EDITOR’S NOTE: How can the private sector use development impact bonds as a catalyst for fighting poverty? Rita Perakis from the Center for Global Development discusses how non-traditional donors are the future of the model.
Government, business, and civil society leaders are exploring how they can use Development Impact Bonds to catalyze development, according to U.K. Secretary of State for International Development Justine Greening. The Secretary of State is one of three high-level co-chairs of the Global Partnership for Effective Development Cooperation which brings together governments of 160 countries, multilaterals, private sector companies, and civil society organizations with the aim of identifying ways to get better development results and holding each other accountable.
Development Impact Bonds are one example of how governments can form “partnerships with business for effective development,” the subject of Justine Greening’s post and her recent comments at a World Economic Forum session in Davos. Under DIBs, governments identify social priorities and objectives, but private money and management come in to make service delivery more flexible and more efficient. Only when services have been effectively delivered, with results independently verified, do donors and/or governments of developing countries (who are more risk-averse than the business sector) remunerate investors for program costs, with some financial returns to compensate investors for the risks they take.
There are several possible roles for business in Development Impact Bonds; besides the key role of providing finance to invest in DIBs, private sector expertise is needed to put in place data management systems and feedback loops that will ensure that services being delivered are adaptive and responsive to local needs (Owen Barder describes how this is working in the U.K. context here). In some contexts, there will also be a role for private service providers. DIB pilots will vary in form, but the purpose of the approach is to provide a platform for a kind of public-private partnership that takes advantage of the strengths of each partner, allowing governments, donors, investors, firms and civil society to each make an effective contribution to reaching a desired social outcome.
For this reason, it’s great to see that the Global Partnership is taking up the idea of DIBs. The Global Partnership was born at the last High Level Forum on Aid Effectiveness, in recognition of the fact that development finance comes not just from traditional aid donors, but also from emerging donors, businesses, philanthropy, and other non-governmental groups. These groups will be represented at the first High Level Meeting of the Global Partnership in Mexico this April, where participants will discuss among other things how they can work together to implement innovative financing approaches for development.
I hope that this diverse group of participants will have a serious discussion about the role each can play in trying DIBs as a new model for partnerships in development. Some possible outcomes to aim for, from the recommendations of the DIB Working Group:
To pool the risks involved in early DIB pilots and signal a serious commitment to private investors, a group of donors could announce in April a DIB Outcomes Fund, which would commit to paying for the positive results of well-designed DIB proposals.
Representatives of the investor community could similarly announce a DIB Investment Fund which would provide ready pools of capital to invest in DIBs and reduce the amount of time and resources needed to raise capital for each DIB opportunity.
As an institution with global reach and convening power, the Global Partnership could have a valuable role to play in ensuring that information gained from emerging DIB pilots is shared and applied to future projects. The Global Partnership could convene a DIB Community of Practice as a forum for DIB partners to share experiences and disseminate lessons, as well as to establish common standards for reporting and transparency. It will be critical to have a mechanism for information-sharing about DIBs; openness, and a method for pooling data from DIB pilots, will accelerate confidence in DIBs, lower transaction costs over time, and help to grow a market for the approach.
The Global Partnership for Effective Development Cooperation is the logical group to be talking about how governments, donors, the private sector and civil society could work together more effectively, and testing and learning from DIB pilots can go a long way in providing a model for how to do that.
Edited for style and republished with permission from the Center for Global Development. Read the original article.