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No one said creating development impact bonds (DIB) was going to be easy, but that hasn’t stopped the development community from trying to get them off the ground. Recent developments have included the Reach Every Mother and Child bill, proposed by US Senators Susan Collins (R-ME) and Chris Coons (D-DE), which includes DIBs as a tool to leverage funding for interventions that improve maternal and child health in developing countries. The DIB for girls education in Rajasthan, India, is now firmly in the implementation stage, with the help of Instiglio, UBS Optimus Foundation, and the Children’s Investment Fund Foundation. And we’ve heard renewed interest in a DIB for nutrition over the past few months.

In addition, The Fred Hollows Foundation, based in Australia, has been hard at work on a DIB to address cataract blindness in Africa. As the Foundation attracts partners to help fund and implement a pilot of the cataract bond, Dr. Lachlan McDonald, the Foundation’s senior health economist, and Alex Rankin, their Global Lead for Policy, Advocacy & Research, shared some lessons learned so far. With Lachlan and Alex’s permission, we’re turning some of those lessons over to you – we hope they’re useful to others seeking to move ahead with their own DIB:

“It’s important to develop an internal constituency and clearly articulate how a DIB can make a contribution. DIBs represent both an operational and philosophical departure from the usual philanthropic grant-based funding in development. All parties need to clearly understand from the outset how the DIB structure can help solve a previously intractable development challenge.

Don’t head off down the DIB track, unless you are part of an organization whose leadership has the vision and drive to take risks and try things that are different. The complexity and logistics of getting a DIB up and running can be daunting – and for many organizations it is much easier to continue to rely on traditional models of financing service delivery interventions.

Finding the right partners to work with and getting the right technical expertise and advice is essential. DIBs are fundamentally collaborative, so you will be spending a lot of time with your partners. Together, you will need to face and solve a host of legal, operational, political and economic challenges. You need to find organizations that share your values and vision and that are prepared to commit for the long-haul. Without the support and efforts of our incredible technical advisors, D. Capital Partners, and the Africa Eye Foundation (our implementing agency), The Foundation’s vision for a cataract bond would never have progressed beyond the concept stage.

Robust, independent monitoring and evaluation of outcomes is critical particularly for a DIB, when returns to investors are reliant on outcomes being produced and verified. DIBs are likely to be best suited to projects with objective measures of success and clear lines of attribution between activities and outcomes. As observed by Social Finance, feasibility is one of the main criteria for success of a DIB. And an important element of feasibility is the existence of a clearly defined, cost-effective, measure of success that has verifiable links to social and economic benefits. Treating blindness from cataracts is a perfect example.

By harnessing a new and dynamic source of capital, DIBs offer a way to increase the scale of social impact beyond what is possible with philanthropic funding. Not all interventions can tap the emerging impact investment market – even when social outcomes are clearly identifiable and measurable. In cataract surgery, for instance, programs operating at the economic periphery mean there is little-to-no prospect of cost recovery while pre-revenue social enterprises can be too risky for debt finance. The outcome funder’s promise to pay for performance in a DIB makes financial returns feasible. DIBs can be one of the keys to unlocking the social impact investor market because they turn programs that would otherwise rely on smaller-scale philanthropic grants into investable opportunities.

The outcome funder is the linchpin of the deal. Rather than having a direct financial interest in achieving the outcome (as is the case in Social Impact Bonds), the outcome funder in a DIB needs to have a general interest in seeing the development outcome achieved and be prepared to commit a predetermined amount of funds for its successful achievement.

Government development agencies are not the sole (or even the best) source of outcome funding. The advantage of a DIB to an outcome funder is that they can shift the implementation risk and the responsibility for the up-front capital contribution to a third party – and they only pay for success. Despite these advantages, development agencies have been slow to see a problem (like cataracts) as being a sufficiently high development priority to support through a DIB. Depending on the development problem being addressed, exploring alternative organizations as the outcome funder may be required. This could include philanthropic foundations with the resources and interest, as well as an appetite for innovation and inclination, to help facilitate a new capital market.”

We hope to see more good news on the DIBs front, and would be especially excited to see The Fred Hollows Foundation pilot a DIB for cataract surgical interventions.

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.