How impact bonds improved British Asian Trust's grant giving

Last month, the British Asian Trust launched a $14.4 million development impact bond to upskill 50,000 young people in India, with a particular emphasis on helping women. It is not the first impact bond the trust has launched in the region. Abha Thorat-Shah, executive director of social finance at the trust, told Devex that the process of developing these instruments has taught the trust a lot about what it means to fund effectively. What are impact bonds? Impact bonds are a type of payment-by-results contract. Instead of funding NGOs to deliver a particular service, the funders pay out only if the project achieves a particular set of outcomes. The difference between an impact bond and a normal PBR contract is that the bond is underwritten by impact investors. If the project works, the investors receive a return. If the project fails, the investors are the ones who lose out. This transfers risk away from the NGOs on the front line. In this case, the DIB pays out according to the number of people who find and retain jobs. Investors have put in about $4 million of working capital and stand to receive a rate of return of 9.6% if the project hits its outcomes. As with many international NGOs, the British Asian Trust is primarily an intermediary — raising money from funders in the United Kingdom, especially from the South Asian diaspora, and using it to support development programs across South Asia. For this project, it acts as a central hub for all parties. Unexplored territory The trust tries to find ways to give efficiently and effectively, Thorat-Shah said, which means trialing new funding methods, and championing unrestricted grant funding. “We started off working on impact bonds because we believe they’re one good way to learn what works — to determine the costs and interventions that are necessary for success — while still investing a decent amount of money,” Thorat-Shah said. While she says grants are a primary funding instrument in South Asia, “you can use a lot of the things that we’ve learned through impact bonds to give better grants.” DIBs encourage innovation, Throat-Shah said. With projects that reward outcomes — and have been underwritten by professional risk investors — NGOs have more freedom to try whatever methods they feel will work, which is often referred to as a “black box” approach. “It’s about small, simple, incremental changes,” she said. “People say ‘Don’t use WhatsApp to get information to parents, they don’t all have phones, use the local milk round. That goes to every house.’” Traditional income streams don’t always offer the same freedom. “The funder says ‘We are paying you to deliver some classes, so you have to deliver some classes,’” she said. “Even if the NGO realizes ‘These classes are actually not the most useful; we should do something else instead’ they may not have the flexibility to do that.” Traditional funding also often creates undesirable power dynamics where funders feel they should be calling the shots. “But the NGOs are the experts,” she said. “That means the funder needs to show humility, and not try to dictate what should happen.” With DIBs this happens more often, according to Thorat-Shah, because the risk has been transferred away from the funder to a third party. “You can use a lot of the things that we’ve learned through impact bonds to give better grants.” --— Abha Thorat-Shah, executive director of social finance, British Asian Trust Another benefit of impact bonds, she said, is that they’ve shown the importance of guaranteed, long-term funding, which allows time to make lasting change. “Often in development, we will say ‘Here is the money to deliver this service for three years’ and then we will not tell you if you can have any more money until two months after those three years have finished,” she said. “People build up expertise in a project and then have to tear it down.” DIBs have a reputation for cost and complexity, said Thorat-Shah, which makes some funders and donors skeptical about their effectiveness. But part of that is the cost of measurement, which is key to outcome-based funding. And she says that while DIBs are often more expensive, at least you know roughly what results the money produced, while in traditional funding it’s often less clear. “In a DIB you start off by taking a baseline and then at the end you know what’s changed,” she said. “You can understand what worked and what didn’t, and what you need to do differently next time.”