An Impact Revolution in Aid

Caring is easy. Making a difference is hard. This perennial problem faced by anyone trying to make the world a better place is felt most acutely in the fight against extreme poverty. International aid is beset by accusations that a decent hunk of what we spend trying to feed the starving, give kids an education, or prevent unnecessary deaths from diseases unheard of in the rich world, disappears in corruption and bureaucracy. So can the hottest innovation in social policy of the past decade, the “Social Impact Bond” (SIB), be applied to development without falling foul of those old failings? The answer, according to a new report by the Center for Global Development (CGD), is an enthusiastic “yes”.

Development Impact Bonds (DIBs) would work just like their big SIB brothers and sisters (also known as ‘Pay for Success Bonds’ and ‘Social Benefit Bonds’) that are being rolled out in rich countries: some delivery agent (an NGO, for example) figures out how to make a measureable improvement in some social problem, someone (usually government, perhaps philanthropy) agrees to pay for that outcome if, and only if, it is achieved, and investors provide the financing that pays for the intervention, earning some profit on the deal if the intervention is successful, measured in terms of the desired social outcome. That’s the principle. What the CGD report does extremely well is draw together detailed case studies of how this might work in practice. From reducing sleeping sickness in Uganda, to providing basic education in Pakistan, to supporting entrepreneurs, the report explains how DIBs could be the solution.

‘Could’ is an important word here. These are theoretical case studies, not done deals, and the report  spells out what needs to happen for the excitement about DIBs to become a reality. First, aid donors will likely have to be the buyers of these outcomes, which means that rich countries will need to raid other aid programmes to pay for DIBs. Not easy when most aid budgets are shrinking. Second, philanthropic foundations and wealthy donors will have a crucial role in paying for the design of the pilot DIBs and, probably, acting as pioneer investors in these new financial instruments. To make this happen more foundations will need to come into this space and, in particular, start thinking more creatively about how they use their endowments. Third, there needs to be a lot of collaboration, particularly in terms of sharing knowledge, between the different actors. Tricky for some governments and for foundations that too often don’t like to be inconvenienced by transparency.

These are big challenges, so it is reassuring that the report comes from a working group co-chaired by Elizabeth Littlefield, President and CEO of the US Overseas Private Investment Corporation, and made made up of representatives of government and philanthropy. Hopefully this is a group with the heft to make sure that its recommendations lead to action.

DIBs are an excellent example of philanthrocapitalism in practice: harnessing financial innovation for real social impact. Yet there are risks. It will take a lot of effort to get the early DIBs off the ground. There is a chance that some of these will fail (although the danger is that the creators of the DIBs will try to ‘prove they work’ but taking too little risk). Getting the balance of benefits right between the payer and the investors will be tricky (other public-private partnerships have a tendency to leave the government with little upside and a lot of downside risk). Fortunately, all of these are well analysed in the CGD report.

Where the report is weakest is in understanding the implications of the revolution that it is trying to start. The ‘FAQs’ section is keen to allay the fears of aid traditionalists that DIBs might mean ‘privatisation’ or impinge on ‘the capacity development of host country governments’. Indeed, the authors take great pains to claim that this revolutionary tool won’t threaten the status quo of aid conventional wisdom. Perhaps this under-selling is deliberate, to avoid a backlash.

But it is also likely to be wrong, if DIBs achieve the scale and impact to which the report aspires. Take the example of setting up schools in Pakistan. Official donors have been pouring money into the leaking bucket of the Pakistan government budget for decades, to little effect. If a DIB can provide the finance for private organisations (not-for-profit and for-profit) to get millions of kids into school, then we will see more aid money bypassing government and more public goods being delivered by private organisations. Judged in terms of impact, that seems like no bad thing to us.