Sustainable Development Goals & Development Impact Bonds

Concepts to action

Situation• In January 2016 the 17 Universal Sustainable Development Goals (SDGs), with 169

targets, will aim to shape agendas and political policies of the UN member states over the next 15 years. The rationale behind the goals has been reported to:– Mirror the complexities of the world in which they will be implemented – Comprehensively encompass the needs of development – Address the root causes of poverty, human rights and economic development – Promote gender equality – Apply to all countries (low, middle and high income)

• The indicators for measuring the SDGs will become available in March 2016, it is anticipated there will be two indicators for each Goal.

• While it is not straight forward to predict, it has been estimated:– An annual global investment of $3.3- $4.5 trillion is required in developing countries – The annual global investment is estimated at $5- $7 trillion– Currently the aid industry globally invests $ 1.4 trillion dollars, leaving a gap ranging

from $1.9- $5.6 trillion.

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WHICH SECTORS REQUIRE FUNDING? 2015 -2030

Sector Description Estimate current investment $ billion

Total investment required$ billion

Investment Gap

$ billionPower Investment in generation, transmission and

distribution of electricity~260 630–950 370–690

Transport Investment in roads, airports, ports and rail ~300 350–770 50–470

Telecommunications Investment in infrastructure (fixed lines, mobile and internet)

~160 230–400 70–240

Water and Sanitation Provision of water and sanitation to industry and households

~150 ~410 ~260

Food security and agriculture

Investment in agriculture, research, rural development, safety nets, etc.

~220 ~480 ~260

Climate change mitigation Investment in relevant infrastructure, renewable energy generation, research and deployment of climate friendly technologies, etc.

170 550–850 380–680

Climate change adaptation Investment to cope with impact of climate change in agriculture, infrastructure, water management, coastal zones, etc

~20 80–120 60–100

Eco-systems/ biodiversity Investment in conservation and safeguarding ecosystems, marine resource management, sustainable forestry, etc.

70–210 (included under other sectors)

Health Infrastructural investment, e.g. new hospitals

~70 ~210 ~140

Education Infrastructural investment, e.g. new schools

~80 ~330 ~250

Complication• So how much is a trillion?

• Generating up to $7 trillion of funding is no easy task

• If we are to meet the SDGs we must have the tools (in this case money) to do so!

• proposed means for financing the SDGs currently include domestic resource mobilisation, leveraging funds from the private sector and ensuring countries meet their target of 0.7% GNI.

• Over the past few decades there has been a focus on domestic resource mobilisation and ODA

• However, in line with the ‘innovation’ trend in the

development sector- leveraging private sector funds is broadly seen as a attractive option. Private financing takes the form of: a) Guarantees/ insurance b) Debt c) blended finance d) sovereign wealth and pension funds and e) impact bonds

• Each of these mechanisms has it’s own merits and limitations, and are best suited for application in a different circumstances

In short, there is no magic bullet

This presentation will aim to explore the use of Development Impact Bonds (DIBs) as a financial

solution for the SDGs

Key Question

Imagine you are the current Prime Minister to the United Kingdom and amongst your wide mandate you are responsible to effectively use tax payers money, to

meet the SDGs in the UK and support developing countries in your role as a donor.

Do you see value in exploring and trialing the use of Development Impact Bonds (DIBs)?

Going forward it is important to clarify that financing the goals is NOT solely about acquiring money but about managing it effectively.

What are Development Impact Bonds?DIBs are a form of results based approach to financing.

An investor (e.g. Rockefeller Foundation or UBS Optimus Foundation) provides up front financing to an intermediary1 (e.g. broker).

The intermediary* uses this money to pay service providers2 (an NGO) to affect some population in need3.

An independent evaluator4 (Monitoring and Evaluation specialists e.g. IDSights) will evaluate and measure the success of the project.

The findings of the evaluation will then be reported to the outcome funder/payer5 (donor or foundation e.g. The Global Fund or USAID), who will then disburse funds to the investor6 based on the results achieved.

*- An intermediary is not always strictly necessary with DIBs ! In a DIB impact investors take on the

financial risk of expanding proven social programmes, not philanthropic funders or governments.

7 reasons to use DIBs? REASON 1:It makes money more effective. By tying funding to measurable results, Impact Bonds reduce the risk of funding programs that do not work.

REASON 3: It focuses the private sector on social issues. By creating an investment opportunity that includes a financial return, Impact Bonds invite the private sector to participate in improving social programmes.

REASON 2: It allows providers to adapt to change. By shifting focus from activity to impact – that is, by reimbursing results rather than receipts – Impact Bonds give service providers more flexibility to do what they need to do to get results.

REASON 4: Transferring risk from public sector to enable earlier intervention and innovation

REASON 5: Providing upfront funding to service providers enabling them to more easily participate in results-based contracts

REASON 6: Improve partner government capacity to manage contracts, develop robust data systems and scale-up successful programmes.

