Development impact bond in Uganda, Kenya hits targets despite COVID-19

In 2017, Charles Gwokajja told Devex that while he had previously been a subsistence farmer who struggled to cover basic family expenses, his participation in a “poverty graduation” program implemented by Village Enterprise in Uganda helped him move on to co-owning a small shop and generating enough income to buy medicine when needed.

Gwokajja, who has since saved enough money to purchase land in a different town, is one of thousands who have now been helped through Village Enterprise’s development impact bond. On Tuesday, the results of the DIB were released, showing that program participants made significant gains in household consumption and assets.

When it launched in 2017, this DIB was the first such bond to focus on poverty alleviation and the first in sub-Saharan Africa. It was also the first to bring in major donors, including the U.S. Agency for International Development and the U.K. Department for International Development, which has since been merged into the Foreign, Commonwealth & Development Office. In many ways, the bond has been a test of not only the poverty graduation model, but also the use of DIBs.

A DIB is a results-based financing mechanism, in which investors — in this case, the Delta Fund, the Bridges Impact Foundation, and others — provide upfront capital for an intervention implemented by a service provider. The investors are compensated based on specific, closely measured results by an outcome payer — or, as with this DIB, a group of them, including USAID, FCDO, and an anonymous donor.

On Tuesday, DIB partners announced that the investors would receive the full payout based on the results, with a roughly 8% internal rate of return, or annual growth rate, on their investment.

What makes this DIB all the more unique is that it succeeded despite the COVID-19 pandemic, which forced program adaptation, a delay to the assessment, and a renegotiation of contract terms. And this happened at a time when a number of similar results-based financing mechanisms — many of them in the U.K. — switched to a fee-for-service model or were scrapped due to the pandemic.

All the parties involved — including the outcome payers, the investors, the evaluator, the designers, and Village Enterprise itself — say the results provide many lessons about the impacts of DIBs, and also for poverty graduation programs.

Powerful results

Village Enterprise’s poverty graduation program helps small groups of “ultra-poor” community members start microenterprises by providing them with training and a $100 grant — plus a supplemental grant if the business is successful — to build their assets and savings.

The impacts of the program were measured by a randomized controlled trial carried out by IDinsight, the outcome evaluator. The RCT found positive results on both indicators it measured: household consumption and household assets.

The 14,000 entrepreneurs in Uganda and Kenya who took part in the Village Enterprise program spent about $10, or 6%, more each month than those in a control group — which meant they paid for more food, goods, and health care services, said Jeffery McManus, a senior economist at IDinsight. Families that participated also had more assets, such as livestock, furniture, savings, and business supplies.

Based on the increases it found, IDinsight estimated the program would generate lifetime impacts of more than $21 million for communities, amounting to roughly four times the overall cost of the project.

The outcomes “were beyond our expectations,” said Sasha Gallant, who runs USAID’s Development Innovation Ventures, which was among the DIB’s funders. “For us, this is a very low-cost version of graduation. It is highly cost-effective and implemented well.”

Village Enterprise’s poverty graduation program slightly outperformed those in the existing literature, even though it was “leaner” and evaluated during the COVID-19 pandemic, McManus said.

The finding that larger asset transfers tested in Kenya did not necessarily drive higher outcomes — but more personalized mentorship and training did — can also inform the use and scale of poverty graduation programs, said Mila Lukic, a partner with the social outcomes contracts team at Bridges Fund Management, one of the investors which is connected to Bridges Fund Management.

While the RCT showed the success of the intervention, many partners in the DIB were also measuring another key element: the impact of the bond itself.

While measuring “the DIB effect” is difficult, having two RCTs of Village Enterprise’s program — an additional one was carried out before the DIB — helps answer the question of what impact the instrument had on outcomes, said Avnish Gungadurdoss, managing partner and co-founder of Instiglio, which designed the DIB.

Both Village Enterprise RCTs showed similar impacts, and the fact that they are almost the same is “remarkable because the program during COVID could maintain its effectiveness level despite the huge disruption,” he said. “It’s a testament to how much more impactful it had to be.”

A COVID-19 curveball

One of the key tests of this intervention and the DIB process was the COVID-19 pandemic, which forced programmatic changes and new negotiations around contract terms.

When COVID-19 hit, Village Enterprise was “determined as an organization to do as much as we could to continue implementation,” said President and CEO Dianne Calvi. Village Enterprise moved entirely to mobile transfers and started doing more digital outreach through text messaging and phone calls to help the business owners. The organization also helped them make decisions about diversifying or modifying their businesses in response to the pandemic.

In addition to the program disruptions, COVID-19 meant that evaluation of the first four cohorts could not proceed as planned. With evaluation tied to payouts, and uncertainty about whether an evaluation could be performed in a timely manner, the partners in the DIB had to renegotiate some of the contract terms.

The other challenge, especially during that time, involved maintaining trust among the various participants, said Gungadurdoss.

While other results-based instruments fell apart as a result of the pandemic, many participants had a strong commitment to stay the course with the DIB. Charlie Morgan, who is responsible for FCDO’s participation in the bond, said she was clear that she wanted to maintain an outcomes element to whatever was agreed and not switch to a fee-for-service model, as some impact bonds did.

Lessons learned

From new contract language to different working relationships to an impact on operations, there were countless lessons to be learned about the instrument.

One key message was that a DIB allows for a different relationship between funders and implementers. Lukic characterized this as an “ongoing partnership” rather than a “contractor-commissioner relationship where you have a power imbalance.”

Calvi described it as a “peer relationship” that doesn’t exist with most other funding.

The DIB also allowed for an opportunity for different development agencies to align around one objective, which can be difficult due to politics or other factors, Morgan said.

Another lesson — also borne out in Educate Girls’ DIB — is that the funding instrument can have a dramatic impact on how the implementer operates and uses data.

As a result of the DIB, Village Enterprise introduced an adaptive management system with customized dashboards, which has made it easier for managers and staff members to monitor results regularly and adapt programming to better drive impact.

“It has transformed the way we do business — not just for the impact bond, but we’ve rolled it out across our operations,” Calvi said.

The flexibility of the instrument, which allows the implementer to have more control, is also a key benefit, according to USAID’s Gallant. This DIB illustrates that the model works, she said.

There were also a few more granular lessons about contracts. In the future, contracts need to address what happens if there is an inability to measure results and should include language that ensures decision-making is guided by what is best for program participants, Gungadurdoss said.

While Village Enterprise had contracts with all the partners in this case, they were not all linked, and having investors and outcome funders on the same contract would be an improvement in future DIBs, Lukic said.

Village Enterprise is looking to scale its poverty graduation program — potentially to Rwanda, where it is in discussion with the government to partner closely with them on implementation and funding, Calvi said. And she’d like to continue using results-based funding, but not much is available through DIBs or other instruments, she said.

This example may push donors to expand the use of similar funding mechanisms, however.

“It is incredibly valuable to have another case of when and how this kind of tool could be effective,” Gallant said.

Update, March 10, 2022: This article has been updated to clarify the type of return that investors saw through the DIB.

This coverage exploring innovative finance solutions and how they enable a more sustainable future, is presented by the European Investment Bank.