What are development impact bonds?
YLabs' Shannon Milroy and Majdi Osman were recently in Paris to share YLabs' experience developing a development impact bond in Rwanda. We thought this might be a good time to talk about what development impact bonds are and why we believe they have so much potential to improve investment in youth.
What was the event about?
YLabs' team were honoured to be invited to speak in an expert seminar on Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs), organized by the OECD Global Network of Foundations Working for Development (netFWD) and the OECD Center for Entrepreneurship.
Where have social impact bonds or development impact bonds been used so far?
Social impact bonds are beginning to be used more widely, particularly to fund programs for disadvantaged youth in high-income countries like the UK and the US. Examples include a SIB to fund interventions tackling recidivism among youth in Massachusetts and the UK and a DIB funding girl’s education in India (Educate Girls) and Pakistan. The world’s first DIB for health was launched in Uganda in 2014 to fund a program to reduce sleeping sickness. A social impact bond was created but not implemented to support the Gashora Girl’s School in Rwanda.
1. The Investors pay upfront for the program to be implemented. They prefer return on investments or an outcomes-based alternative to philanthropy.
2. The Beneficiaries receive a new program, product or service that will be rigorously tested for efficacy.
3. The Local Government support the implementation and receive investment in an innovative program for their citizens without financial risk. The data gather on program efficacy might inform their future policy.
4. The Performance Payers are donors who prefer to test programs for efficacy, and only pay for programs that are proven successful. This might be a large unilateral or multilateral donor
5. The Intermediary raises the initial funds from the Investors, helps set the performance targets through negotiation, and sets up the payment contracts (between investors, program implementers and performance payers).
6. The Third Party Evaluator collects the data needed to understand if the program is meeting its goals. Early data helps improve the program, later results determine how much financial return the Investors receive.
That sounds complicated. Why might this way of financing programs be better than a simple grant from a donor?
DIBs have a number of advantages over traditional donor funding:
- They shift the risk from donors and governments to investors: Local governments or large donors do not have to take on the financial risk of funding the initial implementation of a program. Donors and governments don’t have to be concerned about the politics of funding a program which may be unsuccessful.
- They set a high bar for evidence: The rigorous evaluation necessary to fulfill the payment contracts means that the program will have regular data to improve its performance and at the end it should be clear whether the program was successful and should be continued, or should be stopped.
- It’s an alternative form of philanthropy: Social financing provides a different model for philanthropic giving. Investors may choose to re-invest money returned in adapting or scaling successful programs or use it to stimulate new innovations. This may increase the attractiveness of giving funds to programs funded through this model and, it’s hoped, increase the overall pool of funding available.
- It leverages the expertise of investors: Often the success of a great idea hinges upon how well it’s executed. This is about operations strategy, sound financial management and measurement systems. Investors have an incentive to share their financial know-how to support the implementation of the program. Their skills in measuring performance and using data to inform decision making can increase the likelihood of the program being successfully implemented.
Why is YLabs so interested in social financing for youth?
DIBs make sense for youth programs, as returns on investment continue throughout beneficiaries' lifetimes. The structure of DIBs can allow for returns to be measured over several years, which is a more appropriate model for investing in adolescent health where results accumulate over time. Adolescents are a neglected age group in terms of health investment, so DIBs have the potential to increase funding for adolescent health improvement in resource constrained areas. Programs that improve children’s and young people’s health have a dual return – not only does the program improve health, survival and wellbeing but better health means they are more able to achieve their educational and economic potential throughout their lifetime.