By Marcie Cook, Vice President, Social Enterprise, PSI
As overseas development assistance declines, the challenge to finance the Sustainable Development Goals (SDGs) becomes even more urgent. With a USD 2.5 trillion funding gap, many are looking to the private capital markets and private philanthropy to provide the resources required to translate these ambitious goals in concrete action.
What would happen if we structured development in a way that partners were only paid when we achieved what we promised? For more than a decade, practitioners have experimented with results-based financing (RBF) models that seek to create the right incentives needed to fix broken systems serving better social outcomes.
Development Impact Bonds (DIBs) represent the latest evolution of results-based contracts—and one of many tools in the RBF toolbox. Now, a private investor and the implementer—rather than a traditional funder—absorb the financial risks of under achievement. Both parties are only reimbursed and paid a premium if the pre-determined results are achieved.
For implementers like PSI, the promise of the DIB model is threefold. We can use the model to increase resources through public-private partnerships; establish payment terms bound to outcomes rather than inputs; and improve our use of existing resources through greater flexibility and better use of data.
In 2017, PSI and partners launched the Utkrisht Impact Bond—the largest and most ambitious health sector DIB to date—to tackle maternal and child mortality in Rajasthan, India. Just a few short months post-signature of the DIB, we remain excited about the actual implementation that will take place over the next three years. There have and will continue to be many learnings along the way, all of which will be critical to address if the DIB model is to reach its full potential.
Setting up a DIB requires both time and resources. In the three years it took to establish the Utkrisht Impact Bond, PSI and partners had to determine the most suitable health intervention, identify potential outcome payers and risk-tolerant investors, and align those with a country where a DIB approach had a supportive government partner and market environment.
Once these were in place, we had to iterate continuously to respond to investor, outcome payer, and government inputs, as well as rapidly shifting market conditions.
Currently, in creating a DIB, emphasis is placed on evaluating the interventions and efficiency of the implementers. Although important, we must also create opportunities to test different DIB structures and evaluate conditions where one approach and set of players may be more appropriate than others.
Is an intermediary always necessary at all stages and for all service providers, for example? Would implementers benefit from more direct engagement with the investors during negotiation of terms and risk/reward pay off? Where do we get the greatest return on the financial investment, including reduced time from ideation to getting to market to final delivery?
Additionally, we must consider the government’s eventual role as an outcome payer, if they aren’t from the start. This means engaging them early in the design, structure, and management process.
Also, having a longer time horizon for implementation than the traditional grant period could shift attitudes toward risk, allow for adaptation to changing conditions, and drive change both at the country level and within participating institutions. For PSI, a key metric for success in the Utkrisht DIB is how well we learned from this project and changed the way we do business.
As we develop the evidence base for DIBs, we will be able to better assess the viability of blended financial mechanisms to drive systems change and influence development outcomes. We expect DIBs to become an invaluable tool to bridge the funding gap for the 17 SDGs.
