Development Impact Bonds: a trend or a complete change of mindset?

I have been looking at Social Impact Bonds for few months already, and their version for developing countries, the Development Impact Bonds.
It is a sort of a “pay for success” scheme that also involve investors, who take the risk to advance/invest the money upfront. Total or partial return of their principal and earnings would depend on the actual social (and measurable) outcome achieved. This is in a nutshell what it is, although I am sure it is clearer with some charts and videos, like in here. And no…it is not a bond.
Most DFIs have been watching remotely for now, and I recently learned that MIF has allocated few millions to see what they can do in this sphere. It is still a very emerging instrument, “pilot stage” as we love saying in the International Development world, and there is not a substantial track record that it is really working. Big names such as Goldman Sachs and ABN Amro, have indeed done it, or structured it, but either with the full guarantee of a foundation or out of their “social impact”/”innovation” fund. Bottom line: it kind of trendy,  but still unproven and far from being mainstream.
I personally believe it has lot of potential and I have been discussing this quite often with colleagues and partners. In my opinion, these are the three main  challenges facing anyone who would like to structure a DIB as impact investor:
It is still very confusing: people don’t understand what it it. They connect it almost instinctively to Green Bonds, to Banking on Women Bonds, and all those bonds that promise some social/environmental return. I understand why: there is “development”, “impact” and “bond” in the name, so no wonder. One needs to be patient and explain that it is named “bond” but it is actually not a bond, and that the rationale is totally different. It might be useful to do a slide on the difference between both (note to self..)
It requires a giant change of mindset: once they get the concept, they wonder “but how does it change the behavior of the client?”, it is very hard for development/impact investors to accept the idea that this time, it is about changing THEIR own behavior and being held accountable for their undertakings, and I mean REALLY accountable : no impact, no return.  Impact Investors and DFI are keen on reducing their margin/return pending that client implement some good practices. The rationale is usually : good practices -> better risk profile and good business ->  smaller margin (because of less risk). In DIB, it is about attaching the margin and the overall return to the final impact : return = f(impact)  -> huh ??
 It cannot be done alone: a DIB cannot be decided and executed easily, you have to engage with many parties: co-investors, clients, service providers, and the foundation or the governments that will pay back everyone when the anticipated social outcome is reached. Success factors to look at: first and foremost, the need for such a structure ( do not force a DIB for the sake of it), the alignment between the parties (everyone with his own incentives of course) and ability to do something different fast (no existing process is really ready for a DIB at this stage!)
As always, your comments are welcome. This topic is of high interest for me, feel free to contact me!
PS: Social Impact Bonds on Google Trend
trend
 

Leave a Reply

Your email address will not be published. Required fields are marked *