Considering development impact bonds? Read this.

WASHINGTON — As several recent development impact bonds test the model, organizations are increasingly thinking about whether the financial tool might be right for them. But those involved with previous DIBs, or those who have spent time researching them, have some cautionary advice to offer. Because while early results have shown that in some cases DIBs may work, they are complex instruments, costly both in time and startup financial investment. DIBs work by getting an investor to pay upfront for the costs of an intervention that is then measured by clear, predetermined metrics. If the intervention succeeds in achieving the goals, the outcome payer — typically a donor agency, foundation, or perhaps a company — will pay the investor back based on the performance. Many of the people Devex has spoken to who have been involved in DIBs — managers, investors, outcome payers, and service providers — highlight the difficulty of getting a DIB up and running. Several recommended that before investing in a DIB, organizations should explore whether there is a simple, less costly funding mechanism that might be a better fit. Pursuing a DIB is not often — and perhaps is seldom — the right choice for organizations, they said. “Basically, they work best when there are clear measurable outcomes attributable to a project, a reasonable timeline with a reliable flow of data — you don’t want to set up a parallel system — and that need for risk capital for this population, and the right service providers to be able to meet the rigors,” said Phyllis Costanza, the CEO of the UBS Optimus Foundation, which has been involved in a few DIBs. Here is some of the advice these experts offered. Do your homework Talk to others who have designed or been a part of DIBs to better understand how they work and what they require. This is perhaps an obvious first step, but having a good understanding of the financing mechanism is critical to deciding if it’s the right fit. Safeena Husain, the CEO of Educate Girls, which was the service provider on one of the first DIBs, welcomed organizations to talk to Educate Girls about their experience before jumping in. There are also several intermediaries that have designed DIBs that can help talk organizations through the process. Working with one of them can be helpful in identifying if it’s the right instrument, and if so, eventually structuring the deal. Check your data DIBs only work when there is a proven track record of delivering and achieving results. Often, organizations going into a DIB have already done a randomized control trial on their intervention. That data provides the foundation for the DIB, allowing partners to determine the appropriate goals and pricing. If you decide to move forward with a DIB, make sure you take the time to get the data right. Accurate baseline data is critical. With the Educate Girls development impact bond, a rushed process led to some baseline primary data that relied on secondary sources and turned out not to be accurate, Husain said. Making sure data is correct so that process targets are on track and methodology is straightforward and scalable is important, she said. Before entering a DIB, organizations should build evidence about their program. This is crucial to establishing effective benchmarks so that organizations are not overwhelmed by targets, said Avnish Gungadurdoss, the co-founder and managing partner of Instiglio, which has helped structure and manage several DIBs. “Building evidence and testing a theory of change is an important precondition,” he said. Consider whether your organization is at the right stage If your organization is either very early stage, or has a solid track record of proven impact, then a DIB may not be the right financing tool. “The tag phrase we have is a DIB is really awesome for promising but not proven interventions,” Gungadurdoss said, adding that prospective approaches should have at least one rigorous round of evaluation to establish whether this is the case. If an organization is too young, doesn’t have a strong theory of change, and is still testing its model, a DIB could burn out the organization, he said. It's not a great tool to fund an effort to massively scale, Gungadurdoss explained. It’s more effective if you want to incubate impact. DIBs are also not great for early stage programs because they bring another level of scrutiny, which could put tremendous stress on an organization that may not have the systems or leadership to weather it — so having a proven program is critical, Husain said. DIBs, however, can be a good tool for improving an existing program or testing it in a new area to see if it has the potential to scale. And DIBs can be a great research and development tool, Husain added. Educate Girls found that the results-based funding forced the organization to rework systems, enabling it to be much more responsive to data and improve the impact of its program as a result. Still, organizations should not participate in a DIB when an organization could use a “lighter” tool that requires less coordination from different parties, said Neil Buddy Shah, CEO and founding partner at IDinsight, which has worked as the independent evaluator on DIBs. For programs with a solid track record and proven impact, a complicated DIB may not be the best structure — a more straightforward results-based contract with a donor with some independent evaluation might make more sense in that case, he said. “You don’t need risk capital when you know an NGO will do well if incentivized,” Shah said. He explained that DIBs are best used to bring in organizations with outside-the-box ideas to address hard-to-crack problems that NGOs and foundations have been unable to fix. “The complexity is worth it more when they want risk capital to try something new and innovative on an intractable problem,” Shah said. Husain added that for most interventions, a DIB should be a one-time move, because most of the gains, efficiencies, and improvements will already have been identified and implemented through the first bond. At least that is how she feels about the Educate Girls DIB; while her organization would seek other results-based financing contracts, it likely wouldn’t get involved in another DIB due to the costs and work involved, unless it was looking to refine a new program or intervention, Husain told Devex. A systems check Before going into a DIB, there are a few things organizations should either already have or be thinking about seriously. “A huge part of the story is about performance management,” said Gungadurdoss, cautioning that even if organizations really want to improve and are excited about outcomes, if they don’t have the data, or the tools to respond to the data and make improvements, a DIB is not the right funding mechanism. He recommends organizations try building performance management capabilities in advance of pursuing DIBs. A mindset change The reality is that most development funding is still paid up front for programs more focused on outputs — such as how many malaria bed nets will be distributed — than outcomes. DIBs work differently — and for many organizations, this will require changing workflows and potentially organizational culture or mindsets. And that is not to be underestimated: A shift from an outputs orientation to an outcomes orientation can require a significant cultural change, even for organizations that already have a results-focused orientation. Organizations need to have an iterative mindset with the right tools to guide the improvements they need to make and know if they’re on track, Gungadurdoss said. Organizations need both the hard infrastructure to collect and rapidly relay data, but also the ability to analyze that data and course correct. They should also create a culture of learning and examining what does and doesn’t work, so they have the flexible and results-oriented mindset that DIBs need. Husain said the Educate Girls DIB transformed her organization, and that the shift in organizational culture toward being able to pivot rapidly in response to data was not without its growing pains. Other things to consider Leadership is a key consideration. Without buy-in from all partners, but particularly the leaders of the service provider organizations, a DIB is unlikely to succeed. Managing the process of a DIB and keeping staff on board can be a challenge, so ensuring that people are invested is important, according to Husain. Funders have to think differently, too. Whereas with traditional grants, funders tend to have a lot of say in how a program plays out and often enter the relationship with a plan that doesn’t offer a lot of flexibility, DIBs don’t allow the same intervention or influence in the process. Rather, donors are engaged up front, but then they have to trust the implementer to achieve the results. “I think it’s a great instrument. It is hard sometimes to be willing to sit back as the outcome payer, because the benefit of the DIB is that it should be up to the service provider and then the manager to figure out how to do the best outcome delivery,” said Grethe Petersen, CIFF’s director of strategic engagement and communications. The foundation or donor needs to be truly interested in achieving outcomes, but perhaps doesn’t know the best interventions, she said. “It’s a fantastic method of really letting innovation happen on the ground.” Husain also urges caution, particularly in evaluating the details of how a DIB might be structured, because they can be designed to set up perverse incentives. Without the proper metrics and design, service providers could be incentivized to sacrifice serving entire populations in order to achieve their results. While DIBs are challenging, they can, if implemented correctly, improve an organization or interventions impact, align incentives, and give the service providers more flexibility than traditional contracting to innovate and iterate to achieve results.