Unlocking trillions to impact billions: Development Impact Bonds are emerging as a viable solution

DIBs are results-based finance mechanisms

The UN General Assembly gathered in New York City recently. It was an annual check-up visit to the doctor for the UN’s Sustainable Development Goals. Each year a full battery of tests are performed in the lead up to the gathering of the good and great to see if the world is on track to reach these important and ambitious goals.
The good news is in looking back at 2018 progress has been made across the board. The challenge is there is a long ways to go in a short period of time if the world is to declare victory by 2030. And one of the biggest challenges facing everyone is how to crack the code on a $2-$3 trillion annual funding gap.
As a philanthropic platform committed to transforming the lives of 100 million Indians in the next four years, the Tata Trusts is continuously innovating new ways to deliver impact at scale. The Tata Trusts know that in order for the world to mobilize trillions and ultimately impact billions of lives, there needs to be a call for finding new ways forward through smart collaborations and fresh funding models. One of these will be unlocking private sector and institutional investors to fund development outcomes.

This was the hot topic of conversation among the development world at the UNGA. A growing number of leaders in the sector have realised the opportunity to do things differently, and to change the way in which development is done.

Conversations at the UNGA did not provide a definitive conclusion to the question ‘how do we bridge the funding gap?’ But one solution to this question is starting to gain ground. Enter- outcome-based financial instruments, or more specifically, development impact bonds (DIBs).

DIBs are results-based finance mechanisms in which philanthropic funders only pay for successful results. In a DIB donors only pay their money after an independent evaluator has determined that the programme has been successful and the pre-determined results achieved. The money required for the NGOs to do their work comes from risk investors, who in effect lend their money into the DIB and get their money back, from the donors, after it has been successful. If it does not work, the risk investors lose their money and the donors don’t pay. The risk investors receive a small return if the outcomes are met.

DIBs have been on the rise in recent years and are being used in increasing numbers and with increasing size. What is behind this momentum?For those involved, the promise and appeal of these new and innovative social finance tools is in the way they could have a transformative effect on the way development works. DIBs offer a means of both increasing the transparency of development spending and targeting the delivery of pre-determined outcomes.

A look at the Quality Education Development Impact Bond (DIB) launched in Delhi in September illustrates the true potential of the DIB mechanism. It is thought be the most complex and innovative yet. As the world’s largest education DIB, it is directing more than $11 million over four years at improving literacy and numeracy skills for more than 300,000 children. It is transforming the way education is funded in India and targets funding at the delivery of education outcomes necessary to meet the SDG on quality of education.

DIBs are also showing the sector how it can overcome the challenges of collaboration and highlights the efficiencies of scale that might otherwise leave projects isolated or underfunded.

The Quality Education Development Impact Bond activated a committed group comprising of The Tata Trusts, UBS Optimus Foundation, HRH Prince Charles’s British Asian Trust, the Michael & Susan Dell Foundation, together with the Comic Relief, the UK Government’s Department for International Development (DFID), the Mittal Foundation, and BT (British Telecom).

DIBS are emerging as a viable solution. This latest DIB follows some one hundred others. The model is being improved and optimised with each new DIB, allowing for unprecedented scale and impact. As experience and confidence in the model grows, it is thought that more and different funders will be attracted.

This will both expand the market beyond well-established philanthropic organisations and open up new sources of funding beyond traditional grants. Factor this: if just 1% of global capital market investment was directed towards social finance and the funding of specific outcomes, the world could meet the SDG funding goals by 2030.

At UNGA the sector heard more about these innovative finance instruments and how they are a vital tool in achieving the UN’s ambitious SDGs. They may not solve the development sector’s myriad of challenges, but deploying these innovative development finance instruments will be vital if we want to truly address the global challenges we face.

Michael TS Lindenmayer is Special Advisor at Tata Trusts.