Funding successful social outcomes, not just funding programmes
28 July 2017
At Educate Girls, an Indian NGO, we find ourselves flying a plane while building it, as one of the world’s first implementers of a Development Impact Bond (DIB).
A DIB is one of the latest innovations in development financing - a funding instrument that is closely related to the Social Impact Bond (SIB), or Pay for Success Contract (PFS), which were pioneered in the UK by Social Finance and are now seen in numerous countries.
What is a Development Impact Bond?
A DIB differs from a SIB in that it is funded by a donor agency or foundation, rather than by the government. A DIB is also designed for a low or middle income country, whereas SIBs have mostly been launched in developed economies.
A DIB is essentially a pay-for-success contract, where the service provider receives the upfront working capital from an investor to conduct its programmes or services. The contract is a three-way agreement between:
- an outcomes funder who commits to paying for pre-agreed and independently verified social outcomes
- an “investor” who pays the service provider to deliver the services and has the opportunity to be paid back with interest depending on the social outcomes achieved
- a service provider (normally a non-profit, NGO or charity) who delivers programmes or services to achieve the social change.
Whereas in traditional pay-for-success contracts or payment by results the service provider bears the financial risk, in a DIB that risk is born by an investor.
In 2014 Educate Girls failed to secure funding from DFID’s Girls’ Education Challenge fund. A disappointment, but out of the ashes of our mammoth proposal rose the framework of our DIB. The Challenge fund had specified a component of payment by results and we embraced this with curiosity and interest.
After seven years of operation, Educate Girls was ready for the next level in terms of scale. We had RCT-level evidence of our ability to improve learning in classrooms, had enrolled over 55,000 girls into schools and were working in over 9,000 schools across Rajasthan. We knew that we were going to require long-term committed funders who shared our vision as our ambitions would take us to the millions of children.
We also felt a need and a desire to be able to demonstrate the quality of our impact as we scaled up. We wanted to assure donors that we were not in a race to the bottom to provide a low cost-per-beneficiary to justify scale. And the last thing we wanted was diluted impact as we grew. Payment by results seemed the obvious solution in terms of our commitment to demonstrate this. We were prepared to say “only pay us if we achieve our results”, and the Children’s Investment Fund Foundation, our outcomes payer, liked this approach.
What we couldn’t take on was financial risk. The traditional payment by results approach necessitates large reserves that can allow a charity to take such financial risk. An impact bond, however, transfers that risk to a third-party donor and for their risk-taking they are rewarded with a modest return. This is where UBS Optimus Foundation stepped in and became our investor, with the hope of securing their initial capital back with interest if we achieved or exceeded our target results.
Flexibility to progress
Two years into our DIB, we announced interim results and are very happy with our progress. We have enrolled 87.7% of our targeted out-of-school girls and achieved 50.3% of our target learning gains. We still have a long way to go, but if we continue at this rate our investor is currently on track to receive 108% of their initial investment - safe in the knowledge that they have also created demonstrable and independently verified social change.
Although we are hopeful, it is certainly too early to tell if this funding instrument is going to be hugely successful in its ability to attract more and new funding into the social sector. But we do know that it has deepened our impact. This year 54% of the out-of-school girls we enrolled were 10 years of older – the hardest girls to reach because of poverty, child marriage or patriarchal attitudes.
The flexibility given to us by an outcomes contract rather than an activities-based grant agreement has allowed us to innovate at the field level to improve results at an individual level.
Learning and looking ahead
What we can say for sure is that we won’t be waiting until we have the three-year results before we start thinking about what next. Our pilot has been transformational for us as an organisation, so much so that we are taking lessons learned across the rest of our organisation and are already considering a scaled-up contract for 2018.
The big elephant in the room with DIBs is who will be the outcomes payers. Investors are very interested in the model, service providers are excited by the potential and a number of intermediary organisations are turning to DIB design as one of their offerings.
According to Brookings’ upcoming figures, there are 30 impact bonds in low and middle income countries in the design phase, but Educate Girls still remains on a lonely path as the only DIB currently in operation. Hopefully next year when we announce the final results we will have more experiences to compare and more fellows on this journey!
Hear more about the latest trends in funding and fundraising at Bond's Funding for Development Conference,8 October 2018.