February 18, 2014
From the Paper:
Development Impact Bonds: Background
Development Impact Bonds (DIBs) are a new approach to designing and funding development programs that bring together governments, donors, private investors, and non-profit and private sector service delivery organizations to deliver results which society values. Private investors pay in advance for social interventions and work with delivery organizations to ensure that they make progress towards agreed outcomes. If and only if independent verification shows that results have been achieved, donors and/or governments pay investors back their original investment plus a return that is proportionate to the level of success achieved. If the interventions fail, investors lose some or all of their investment (see p. 6-7 for a more detailed description of the roles of DIB parties). The approach is based on Social Impact Bonds, which were first launched in the UK and are now being tested in the U.S. and other industrialized countries as a more cost-efficient and locally responsive way to solve social problems. A distinguishing feature of DIBs is that they would be implemented in developing countries whose governments may not yet have the resources to finance additional public services, and third party donors, such as aid agencies or philanthropists, would repay (in part or in full) investors if results are achieved. There are many potential advantages to this new outcomes-based, investment-backed contracting structure: DIBs align incentives to focus on outcomes; leverage the support of the private sector in terms of accessing finance, transferring the risk of program implementation, and increasing innovation and efficiency in service delivery through investor oversight; build in flexibility for service providers to experiment and find solutions that work; and provide a platform for coordinating government, private sector, and non-government service providers.
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