REASON 7: Much of the money from ODA can end up in the overhead costs of organisations that pass the money along very long supply chains. The intended beneficiaries of aid have no way to identify failure or reward success, and no voice or representation, so there is no bottom up pressure to improve. Many of these problems are an unintended consequence of donors having to mitigate the risks inherent in providing money in advance of outcomes being achieved.

Examples of DIBs in LMICs

In India, a DIB is being developed to seek to close the gender gap in education in Rajasthan (Instiglio, 2014 and undated, b; Mair, 2014; Crabtree, 2013).

In Mozambique, a ‘pioneering new coalition’ is planning to provide sustainable, cost-effective funding for malaria control through DIBs (Han, 2014; Belinsky, 2014a).

In Pakistan, DIBs are being considered as an innovative financing mechanism for education in Punjab (CGD and Social Finance, 2013; Wheeler and Egerton-Warburton, 2012).

In Uganda, there are reports of a number of DIBs under development, including one on education and another on sleeping sickness.

In Rwanda, DFID is planning a DIB in the education sector. A scoping report has been produced which explores two broad options (Robinson, 2013).

7 obstacles against using DIBs?1) Change of mindsets: Perhaps given the multi-stakeholder terrain funding a programme must be considered to be similar to making an investment. This may be difficult to see from those with a perspective that development should be to a large extent ‘selfless’.

2) Like all new mechanisms DIBs are being introduced based on limited experience, as a result, the evidence base is extremely thin and funds from foundations that might have been available as grants risk being diverted to DIBs. It is argued that Domestic Resource Mobilisation is a better more worthwhile cause.

4) Power/ Interest for better or worse, businesses’ main concern is to make money (often in the short term for a few people) while states’ main concern should be the welfare of their citizens (often in the longer term and for many or all people). Therefore fundamental differences between government and enterprise do exist

5) Expectations of what evaluations of DIBs might produce are widely divergent. It is extremely unlikely that evaluations could meet all the expectations without extremely high levels of resourcing ( worryingly where resources are low the scaling back is done for the evaluation).

6) DIBs have the potential of adding extra middlemen to the process, increasing bureaucracy and management fees (which could be better used for other programmes)

3) There is reluctance among some stakeholders to talk openly about their experiences and plans. Reasons are complex but include concerns about biasing procurement processes and giving away valuable intellectual property. This reluctance or ‘secrecy’ is a major potential barrier to synthesising lessons learnt into a body of evidence.

7) Does civil society have the capacity to deliver against such narrowly defined criteria and would they want to do?

Key Lessons Learned• Initially private sector investors who are likely to be attracted to this proposition include foundations and

high net individuals who are interested in social returns and not solely financial ones. The reason for this is there is very little track record for organisations in this area. Thus, the risk profile of investing NGOs in LMICs is somewhat unknown.

• The pay for success counterpart should always ensure that they have done their level best to ensure a strong risk mitigation strategy is in place for the investors funds. Measures would include enforceability of contracts, creditworthiness of payers, and ability of the investors to monitor and oversee the project underlying their investment.

• Another factor that will determine the success of Dibs will be the ability of bond designers to balance the quality of pilot projects and their replicability. The work of creating novel contracts, unusual financial arrangements, and a state-of-the-art social sector performance management system saddles pilots with costs that may appear unreasonable when compared to costs of existing non-Dibs projects. Financial support for broad-based market-building activities, such as feasibility studies and workshops will be critical for progress in this area.

• Donors will need to fund designers to conduct studies into prospective programmes, and help governments adapt their procurement systems to Dibs. Rigorous, low-cost evaluations, such as the ones designed by the impact evaluation organisations, will need to be custom-made for Dibs for them to be accepted widely as an effective funding model and reach their potential.

• The private sector can be more effective at testing different approaches, monitoring performance, scaling up success and exiting from failure, creating incentives to do better, and is less susceptible to political pressures to misallocate resources.

Three things you can do?1. If you are interested in the subject area either as finance or development

expert the first step is to familiarise yourself with the other industry and it’s jargon. This can be achieved through reading the literature, joining knowledge sharing platforms, reaching out to professionals or taking a training course

2. Try to identify opportunities where the application of DIBs is appropriate and can be scaled up. Before doing this do ask yourself: – Does it( the opportunity) consequences clearly demonstrate a reduction in future cost?– Can it produce measurable outcomes. – Can it produce outcomes in a short timeframe (under 10 years).– Is there previous evidence of its success.– Is it located in an appropriate political & legal environment.

3. If you implement DIBs share lessons on your challenges and successes

Thank you

Do you see value in exploring and trialing the use of Development Impact Bonds (DIBs)?

‘When things are broken let us try to fix them, not throw them away’If you feel this solution is not perfect help us to constructively strengthen it, try

not to point out problems that lead us to discard it!