Updated: Jun 17, 2021
The ultimate goal of the Impact Revolution is to help as many people as possible and solve the world’s biggest problems. One way our revolution will do this is by helping to achieve the SDG goals by 2030. However, doing so requires us to find about $30 trillion, and the traditional models of government spending and philanthropic giving, which we previously discussed, are not going to cut it. Today I will explain how Development Impact Bonds (DIBs) offer an innovative way to deliver attractive returns and help close the SDG funding gap while tackling major problems in education, health, and the environment in developing countries.
As discussed in my last blog, the original SIB model requires private investors to finance a certain initiatives and to later be paid back by the government pending its success. In developing economies, governments lack the money to pay investors back, and this is where DIBs come in. In countries with limited government resources, DIBs help attract philanthropic money from foundations and aid organizations to pay for the outcomes achieved and provide investment for the delivery organizations that will achieve them.
While many philanthropic donors might consider it futile to fund initiatives in emerging markets, they are attracted to the new idea of paying for outcomes and success and in creating a dynamic similar to that of venture capitalists and entrepreneurs.
The World’s First DIB - Educate Girls
In 2015, the world’s first DIB was launched in India in conjunction with the Indian NGO Educate Girls, with the goal of increasing young girls’ access to education. Indian children face significant barriers to a proper education: 47 percent of fifth-graders cannot read a paragraph, and 30 percent cannot do a simple subtraction sum. Familial and cultural expectations make the problem even more severe for girls: 42 percent of them are told to quit school by their parents, and only 55 percent of schools in the country have toilets for girls. In the Indian state of Rajasthan, 40 percent of girls drop out of school before fifth grade.
Narayani, a young Indian girl, had been out of school for several years when Educate Girls, stepped in as the DIB service provider. Educate Girls spent time with her family and convinced them to re-enroll her in fourth grade. Getting back into school for the first time in years was overwhelming, but Educate Girls helped her do it through a program that involves working with families and teachers. The program intervenes with remedial education and support to help girls like Narayani get up to grade level so they’ll be more likely to stay in school.
During the DIB, Educate Girls collected enough data on children’s learning styles to revamp the remedial curriculum they were receiving. Thanks to this intensive work, many girls like Narayani can now read in Hindi, solve math problems, and have learned the English alphabet.
Ultimately, Educate Girls, which was put together by Instiglio, the Colombia-founded impact finance advisor, was a success: the project achieved 92 percent student enrollment, smashing its target of 79 percent and 160 percent of the final learning target. This success translated into success for the investor as well; UBS Optimus Fund recouped its initial funding of $270,000 from the outcome payer, the Children’s Investment Fund Foundation, plus $144,085 representing a 15 percent annual return – money that will be reinvested in further programs.
As a result of its success with this tiny DIB, Educate Girls has raised more than $90 million of philanthropic grants to roll out its programs – a considerable increase from its initial funding and clear evidence of how DIBs can help charitable service providers to scale.
Today, there are a dozen DIBs in operation, including the first humanitarian one – the $25 million International Committee of the Red Cross Program for Humanitarian Impact Investment (PHII) – and more are in the pipeline. In the case of the Red Cross DIB, institutional and private investors have put up the money needed to establish community centers in Mali, Nigeria and the Democratic Republic of Congo to support people affected by violent conflict, accidents and disease.
An international group of outcome payers (the overseas development agencies of Switzerland, Belgium, the UK and Italy, and La Caixa Foundation, a large Spanish banking foundation) have agreed to repay investors after five years. Depending on the results, the investors will either earn as much as a 7 percent return each year or lose up to 40 percent of their investment. Under the leadership of Peter Maurer, its President, the Red Cross is seeking to use SIBs and DIBs to reduce its 80 percent dependency on government grants.
As we can see, DIBs have the potential to create important new revenue streams for charitable delivery organizations like the Red Cross. These new models undoubtedly tremendous potential, but as the Educate Girls example shows, the first SIBs and DIBs have started small. The Educate Girls program targeted a few hundred girls in one state in India, and while the results were transformative for those who participated, millions more need the same kind of help.
The Education Commission’s 2017 report signals that we face an urgent global learning crisis: 250 million children are not in school, and a further 330 million are not actually learning. If we continue on this trajectory, half of the world’s youth will be out of education or failing to learn by 2030, and only one in ten young people in low-income countries will gain basic secondary-level skills. This is a huge problem that needs to be tackled on a very large scale.
To solve problems of this size, large-scale pay-for-outcomes models are needed. To create this positive change in the world, its necessary to change our thinking and find creative solutions to issues afflicting society. To learn more, read IMPACT: Reshaping Capitalism to Drive Real Change and claim your place in the Impact Revolution.