Urban Institute
Research Analyst

The development impact bond: Paying for better development outcomes

March 9, 2017 - 2:49pm

In 2013, the Center for Global Development and Social Finance UK created the concept of a development impact bond (DIB) by adapting the pay for success (PFS) model to international development challenges. The structure of a DIB parallels that of a PFS project: investors provide up-front capital to a local service provider to deliver a specified intervention, with the hopes of both better outcomes and a modest return on capital. In contrast to PFS, in which the outcome payor is usually a domestic state or local government, the outcome payors in DIBs so far have been foreign governments, nongovernmental organizations (NGOs), and/or multilateral organizations.

The world’s first DIB, a project in the North Indian state of Rajasthan, launched in 2015 with the dual aim of enrolling out-of-school girls and increasing language and math literacy among both boys and girls. First year results are promising, and suggest that the project is on track to meet desired outcomes. In addition to tangible progress towards project outcomes—nearly half of all out-of-school girls identified in Year 1 were enrolled in school, with the project a quarter way to achieving its literacy goals—process updates from intermediary Instiglio indicate that the DIB has encouraged partners to approach and think about their work with a heightened emphasis on measurable results.

There are several ongoing DIBs in various stages, including one in Peru to conserve rainforests and protect indigenous livelihoods, and another in Uganda to control the spread of sleeping sickness. But like PFS and other forms of results-based financing, DIBs not only target discrete issues, but also seek to transform the systems, processes, and mindsets that create, or at least fail to alleviate, those issues.

In paying for inputs, with minimal process monitoring, traditional approaches to international development incorporate few feedback mechanisms that could otherwise promote on-the-ground problem solving and necessary course corrections. Making repayment contingent upon results incentivizes meaningful and often innovative collaboration among all DIB stakeholders to maximize the project’s chances of meeting desired outcomes. Furthermore, DIBs create clarity around the project’s goals, and the impact evaluation validates whether those goals have been met—providing key lessons learned to inform future endeavors. 

Innovative development financing solutions, like DIBs, appeal to a demand for measurable development results, just as PFS appeals to U.S. state and local governments’ interest in using new models to solve challenging social problems. Importantly, emerging discourse also emphasizes the capacity of PFS to spur changes in the way that government thinks about and procures social services—ultimately leading to more efficient and effective public services. DIBs, modelled off PFS, offer a similar opportunity to systems in developing countries: by forging new partnerships, paying for results rather than inputs, and building a strong local perspective into projects, DIBs can boost accountability, flexibility, and innovation while helping to alleviate some of the world’s most intractable social problems. 

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