As the world cheers for halving its population living under $1.25 per day, it has already put “eradicating extreme poverty for good by 2030” at the top of its post-2015 agenda. However, accomplishing another global victory in the next 15 years doesn’t seem easy. While foreign aid played a role in alleviating global suffering in past decades, criticism has mounted over aid effectiveness, poor governance and transparency in aid recipient countries, and rising inequalities in the developing world.
Furthermore, traditional aid donors now confront challenges from emerging economies such as BRICS, which do not necessarily follow the conventional rules of aid distribution. The shrinking international development budget in some developed countries also restricts their continued engagement with the developing world.
Despite these difficulties, the development community has found an alternative approach: Development Impact Bonds (DIBs).
Pay for quality social services – an international application of social impact bonds (SIBs)
In 2010, Social Finance, a UK-based non-profit organization, introduced the concept of SIBs into the social investment market. The SIBs model strives to attract more investors from private sector to invest in social services that are usually too expensive for the government to start, such as programs to reduce recidivism rates. The basic principle behind SIBs is “pay for success”. In other words, the investors get paid by the program funders (usually the home governments), if the programs implemented by the contracted civic organizations are successful. Program performance is measured based on metrics agreed by all parties. Therefore, instead of profiting from service outputs, the investors are expected to get returns based on outcomes.
As an initiative to bring public, private and third sectors together to generate positive social impact, the SIBs model is being tested worldwide in developed countries such as the UK, Canada and the US. According to a report produced by Social Finance in partnership with the Center for Global Development, 14 SIBs programs are currently up and running in the UK covering a variety of areas such as homelessness, youth development and criminal justice.
From SIBs to – Development Impact Bonds (DIBs)
While the SIBs model is being mostly tested on domestic social services in developed countries, Social Finance has started to export the idea to the developing world. Though with a different name, DIBs functions similarly to the SIBs – gathering public, private and third sectors to determine service goals, approaches, and performance measurement, sometimes with an intermediary organization to coordinate.
Social Finance’s consultation report also suggests country-based cases that would benefit from the DIBs model more than traditional aid or result-based approaches.
For example, in the rural areas of Uganda, mass-scale interventions should be made at a fast pace to alleviate the Rhodesian sleeping sickness – an acute and fatal disease transmitted by the tsetse flies and often carried by cattle. Left unrestrained, the sickness can converge with the Gambian sleeping sickness, a chronic form of the former, as mentioned by the report. Consequently, spraying insecticide on cattle on a regular basis in the disease-affected areas is a crucial step of intervention.
Accordingly, if the mass-scale spraying was implemented via traditional aid and result-based programs, the donors would need to pay for the service regardless of efficiency and scope, because both approaches require cooperation from the contracted practitioners and other stakeholders. Additionally, the contracted partners would not be required to record nor provide detailed information of the program progress to the donors, causing transparency problems.
By contrast, DIBs can attract more private investors into the program so that the mass-scale intervention could be achieved faster. Contracted practitioners would be responsible for submitting detailed progress report for oversight purposes. Simultaneously, the investors could only make profits if the program performance met the standards agreed by donors, implementers, and investors.
Despite the potential benefits, DIBs might also inherit “genetic shortcomings” of their predecessor, SIBs. According to McKinsey, a global management consulting firm, DIBs will likely add complexity to the investment process and make the original social service more expensive than having government funding it alone. Another is the difficulty of coordinating three sectors to negotiate and consult with each other on various issues ranging from performance measuring to program payment. Some are also concerned that the original SIBs model might “politicize” philanthropic spending, making it part of the government expenditure. Despite the fact that DIBs are still waiting for more evidence and implementation, they do provide an alternative to traditional foreign aid and result-based social service delivery.