5 things you must know about Development Impact Bonds

impact

I had the chance to interact intensively on the Development (Social) Impact Bond (DIB) for the past year, and I am summarizing here some of my thoughts. I wrote about the trend here few months ago.

  • They are not “bonds” and this creates a lot of confusion every time the topic is brought up. The discussion goes on to ratings, fixed-income risks, and listing, all not applicable (yet) to this product. It is often a full-fledged loan with some features closely related to the expected social outcome. The “bond” was more of a marketing word that is still being used, because it is too late to change it…For a full presentation of what it is, you can watch this.
  • It is not completely new, as there have been indeed performance-based contracts for decades, where payments by donors are made upon reaching results. What is new here is that “results” (100 students trained) are replaced by “outcomes” (100 students employed), and private capital gets factored in the model, with investors advancing the (working) capital before payments are done.
  • Beware the hype… as most of the Social Impact Bonds are being implemented in the UK, with few others in US, capturing a very tiny part of the overall social/public service finance. In the low income countries, where donors were expected to drive the scaling up of DIBs, many structures are still being discussed, and only a couple have stared so far (the Educate Girls one). It is very early stage, with relatively high transaction costs. Successful implementations are still rare. It is taking time, and this only creates fatigue and might jeopardize the growth of such high potential instrument in the future…
  • The outcome payer is the boss, …literally the whole structure depends on the social outcome and the amount defined by the outcome payer. That’s why we started overlooking opportunities with not commitment of outcome payers. Investors are the easiest part of the on-boarding process. Large range of factors, including legal issues, lack of incentives, difficulty to “price” outcomes and high transaction costs explain the lack of excitement among donors and authorities. The paradigm change, embraced by authorities in UK and in US, is very slow among donors. We have been quite surprised by the quasi-absence of the World Bank Group in the DIB discussions, for instance.
  • Innovation is being replaced by scale…Social/Development Impact Bonds were initially designed to increase focus on the outcomes vs the implementation, providing the service provider with room for innovation and several trials and errors. This however creates tension with both investors who want the track record, and outcome payers who want to keep control on the process. Most SIBs are hence being implemented as way to scale and catalyze more investments toward existing social intervention, then to promote innovation or try out new solutions (which is not necessarily a bad thing)

Check-out the excellent report on “Social Impact Bonds after 5 years”. Share your comments below! 🙂

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