EDITOR’S NOTE: Philanthropy has a distinct role to play in development, but sometimes it clashes with the traditional sources of development finance. This is where development impact bonds can be useful, according to Rita Perakis from the Center for Global Development
Foundations are not primarily interested in what they can “give” to contribute to development, but how they can make targeted investments and form effective partnerships with other development actors, as CGD in Europe colleagues and I heard last week at the meetings of the OECD Global Network of Foundations Working for Development, or netFWD.
It was great to see the netFWD team in action and clear that such a group of foundation representatives is needed. Philanthropists have been making a growing contribution to global development but until now haven’t had their own platform for sharing experiences and coming together to think about their impact on development, and how they can affect development policy. Members of the network are listed here.
Philanthropy has a distinct role to play in development and one that sometimes clashes with more “traditional” sources of development finance. As Michael Green says in this excellent article for netFWD, Philanthropy and Official Development Assistance: Clash of Civilisations?, philanthropists are increasingly important to the global development scene but their work and that of official donors have often been happening in parallel, not in genuine complementary partnerships. We saw at the netFWD meetings evidence of the “long-standing and uneasy relationship between state and private actors based on very different attitudes and cultures” that Michael describes; foundation representatives noted that, in their world, the official donor world is considered to be cumbersome and inefficient.
Moreover, several people at the meeting noted that the role, or potential role, of philanthropists is often misunderstood by the official donor community. Foundations don’t want to be viewed primarily as a source of funding; it’s not just a question of how much they can give but how they can improve the ways that programs and services are delivered.
This is where Development Impact Bonds, the subject of two sessions at the netFWD meetings, fit into the conversation. DIBs are a new approach to development funding that create a partnership between public sector agencies – who identify desired social outcomes, and pay for them if they are achieved – and private sector investors - who provide financing to implement programs; provide a problem-driven, client-based approach to delivering programs; and take the risk that programs fail to achieve results. (There’s much more on how all of this works in the recently released report of the Development Impact Bond Working Group.)
What sets DIBs apart from lots of other forms of public-private partnership is that each of the actors in a DIB has a clear role to play; the partnership is not necessarily about different actors working together each step of the way, but rather taking on distinct roles and complementing each other’s roles while working towards a common goal. Michael Green refers to a “division of labor” as part of the solution to the challenge of making these partnerships effective: “Rather than trying to fill the funding gap in existing official donor program, philanthropy should play the role of innovative risk capital in development, testing new ideas that can be scaled by official donors in collaboration with partner governments and local organizations.” DIBs are one example of a way to put socially-minded investors in this role of taking risks and finding out what works – a role that is harder for donor agencies to play.
At the netFWD meetings, Toby Eccles from Social Finance spoke about how the Social Impact Bonds launched in the UK were a way to create effective service delivery, with feedback loops and ways to respond to information that was being gathered – an entirely new business model for social programs. In order to do that, flexible funding was needed in the form of private capital – hence SIBs as a new financial model. So SIBs have always been about the how that the private sector can bring into social service delivery in addition to the financial resources. Likewise, as this model is being applied to development, Owen Barder pointed out that it’s all about creating a new business model that is locally owned and locally responsive. Under a well-designed DIB, investors wouldn’t get remunerated if that didn’t work. (Owen’s presentation to the netFWD group is posted here.)
Mark O’ Kelly, head of finance at the Barrow Cadbury Trust, an investor in the Peterborough Prison SIB, provided a foundation’s point of view: the Trust was attracted to the idea of targeting its investments towards interventions that can improve social outcomes. The alignment of shared goals was important to them, as was the flexibility and rigor that the SIB approach brought to the question of how do you keep prisoners from re-offending? As early results of the Peterborough SIB are coming in, it is providing a living example of the client-driven approach and feedback loops that we were discussing with the netFWD group and hope to see with DIBs.
Owen explained several ways that foundations could get involved in DIBs (also highlighted in the DIB Working Group recommendations), including by:
1) Investing in DIBs: Foundations could be among the investors funding DIBs and driving more flexible and innovative approaches to service delivery than typical public sector programs provide. Successful interventions would yield social and financial returns on these investments.
2) Committing to pay for outcomes: In some cases, foundations may instead want to use grant funding to pay for outcomes under a DIB. This is a more hands-off role but would signal a commitment to push for better results in a particular sector, and to testing the DIB model.
3) Catalyzing a DIB market: The transactions costs of early DIB pilots are high for implementers. Foundations can make these costs less prohibitive by providing subsidies, for example to intermediaries who are likely to put early DIBs together, which would catalyze the development of a market for this approach.
4) Supporting a community of practice around DIBs: As DIB pilots are developed, the actors involved and the market at large will benefit greatly from open processes that enable sharing of lessons and experiences. The DIB Working Group recommends that foundations and DIB outcomes funders consider establishing common standards for making outcomes data and information publicly available, as well as creating a forum, or Community of Practice, for sharing experiences. Foundations can help to develop systems of information-sharing and can be a part of this community.
There is a lot of work to be done to develop a DIB market, but the good news is that the foundation representatives we’ve spoken to are interested in taking on the challenge, and carrying out potentially any of these roles. They reacted positively to DIBs as a good representation of the direction in which development finance is going, with clear, suitable roles for all actors involved.
Mario Pezzini, director of the OECD Development Centre, neatly synthetized many of the contributions when he noted that DIBs are a “refreshing” approach that force practitioners to ask the right questions, including: how can we manage risks and create systems that allow for making decisions in a quick and efficient way? There were certainly questions around how to best implement DIBs and how quickly to roll out an approach that has not been proven yet – but all the more reason to try it, don’t you agree?
Edited for style and republished with permission from the Center for Global Development. Read the original article.