Social Impact Bonds in Developing Nations: When SIBs Become DIBs

The readings for the week revolved around the theme of “Capitalization and Impact Assessment for Social Innovation,” and described numerous ways that financial engineering could be used as a force for change via investments in social enterprises, often times known as impact investing. One of these forms of financial engineering that sparked my interest were social impact bonds (SIBs). The way a SIB functions is that the state or local government is contracted with an intermediary to develop a SIB that funds a social services project. The intermediary is then responsible for finding nonprofit organizations to implement the project, getting capital from impact investors to fund it, and managing the project to ensure effective and efficient implementation. SIB investors are repaid by the government only if the program achieves the preset performance goals and the intermediaries and nonprofit service providers are also paid if the program is successful.

           After learning more about the SIBs in the readings, I became very interested in their approach and ability to engage in cross-sector collaboration in this ‘financial engineering for social impact’ space. With that being said, it is important to recognize the vital position governments have in SIBs. In fact, Callanan et. al. mention in their article that SIBs can’t even happen without the support of the government [1]. Although SIB implementation has begun in the UK and is being piloted in countries like the US and Australia, I started wondering about how less developed nations could benefit from them and what the implications would be for international development and development aid efficiency if SIBs were to be implemented. If government support is so crucial to the creation of SIBs, how could developing nations (whose government revenue is substantially lower than those of developed nations) somehow benefit from funding opportunities like SIBs? What would be some of the differences that SIBs would have if implemented in developing countries?

                A report published by the Center for Global Development focused on Development Impact Bonds (DIBs), which are SIBs specifically formulated for developing nations. According to the report, the DIBs are a “new business model for development programmes, designed to encourage the innovation and flexibility for better results that are often stymied by the limitations of government budgeting, contracting, and performance management.” [2]

 Though the report asserts that the principles are the same for both Bonds, it highlights that a distinctive feature of a DIB is that at least a portion of the outcome payments are delivered by a development organization or charity, since developing governments may not have enough revenue to meet outcome payments [2]. Moreover, in an April 2016 blog post published by the Brookings Institution, the authors highlight South Africa’s exciting experience as the first middle-income government to implement an SIB [3]. The post mentions that one of the ways that SIB implementation in South Africa differs from in the UK is that since there are few service providers in the Western Cape province where the SIB is being implemented, the scale and delivery of impact would be more critical in the South African context due to the possibility of different outcomes per township, whereas outcomes in the UK were focused on providing future value to the economy.

All in all, the implementation of DIBs is an exciting prospect to look forward to. However, certain considerations will have to be taken into account such as the increased role of charities and donors as opposed to SIBs. Nonetheless, what will DIBs mean for developing country governments? Are they completely taken out of the equation? In order for cross-sector collaboration to be a factor in DIBs just like they are in SIBs, some sort participatory role for the developing country governments will have to be laid out, even if this role isn’t financially-related.

[1] http://mckinseyonsociety.com/downloads/reports/Social-Innovation/McKinsey_Social_Impact_Bonds_Report.pdf

[2] http://www.cgdev.org/sites/default/files/investing-in-social-outcomes-development-impact-bonds.pdf

[3] https://www.brookings.edu/blog/education-plus-development/2016/04/06/south-africa-is-the-first-middle-income-country-to-fund-impact-bonds-for-early-childhood-development/