grant both assumptions needed to be validated. Therefore, it was recommended that the stimulus grant should not be deployed. The Village Enterprise view is that the training and social capital - delivered through the VE DIB - have complement the in-programme asset transfers increasing business owners' independent adaptability and resilience.
Collier, P. (2008) The Bottom Billion: Why the poorest countries are failing and what can be done about it. Oxford: Oxford University Press.
Deaton, A. (2013) The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton: Princeton University Press.
Ecorys (forthcoming) Independent Evaluation of the Development Impact Bonds (DIBs) Pilot programme.
Ecorys (forthcoming) Village Enterprise Development Impact Bond (DIB): A case study produced as part of the DFID DIBs pilot programme evaluation.
Page last updated: October 2021.