DIB - The new kid on the development block

The Development Impact Bond (DIB) has come a long way in a short time. Despite its relative novelty as a source of development funding, it is attracting growing interest from investors, front-line implementers and major development aid agencies.

Actually, it's not hard to understand the growing popularity of the DIB or why it is winning over an increasing number of adherents among investors, NGOs and development aid organizations, even those who once questioned their viability and effectiveness. Increasingly, the DIB is seen as a complementary source of development aid, rather than as a rival, that can stimulate new sources of finance to plug the huge funding gap of several trillion dollars annually to reach the UN Sustainable Development Goals (UN SDGs).

A big selling point of the DIB is its emphasis on outcomes rather than activities. A DIB typically incorporates a series of mechanisms that measure results to provide transparency to the investors, outcome funders and other stakeholders that shows their funding is having an impact. This is a key differentiator from traditional approaches to development funding that may fail to deliver what was agreed on, or simply lack the means to measure it. Perhaps for this and other reasons, the DIB is seen by some as an attempt to commercialize the development sector. Let me briefly address this and other misconceptions associated with the DIB before illustrating the concept with an example.

DIBs are not about privatizing or commercializing the development aid space, quite the contrary. They offer an innovative and complementary funding model that can be used to target development projects that might otherwise find it hard to attract initial funding, particularly in view of shrinking government aid budgets. For bilateral donors, they are an attractive way to partner with private sector investors and demonstrate to tax payers that funds for aid are being deployed cost effectively to achieve their intended purpose.

A key feature of the DIB is the transfer of risk from public agencies and governments to private investors who provide upfront funding, without which, such projects could never get off the ground. Such a transfer of risk has its price and investors must be compensated with reasonable returns that are commensurate with the risk taken. At the same time, these investors are driven by a strong desire to achieve social impact. That means their expectations of financial returns are focused on investing in projects with the best prospects of achieving the strongest social outcomes. It also offers them the opportunity to re-invest the accrued funds into other development vehicles that will bring additional benefits to society.

As an early mover in this space, UBS Optimus Foundation launched the first ever DIB in education, now in its final year. The goal of the Educate Girls Development Impact Bond, launched in 2015, is to improve educational access and achievement for 15,000 children, mainly girls, in rural Rajasthan in India, with some of the lowest literacy and numeracy rates in the country, and where the gender gap is extreme. The Educate Girls DIB was designed to act as a “proof of concept” pilot to show potential donors and investors how a DIB can yield societal gains while offering results-based financial returns. Unlike traditional grants, these returns can be recycled into future programs. Based on second year results published in July, UBS Optimus Foundation is on track to recoup not only its initial investment, but also a results-based return, which can be reused to fund other innovative development finance programs. A very exciting concept indeed.

One additional benefit is that DIBs are a good way to incentivize implementation managers and enhance their ability to deliver social outcomes by making it attractive and profitable for them to improve their programs' results. In one example from Educate Girls, the service providers quickly noticed that the children's English scores were not improving as expected. Further investigation revealed that some teachers lacked confidence in their English skills. The service provider was able to rectify the problem by changing their teacher training curriculum and targeting specific teachers and schools that had fallen behind. It is just one of several examples that show the benefit of systematically collecting and analyzing data.

As you see, by focusing on outcomes, instruments like the DIB can bring fresh perspectives and ideas, as well as an accelerated innovation curve to deliver new solutions to longstanding human development challenges. We believe the DIB can perpetuate smart, outcome-oriented, continuous philanthropy, which is our ultimate goal. In the next blog, we take this idea further and explain not only how a DIB works, but how we are feeding the learnings from Educate Girls into our next and more ambitious project to build a large-scale DIB.

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DIB disclosure:

Development Impact Bonds are not financial products.